Luigi Paganetto Editor Public Debt, Global Governance and Economic Dynamism Public Debt, Global Governance and Economic Dynamism Luigi Paganetto Editor Public Debt, Global Governance and Economic Dynamism 123 Editor LuigiPaganetto Tor Vergata FoundationforEconomic Research Rome Italy WewouldliketothanktheItalianMinistryofForeignAffairsforthefinancialcontributionto realizethispublication ISBN 978-88-470-5330-4 ISBN 978-88-470-5331-1 (eBook) DOI 10.1007/978-88-470-5331-1 SpringerMilanHeidelbergNewYorkDordrechtLondon LibraryofCongressControlNumber:2013937600 (cid:2)Springer-VerlagItalia2013 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionor informationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodology now known or hereafter developed. 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While the advice and information in this book are believed to be true and accurate at the date of publication,neithertheauthorsnortheeditorsnorthepublishercanacceptanylegalresponsibilityfor anyerrorsoromissionsthatmaybemade.Thepublishermakesnowarranty,expressorimplied,with respecttothematerialcontainedherein. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Luigi Paganetto Part I US Growth Policies in the Election Year Five Economic Challenges for the Next US President. . . . . . . . . . . . . 7 Moreno Bertoldi The Multiplier, Sovereign Default Risk, and the US Budget: An Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 William R. Cline Cyclical Policies, Structural Imbalances and Growth of the U.S. Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Dominick Salvatore Part II Assessing the Impact of Labor Market Reforms Short-Time Work Scheme and Unemployment Insurance Program Beneficiaries: The Analysis of Employment Outcomes . . . . . . . . . . . . 55 Giuseppe De Blasio, Leopoldo Mondauto and Maurizio Sorcioni Part III Imbalances, Tensions and Possible Readjustments: Evidence from Intertemporal Accounting and the Financial Accounts In Need of Sectoral and Regional Rebalancing in the Euro Area: A Euro Area Sectoral Accounts (Flow-of-Funds) Perspective . . . . . . . 67 Philippe de Rougemont v vi Contents Patterns in Financial Flows? A Longer-Term Perspective on Intersectoral Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Daniele Fano and Giovanni Trovato Part IV G20, Global Governance and Regional Integration The Determinants of Macroeconomic Imbalances in the Euro Area: The Role of External Performances. . . . . . . . . . . . . . . . . . . . . . . . . . 105 Paolo Guerrieri and Piero Esposito The Group of Twenty: Origins, Prospects and Challenges for Global Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Homi Kharas and Domenico Lombardi Then and Now: European Trade, Payments, and Financial Regionalism in Historical Perspective. . . . . . . . . . . . . . . . . . . . . . . . . 145 Juan Carlos Martinez Oliva What Is Wrong with the G20?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Ignazio Angeloni Part V Multipliers, the Crisis and Beyond Fiscal Multipliers and Public Debt Dynamics in Consolidations . . . . . 167 Jocelyn Boussard, Francisco de Castro and Matteo Salto The Effects of Expenditure Shocks in Italy During Good and Bad Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 Francesco Caprioli and Sandro Momigliano Part VI EU Governance, Growth and the Eurozone Crisis EMU in Crisis: What’s Next? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Francesco Paolo Mongelli and Ad van Riet Europe: Is Austerity Compatible with Endogenous Growth?. . . . . . . . 253 Luigi Paganetto and Pasquale Lucio Scandizzo Germans at the Crossroad: Preserve Their Socio-Economic Model or Save the Euro?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 Luigi Bonatti and Andrea Fracasso Contents vii The Austerity Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 Carlo Cottarelli Part VII EMU Policy and Public Debt The Sovereign Debt Crisis in Europe: How to Move from Bad to Good Equilibrium? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Pier Carlo Padoan, Urban Sila and Paul van den Noord Interest Rate Shock and Sustainability of Italy’s Sovereign Debt. . . . . 327 William R. Cline EMU Sovereign Spreads and Macroeconomic News . . . . . . . . . . . . . . 343 Daniela Arru, Davide Iacovoni, Libero Monteforte and Filippo Maria Pericoli Objectives and Instruments of Economic Policy in the Eurozone: How to Overcome the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 Rainer Masera From Collapse to Constitution: The Case of Iceland. . . . . . . . . . . . . . 379 Thorvaldur Gylfason Part VIII Policy Recommendations Conclusive Intervention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 Maurizio Melani Introduction Luigi Paganetto Abstract Public debt and euro continue to be the most challenging questions Europe is trying to face. Public debt and euro continue to be the most challenging questions Europe is trying to face. Imbalancesandlargedifferencesintherateofgrowtharestillworryingfigures of the international economic scenario. The inadequacy of economic dynamism is the main problem for the most advanced countries, mainly in Europe. Accordingtosomecommentators(seeforinstanceDeGrauwe2011;Tabellini 2011 and Wyplosz 2011) the Eurozone has been saddled in a bad equilibrium becausetheECBwaitedtoolongbeforeusingitsBigBazookaandhasrefusedto act as a lender of last resort. They believe that if the next rescue operation were only big enough, the Eurozone drama would come to a happy end. The near-term costs of austerity mean we should keep thinking about alterna- tives, such as making commitments to future tightening more credible (e.g., entitlement-programme reforms). However, the presence of a sovereign-risk channel also provides a strong argument for focusing on ways to limit the transmission of sovereign risk into private-sector borrowing conditions. Tornell has put in evidence that the problems come from tragedy-of-the-com- mons transpiring in the Eurosystem, where the ECB and the 17 national central banks share a common pool of money demand. The Eurosystem is not a unitary textbook decision-maker. • InterestratesaresetinacentralisedfashionbytheECB’sgoverningboard,but • Each national central bank has de facto power over the expansion of central bank credit to banks in its jurisdiction. L.Paganetto(&) TorVergataFoundationforEconomicResearch,Rome,Italy e-mail:[email protected] L.Paganetto(ed.),PublicDebt,GlobalGovernanceandEconomicDynamism, 1 DOI:10.1007/978-88-470-5331-1_1,(cid:2)Springer-VerlagItalia2013 2 L.Paganetto Generally, a private bank can borrow from its national central bank as long as the bank (1) is financially sound and (2) has eligible collateral. What opens the door to the tragedy-of-the-commons is the way in which these conditions are implemented: • Supervisory powers reside with national authorities, not with the ECB in Frankfurt. TheopportunitiesforinstitutionaladvancementintheEUcreatedbythedismal management of the Eurozone crisis may well include the establishment of a banking union. Lack of centralised supervision and mandated supervisory action are main missing elements in the proposals that have been tabled so far. Here, a decision must be taken, first of all, on the competent authority at EU level. The European council already has the legal power to implement the central- ization of supervision at the ECB while EBA could be realized with ordinary legislation. By mid-2012 it is clear that the global recovery is at risk. Byincreasinguncertainty,whiledepressingdemandinanimportantpartofthe worldeconomy, theEurozonecrisisisdangerouslyslowinggrowthintheUSand emerging economies. This is particularly worrying since the US economy could easily be pushed close to the recession zone. By 2010, governments on both sides of the Atlantic had clearly adopted diverging strategies: • for the US restoring self-sustained growth was the priority; • for Europe the priority was to bring budgets back into balance. The problem is that reducing budget deficits without harming growth had become trickier (Wolf 2010). The conclusion is easy to draw. Eurozone governments have to acknowledge that their response to the sovereign crises has been wrong. In present circum- stances,bringingbudgetsbacktobalanceasquicklyaspossibleandatanycostfor growth is a recipe for disaster. ThestrategyadoptedinMay2010hasnotjustfailedtoachieveitsaims:restore debtsustainability,avoidcontagionandreducemoralhazard.Ithasnotproduceda solution that is likely to bring the crisis to its end. Policy makers are facing a dilemma. Still high deficits, rising debt ratio and the volatility of financial markets all argue for continued fiscal consolidation. The IMF Fiscal Monitor (April 2012) points out that too little fiscal consoli- dation could roil financial markets, but too much risks further undermining the recovery. Fiscal tightening could be expected to reduce short term growth mainly while output gaps are negative. If fiscal multipliers are large and public debt is high, fiscal adjustment may appear counterproductive in the short run. Introduction 3 What is the appropriate pace of fiscal consolidation? A gradual and more flexibleapproachcouldbepreferable?Orisstillneeded,assuggestedbyWyploza UturninthepoliciesadoptedtofacethecrisisinEurope?Unfortunatelyitwillbe costly. We have to take account in general, that selffulfilling depressionary expecta- tions push the economies below their potential. Thedynamisminaneconomymaybeunderminedbynegativeexternalitiesthat negatively influence the perspectives of endogenous growth. Tax increase and expenditures cuts reduce the confidence in the future of the economy. Is austerity self-defeating? Is it keeping Europeans underemployed for years and destroyingtheverygrowthneededtopayoffthedebt?Orisitsteeringnationsclearof Greek-liketragedies? References DeGrauweP(2011)TheGovernanceofaFragileEurozone.CEPSWorkingDocumentNo.346, May2011 TabelliniG(2011)TheEurozonecrisis:whatneedstobedone.www.VoxEU.org,15July2011 WyploszC(2011)EurozoneLeadersStilldon’tGetiit.www.VoxEU.org,25Oct2011 WolfM(2010)Whyplansforearlyfiscaltighteningcarryglobalrisks.FinancialTimes,16June 2010