A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro Working Paper State-of-play in implementing macroeconomic adjustment programmes in the euro area ROME Discussion Paper Series, No. 14-05 Provided in Cooperation with: Research Network “Research on Money in the Economy” (ROME) Suggested Citation: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro (2014) : State-of-play in implementing macroeconomic adjustment programmes in the euro area, ROME Discussion Paper Series, No. 14-05, Research On Money in the Economy (ROME), s.l. 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Further information is available on www.rome-net.org. ISSN 1865-7052 Research On Money in the Economy Discussion Paper Series ISSN 1865-7052 No 2014-05, May 2014 State-of-play in Implementing Macroeconomic Adjustment Programmes in the Euro Area* Daniel Gros, Cinzia Alcidi, Ansgar Belke, Leonor Coutinho and Alessandro Giovannini The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. NOTE: Working papers in the “Research On Money in the Economy” Discussion Paper Series are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the author(s) and do not indicate concurrence by other members of the research network ROME. 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Michler, Heinrich-Heine-University of Duesseldorf, Department of Economics, Universitaetsstr. 1, Build. 24.31.01.01 (Oeconomicum), D-40225 Duesseldorf, Germany Tel.: ++49(0)-211-81-15372 Fax: ++49(0)-211-81-15261 E-mail: [email protected] [email protected] DIRECTORATE GENERAL FOR INTERNAL POLICIES ECONOMIC GOVERNANCE SUPPORT UNIT (EGOV) Committee study on the State-of-play in implementing macroeconomic adjustment programmes in the euro area Study on the request of the Economic and Monetary Affairs Committee February 2014 ECON EN State-of-play in implementing macroeconomic adjustment programmes in the euro area February 2014 Abstract Two of the four macroeconomic adjustment programmes, Portugal and Ireland’s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound. 2 PE 497.740 This study was requested by the European Parliament's Economic and Monetary Affairs Committee. AUTHORS Daniel Gros, Director, Centre for European Policy Studies Cinzia Alcidi, LUISS Research Fellow, Centre for European Policy Studies Ansgar Belke, Jean Monnet Professor, University of Duisburg-Essen Leonor Coutinho, Europrism Research Fellow, Europrism Research Centre Alessandro Giovannini, Researcher, Centre for European Policy Studies RESPONSIBLE ADMINISTRATORS Jost Angerer Stanislas de Finance Economic Governance Support Unit Directorate for Economic and Scientific Policies Directorate-General for the Internal Policies of the Union European Parliament B-1047 Brussels LANGUAGE VERSION Original: EN ABOUT THE EDITOR Economic Governance Support Unit provides in-house and external expertise to support EP committees and other parliamentary bodies in playing an effective role within the European Union framework for coordination and surveillance of economic and fiscal policies. E-mail: [email protected] This document is also available on Economic and Monetary Affairs Committee homepage, under section European Semester and Economic Dialogue at: www.europarl.europa.eu/ECON Manuscript completed in February 2014. © European Union, 2014 DISCLAIMER The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the publisher is given prior notice and sent a copy. PE 497.740 3 NOTE FROM THE AUTHORS This briefing paper is based on official documents produced by the IMF and the European Commission and on analysis contained in recent economic literature. The main purpose of this briefing paper is to present stylised facts in a systematic fashion and to summarise academic and policy analysis in order to provide a useful background against which to make an overall assessment of the macroeconomic adjustment being made in the four countries under programme. Our assessment of the adjustment process is based exclusively on available facts and data and does not consider anecdotes or other accounts that could potentially lead to partisan judgements. Our tasks did not include comments on the democratic accountability of the Troika or an evaluation of its inner workings. GLOSSARY ECB European Central Bank EFSF European Financial Stability Facility European Financial Stability EFSM Mechanism ELA Emergency Lending Assistance EMU Economic and Monetary Union ESM European Stability Mechanism GLF Greek Loan Facility IMF International Monetary Fund PSI private sector involvement SBA Stand-By Arrangement SPV special purpose vehicle 4 PE 497.740 CONTENTS Note from the authors 4 Glossary 4 CONTENTS 5 LIST OF TABLES 7 LIST OF FIGURES 7 Executive summary 8 1. Introduction 9 2. The feasibility of the macroeconomic adjustment 12 2.1 Why the macroeconomic adjustment was suddenly needed 12 2.2 Multipliers and the impact of the fiscal adjustment 16 2.2.1 The ‘fiscal multipliers’ debate 18 2.2.2 Concluding considerations on multipliers 19 2.3 Comparing falls in output 20 2.3.1 Investment 21 2.3.2 Exports 22 2.4 Concluding remarks on the macroeconomic adjustment 23 3. Greece 26 3.1 The Greek tragedy: The unsustainability of public finances 26 3.1.1 Debt and financing outcomes 27 3.1.2 The theoretical and practical issues in designing the programme 29 3.2 Transforming Greece in a competitive economy 30 3.3 The feasibility of the adjustment programme 31 4. Portugal 31 4.1 Ensuring public finances and financial sector sustainability 32 4.2 Increasing external competitiveness and potential growth 33 4.2.1 Export-driven