Panagiotis E. Petrakis Pantelis C. Kostis Dionysis G. Valsamis European Economics and Politics in the Midst of the Crisis From the Outbreak of the Crisis to the Fragmented European Federation European Economics and Politics in the Midst of the Crisis ThiS is a FM Blank Page Panagiotis E. Petrakis • Pantelis C. Kostis • Dionysis G. Valsamis European Economics and Politics in the Midst of the Crisis From the Outbreak of the Crisis to the Fragmented European Federation Panagiotis E. Petrakis Pantelis C. Kostis Dionysis G. Valsamis Department of Economics University of Athens Athens, Greece ISBN 978-3-642-41343-8 ISBN 978-3-642-41344-5 (eBook) DOI 10.1007/978-3-642-41344-5 Springer Heidelberg New York Dordrecht London Library of Congress Control Number: 2013957873 # Springer-Verlag Berlin Heidelberg 2013 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) Contents 1 Introduction .......................................... 1 Part I The European Crisis 2 The Evolution and the Current Status of the European Financial Crisis ....................................... 7 2.1 Evolution of the European Union . ...................... 7 2.2 The Historical Evolution of the Crisis .................... 13 2.3 An Initial Approach to the Crisis . 16 References ............................................ 20 3 The Great European Recession ........................... 21 3.1 The Costs of the Great Recession ....................... 22 3.2 The Redistribution Consequences . 25 3.3 The Comeback Lag and the Divergence Evolution . ....... 30 References ............................................ 31 Part II The Structural Elements of the Crisis 4 The European Suboptimal and Segment Areas ............... 35 4.1 The Limitations of Eurozone Member Countries . ......... 36 4.2 The Segmented Economic and Social Areas . .............. 38 References ............................................ 42 5 European Stock Asymmetries ............................ 43 5.1 Population and Geostrategy Asymmetries . ................ 43 5.1.1 Population Balances ........................... 44 5.1.2 Geostrategy Balances . 47 5.2 The Economic Stock Imbalances . 48 5.2.1 Debt: Public and Private ........................ 48 5.2.2 Tangible and Intangible Assets . ................ 49 References ............................................ 51 v vi Contents 6 European Flow Imbalances .............................. 53 6.1 Public Deficits . 53 6.2 The External Accounts ............................... 54 6.3 Savings and Investments ............................. 58 6.4 Employment and Inflation . ...................... 59 6.5 The Competitiveness Imbalances ....................... 60 References ............................................ 64 7 Culture, Institutions and Politics as Crisis Generators .......... 65 7.1 Cultural Background ................................ 65 7.2 Political Balances . 67 7.3 Governance . 70 7.4 Institutions and Incentives . 71 References ............................................ 75 Part III The Policy Response 8 The Growth Lag and Strategic Choices ..................... 81 8.1 The Long-Term Growth Lag . ..................... 81 8.2 The Growth Priorities ............................... 83 8.3 The Attainment of Long-Term Competitiveness and Export Orientation . ...................................... 84 8.4 The Bank-Based Growth . 87 8.5 Debt Management . ................................. 88 References ............................................ 94 9 Fiscal Policy and Consolidation ........................... 97 9.1 The Effectiveness of Fiscal Policy . 97 9.2 Contractionary or Expansionary Austerity Policy . ......... 99 9.3 Tax-Based Versus Spending-Based Fiscal Consolidations . 101 9.4 The Size of Fiscal Multipliers . ......................... 102 9.5 Fiscal Tightening in a Liquidity Trap . ................. 104 9.6 The Role of Perceived Risk of Sovereign Debt . 105 9.7 Can Austerity Be Self-Defeating? ....................... 106 9.8 Synchronized Fiscal Consolidations and Spillover Effects . 109 9.9 Fiscal Consolidation Programs After the Euro . 110 References ............................................ 115 10 The Supply Side Policies ................................ 119 10.1 Supply Side Rationale . ......................... 119 10.2 Structural Reforms . 120 10.3 The Required Adjustment and the Adjustment Speed ........ 123 10.4 The Effectiveness of Economic Policy in Europe . 126 References ............................................ 131 Contents vii 11 Monetary Policy ....................................... 133 11.1 The Imbalanced Monetary Policy ...................... 133 11.2 Rebalancing and Inflation . 137 11.3 The Effectiveness of Monetary Policy and the Liquidity Trap .................................... 140 11.4 The Financial Transaction Tax . ..................... 141 References ............................................ 142 12 The Policy of the European Central Bank ................... 145 12.1 The Open Market Operations ......................... 145 12.2 The ECB as a Treaty Changer ........................ 149 12.3 The Multiple Bond Equilibria . ....................... 150 12.4 The Euro’s Confidence . ............. 153 12.5 The Role of the Lender of Last Resort . 155 References ............................................ 158 13 Restoration of the Banking System and the Banking Deleveraging Process ................................... 159 13.1 Contagion and Systemic Risk . 159 13.2 The Financial Market Fragmentation . ................... 161 13.3 Weak European Banks .............................. 163 13.4 The Credit Crunch and the Financing of the Real Economy . 165 13.5 The Deleveraging Process . .......................... 166 References ............................................ 173 14 The Role of the IMF in the European Evolution .............. 177 14.1 The Character of the IMF . 177 14.2 Global Financial Governance and the IMF’s Role . ........ 181 14.3 The IMF in Europe . 181 14.4 The IMF and Sovereign Debt Management ............... 183 14.5 Conditionality and Supply-Side Policies ................. 185 14.6 The IMF and Domestic Policies ....................... 187 References ............................................ 189 Part IV The Political Economy of European Synthesis and the Medium Future 15 Debates and Choices .................................... 193 15.1 The Political Economy Approach: Ideas and Cultural Background Diversification . 193 15.2 The Critical Debates . .............................. 195 15.3 The Social Model Controversy . ...................... 198 References ............................................ 201 viii Contents 16 The European Synthesis ................................. 203 16.1 The European Response to the Crisis . ................ 203 16.2 Fiscal and Macro Management . ................... 204 16.3 Financial Stabilization, Banking Sector Reorganization and the Deleveraging Schedule . ........................ 206 16.4 The Structural Readjustment .......................... 213 References ............................................ 221 17 The Medium-Term Future for the World and Europe .......... 223 17.1 The Medium-Term Future for the World: 2015–2025 . 223 17.2 The Two Potential Worlds ........................... 226 17.3 The European Evolution ............................. 228 References ............................................ 232 18 Economy and Politics ................................... 235 18.1 An Integrated Approach to the Crisis and Politics . ....... 235 18.2 The Political Economy of the European Crisis . 239 18.2.1 Geostrategic Issues and Economic Nationalism . 239 18.2.2 Beggar-Thy-Neighbor Policies .................. 243 18.2.3 The Euro as an Exchange and Reserve Currency and the Internal Repercussions . 244 18.2.4 The Democratic Deficit and Monetary Policy