Cernobbio, April 2019 The Global Dilemma and the European Paradox Prof. Dr. Heiner Flassbeck www.makroskop.eu We are living in extraordinary times: Never in history interest rates were so low Short term rate in the UK flassbeck-economics.de -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% Source: OECD, Deutsche Bundesbank Deutsche OECD, Source: 1) 1956 We Annual yield on 10 on yield Annual 1957 1958 Geneva and Zurich, February Geneva February Zurich, and 2015 1959 1960 are 1961 1962 1963 entering - 1964 year government bonds (monthly basis), minus annual rate of change CPI (monthly basis) (monthly CPI change of rate annual minus basis), (monthly bonds government year 1965 1966 1967 1968 1969 1970 1971 1972 a 1973 1974 recession 1975 1976 1977 1978 Long 1979 1980 1981 - 1982 inGermany rates interest real term 1983 1984 with 1985 1986 1987 1988 1989 zero 1990 1991 1992 1993 interest 1994 1995 1996 flassbeck 1997 1998 1999 2000 - economics.de 2001 rtates 2002 2003 2004 1) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 We are entering a recession without a revival of investment Investment ratio of private companies in Germany 1) 25 24 23 nominal 22 21 20 19 18 17 16 15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1) Bruttoanlageinvestitionen (neue Anlagen) im Verhältnis zur Bruttowertschöpfung der privaten Unternehmen ohne Grundstücks- und Wohnungswesen. Wert für 2018 berechnet mit Hilfe der Bruttoanlageinvestitionen der nichtstaatlichenSektoren ohne Wohnbauten. Quelle: Statistisches Bundesamt, eigene Berechnungen. flassbeck-economics.de in % 10 15 -5 0 5 Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, FRED. Zinssatz auf US auf Zinssatz FRED. im des BIP Vergleich Vorjahr,zum Wachstumsrate Quelle: 1951 1953 1955 Regime Regime 1957 the US in nominal interest and Nominal Growth 1959 1961 1963 change 1965 1967 1969 - 1971 back 1973 rate GDP Growth - Staatsanleihen von mit Laufzeit fester Staatsanleihen 1975 to 1977 1979 the 1981 past 1983 1985 10 Interest Interest ten year bonds - Jahren, Jahren, FED. 1987 after 30 after 1989 flassbeck 1991 1993 1995 years - economics.de 1997 1999 2001 of 2003 failure 2005 2007 2009 2011 2013 2015 2017 in % 10 15 20 -5 0 5 Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, AMECO. Zinssatz auf französische Staatsanleihen v mit Staatsanleihen Laufzeit fester französische auf AMECO. Zinssatz im des BIP Vergleich Vorjahr,zum Wachstumsrate Quelle: 1961 1962 1963 1964 1965 1966 1967 1968 1969 Growth and interest in France in and interest Growth 1970 1971 1972 1973 The same 1974 1975 rate GDP Growth 1976 1977 1978 1979 1980 1981 is 1982 true 1983 1984 1985 1986 for 1987 ten Interest bonds yearrate for 1988 1989 France 1990 1991 1992 on 1993 10 Jahren, FRED. Jahren, 10 1994 flassbeck 1995 1996 1997 1998 1999 - economics.de 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 in % 10 15 -5 0 5 Quelle: Wachstumsrate des BIP im Vergleich zum Vorjahr, Statistisches Bundesamt, AMECO. Zinssatz auf Bundesanleihen Bundesanleihen auf AMECO. Zinssatz mit Bundesamt, feste Statistisches im des BIP Vergleich Vorjahr,zum Wachstumsrate Quelle: 1956 1958 1960 1962 Deutschland in für Staatsanleihen Zinssatz und Wachstum 1964 1966 1968 des BIP Wachstumsrate 1970 1972 ... 1974 and 1976 for 1978 1980 Germany 1982 1984 1986 1988 1990 Zinssatz 10 Zinssatz r L 1992 aufzeit von 10 Jahren, OECD & AMECO. & OECD Jahren, von 10 aufzeit flassbeck 1994 1996 - Jahres - economics.de 1998 - 2000 Staatsanleihen 2002 2004 2006 2008 2010 2012 2014 2016 2018 But it is too late for a market solution! GDP-Growth1) , interest rate2) and public debt rate3) in the USA 15 120 GDP1) (left axis) 100 Interest rate2) (left axis) 10 80 60 in % in 5 40 3) in % of GDP Public Debt (right axis) 20 0 0 -20 -5 -40 1951 1993 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1) Gross Domestic Product, Percent Change from Preceding Period, Annual, Not Seasonally Adjusted 2) Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis 3) Total Public Debt as Percent of Gross Domestic Product, Percent of GDP, Annual, Seasonally Adjusted Source: FRED, FED flassbeck-economics.de Fiscal policy is the only option left, government debt, not labour market flexibility is the solution Unemployment rate and US budget balance 11 -12 10 -10 Budget balance 9 -8 8 -6 7 -4 6 -2 5 0 Unemployment rate 4 2 3 4 Unemployment Unemployment rate % in (annualaverage) US US budgetbalance in % GDP of (inverted scale) 2 6 1 8 0 10 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Federal Reserve Bank of St. Louis flassbeck-economics.de In Japan as well, the government is the missing debtor But this solution is forbidden in Germany and in Europe Germany relies on current account surpluses to solve the problem of the missing debtor, but not everybody can do that Financing balances1) of economic sectors in Germany 1991-2018 8 private households 6 4 Companies 2 0 -2 Government in percent of GDP of percent in -4 -6 -8 Foreign countries2) -10 -12 ) 2 2018 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1) In % of nominal GDP; 2) Negative values mean foreign indebtedness 2) Estimate of the EU Commission Source: AMECO flassbeck-economics.de That is why Europe is totally unable to solve ist unemployment problem Unemployment rate1) 14 EMU2) 12 10 8 USA 6 Japan Quote in % Erwerbspersonen % in der Quote 4 2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 flassbeck-economics.de Critical Analyses on Politics and Economics Visit us at www.makroskop.eu Publisher: Prof. Dr. Heiner Flassbeck & Dr. Paul Steinhardt Unit labour cost growth determines inflation rates Inflation (CPI) und ULC Growth in different countries, 1970-1990 and 1990-2016 18% 16% 14% R² = 0,9719 12% 10% 8% annual rate of change of ULC in % ULC of ofchange annualrate Ø 6% 4% 2% 0% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Ø annual rate of change of CPI in % Source: Ameco; Apart from Switzerland all countries are marked with two dots for the given period of time. Japan ab 1980. CPI stands for consumer price inflation. flassbeck-economics.de Evidently, the break is not to be found in the 50s West Germany 1950 - 1960 15% 10% Government Private Households 5% in % ofGDP% in 0% Foreign2) -5% Companies -10% 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1) In % of nominal GDP; 2) Negative values mean foreign indebtedness Source: Statistisches Bundesamt Geneva and Zurich, February 2015 flassbeck-economics.de Not in the 60s West Germany 1960 - 1975 10 Private households 8 6 4 in % ofGDP in 2 Government 0 Foreign countries 2) -2 -4 -6 Companies -8 -10 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1) As a percentage of nominal gross domestic product 2) Negative values mean foreign debt Source: Deutsche Bundesbank,Geneva Ameco and. Zurich, February 2015 flassbeck-economics.de.