András INOTAIAndrás INOTAIHow to manage the costs of How to manage the costs of

crisis management in the crisis management in the European Union?European Union?

„„Post-Crisis Economic Development of EU and Bulgaria”Post-Crisis Economic Development of EU and Bulgaria”18-19 October 2012, Sofia18-19 October 2012, Sofia

1. Macroeconomic impacts of the global 1. Macroeconomic impacts of the global financial and economic crisisfinancial and economic crisis

- return to growth or lost decade?- return to growth or lost decade?- rapid recovery of exports: another argument for - rapid recovery of exports: another argument for

export-oriented growth pattern?export-oriented growth pattern?- budget deficit and steps towards fiscal - budget deficit and steps towards fiscal

consolidationconsolidation- the long-term negative impact: what to do with - the long-term negative impact: what to do with

reducing the public debt?reducing the public debt?

2. 2. Shifting emphasis on crisis management: from Shifting emphasis on crisis management: from fiscal consolidation to growth stimulus?fiscal consolidation to growth stimulus?

- original approach: unilateral fiscal consolidation- original approach: unilateral fiscal consolidation- no other way available in some countries- no other way available in some countries- German pressure (raising revenues by higher taxes and - German pressure (raising revenues by higher taxes and

more efficient tax collection + cutting expenditure more efficient tax collection + cutting expenditure during social crisis, reducing the staff of public during social crisis, reducing the staff of public administration, stopping subsidization of state-owned administration, stopping subsidization of state-owned companies)companies)

- attitude of financial markets- attitude of financial markets- blind belief in automatic return to growth as a result of - blind belief in automatic return to growth as a result of „ „successful” fiscal consolidationsuccessful” fiscal consolidation- belief in return of international capital- belief in return of international capital- higher labour market flexibility - higher labour market flexibility

3. Why unilateral fiscal consolidation does not 3. Why unilateral fiscal consolidation does not work?work?

- crisis deepened, negative spiral emerging (negative - crisis deepened, negative spiral emerging (negative growth, high unemployment)growth, high unemployment)

- adjustment costs very high but different degrees across - adjustment costs very high but different degrees across member countriesmember countries - negative social and political consequences- negative social and political consequences - continuous/repeated negative opinion of rating - continuous/repeated negative opinion of rating

agenciesagencies - no return of confidence + foreign capital, increasing - no return of confidence + foreign capital, increasing

costs of refinancing debtcosts of refinancing debt

4. Factors of „change of paradigm”4. Factors of „change of paradigm”

- failure of one-sided approach based on fiscal - failure of one-sided approach based on fiscal consolidationconsolidation

- spread of crisis to several other member - spread of crisis to several other member countriescountries

- slowing/frozen growth prospects in the EU (and - slowing/frozen growth prospects in the EU (and the world economy): towards a „lost decade” the world economy): towards a „lost decade” without reaching pre-crisis GDP levels before without reaching pre-crisis GDP levels before 2014-20202014-2020

- rapidly growing unemployment, with special - rapidly growing unemployment, with special regard to youth unemployment („lost regard to youth unemployment („lost generation” and its socio-political generation” and its socio-political consequences)consequences)

4. Factors of „change of paradigm”4. Factors of „change of paradigm”

- populism and demagogy, anti-EU - populism and demagogy, anti-EU movements and public opinionmovements and public opinion

- income polarisation- income polarisation- undermining the middle class-based - undermining the middle class-based

structure and threat to the fundamentals of structure and threat to the fundamentals of European democracyEuropean democracy

- failed or delayed reacion at EU level - failed or delayed reacion at EU level (partial crisis management instead of (partial crisis management instead of clearcut crisis prevention – see Greece clearcut crisis prevention – see Greece

between January and May of 2010)between January and May of 2010)

5. Dilemmas at present: how to mix policy 5. Dilemmas at present: how to mix policy measures of fiscal consolidation with measures of fiscal consolidation with

growth stimulus?growth stimulus?

- - first fiscal consolidation before growth stimulusfirst fiscal consolidation before growth stimulus - growth as a remedy of more manoeuvring room - growth as a remedy of more manoeuvring room

for fiscal consolidationfor fiscal consolidation

- both at the same time, but how- both at the same time, but how??

6. What kind of steps in favour of growth-oriented 6. What kind of steps in favour of growth-oriented strategy?strategy?

- EU-2020 – key targets agreed, but…- EU-2020 – key targets agreed, but… - growth and jobs- growth and jobs - Six Pack (German influence) – structural - Six Pack (German influence) – structural

change, privatisation, deregulation of labour change, privatisation, deregulation of labour marketsmarkets

- but: short vs. longer term effects - but: short vs. longer term effects social and political costssocial and political costs different adjustment capacity of different adjustment capacity of

member countries member countries - growth stimulus of Euro 120 bn (less than 1 per - growth stimulus of Euro 120 bn (less than 1 per

cent of EU GDP) cent of EU GDP)

6. What kind of steps in favour of growth-oriented strategy?6. What kind of steps in favour of growth-oriented strategy?

- uncertainties:- uncertainties: - very limited manoeuvring room of several - very limited manoeuvring room of several

countriescountries - loosening fiscal discipline if money for growth - loosening fiscal discipline if money for growth

availableavailable - behaviour of financial markets uncalculable- behaviour of financial markets uncalculable - Euro 120 bn very small amount, when - Euro 120 bn very small amount, when

exacerbated debate about the future of the exacerbated debate about the future of the multiannual financial framework between 2014 multiannual financial framework between 2014 and 2020and 2020

7. Key elements of potential growth7. Key elements of potential growth - domestic demand? - domestic demand? - limited space- limited space

- more space if poorer segments of the - more space if poorer segments of the society favouredsociety favoured

- external „support”: Germany’s „budgetary - external „support”: Germany’s „budgetary

easing”?easing”?

7. Key elements of potential growth7. Key elements of potential growth- investments: yes, if…- investments: yes, if…- still existing overcapacities- still existing overcapacities- general investment climate (due to economic, social and - general investment climate (due to economic, social and political factors)political factors)- future-oriented investments- future-oriented investments- in which sectors- in which sectors- time factor: short-term easing vs. long-term remedies- time factor: short-term easing vs. long-term remedies- uncertainty of long-term investments (R+D, innovation)- uncertainty of long-term investments (R+D, innovation)- education and long-term supply-demand on labour - education and long-term supply-demand on labour

marketsmarkets- splitting labour markets (competitive vs. uncompetitive - splitting labour markets (competitive vs. uncompetitive sectors – and government policies needed everywhere)sectors – and government policies needed everywhere)

7. Key elements of potential growth7. Key elements of potential growth

- exports: most important growth factor- exports: most important growth factor

- experience with crisis (quick recovery of - experience with crisis (quick recovery of exports)exports)

- growing orientation towards extra-EU - growing orientation towards extra-EU markets, but…markets, but…

- factors of international competitiveness- factors of international competitiveness

8. Conclusions8. Conclusions

- unilateral fiscal consolidation does not help- unilateral fiscal consolidation does not help- change necessary but results far from unambiguously - change necessary but results far from unambiguously

positivepositive- exports as key factor of growth- exports as key factor of growth- debt problem international: EU and USA (to be managed - debt problem international: EU and USA (to be managed

by internationally controlled higher inflation)by internationally controlled higher inflation)- key challenges hidden by crisis (demography, labour - key challenges hidden by crisis (demography, labour

market, social model, even democracy)market, social model, even democracy)- a new quality of EU-level policy-making necessary: fiscal - a new quality of EU-level policy-making necessary: fiscal transfer union + political union – as soon as possible transfer union + political union – as soon as possible

(time is rapidly running out)(time is rapidly running out)

8. Conclusions8. Conclusions

- fiscal consolidation and the management of its - fiscal consolidation and the management of its social and political costs (negative social social and political costs (negative social impacts more threatening than consequences impacts more threatening than consequences of climate change in the second decade of the of climate change in the second decade of the 21st century)21st century)

- fiscal consolidation without eliminating key - fiscal consolidation without eliminating key factors of lack of competitivenessfactors of lack of competitiveness

- how to direct investments into the „real sector”- how to direct investments into the „real sector”- how to encourage personal savings for - how to encourage personal savings for

investments and not for private consumptioninvestments and not for private consumption- political vs. economic rationality- political vs. economic rationality

Thank you for your attention.Thank you for your attention.