Productivity slowdown: Comparative perspectives Euro area and Germany Marcel Fratzscher DIW Berlin and Humboldt University Berlin PIIE Workshop Washington DC, 16 November 2015
The crisis trap Financial/banking crisis Credit crunch Credit risk & losses Cost of recapital. Credit risk & losses Economic crisis Confidence crisis Fiscal consolidation Fiscal deficits Debt crisis 2
Secular stagnation? Growth as key challenge Real GDP in Europe (Index, Q1 2008 = 100) Euro Area Germany Spain Netherlands France Italy 104 102 100 98 96 94 92 90 Credit standards (Change compared to previous quarter) 80 70 60 50 40 30 20 10 0-10 -20 Consumer Credit (Next Qtr) Firm Credit (Next Qtr) Housing Credit (Next Qtr) 2008 2009 2010 2011 2012 2013 2014 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Eurostat. Last observation: Q4 2014. EA7d Source: European Central Bank. Last observation: Q2 2015. EA2c
The Germany Illusion
Most Europeans with little productivity growth Change ULC (1999-2007, diff. to EA avg.) Productivity (inverted sign) Compensation ULC 40 30 20 10 0-10 -20 IE ES PT GR IT NL FR BE FI AT DE Quelle: Eurostat, EU Commission. 5
6 Diverging productivity and investment
Dysfunctional credit channel Source: 7 ECB, JP Morgan.
8 Bank risks rising further
9 Deflation risk rising too
II. Investment gaps are large in Europe Average investment gap % GDP 1999-2012 1999-2007 2010-2012 Germany 2,9 2,5 3,7 Netherlands 2,6 1,9 4,8 Finland 1,5 1,5 2,0 Belgium* -0,8-0,5-0,7 France 0,0 0,3-0,3 Austria -0,5-1,0 0,6 Italy -0,9-1,4 0,5 Greece -1,5-5,0 3,0 Portugal -0,8-2,7 4,1 Spain -4,3-6,2 1,1 Ireland -0,1-3,6 9,4 USA** -1,2-2,3 1,9 Japan 0,1-0,6 2,4 Sources: DIW calculations based on OECD data
Investment gap in most sectors Source: WIOD SEA, World Bank, calculations DIW Berlin
Expert committee on investment : 10-Point Plan 1. Rules Positive net investment rate (unexpected) surpluses to be used for public investment Creation of autonomous institutions with specific tasks (e.g. Asfinag AUT) 2. Public investment esp. municipalities financing: 15 bn. "Investment pact for municipalities" technical assistance: public infrastructure bodies risk sharing: "investment fund" and "citizens fund" 12
Expert committee on investment : 10-Point Plan 3. Private Investment Environment: skilled workers, immigration, regulation, workforce participation, family policy, financing research and development: 3.5% goal startup companies: mentality, taxation on losses, biased taxation of equity capital energy digital infrastructure 4. Europe transform Juncker plan into a permanent mechanism energy, digital infrastructure, transport, regulation 13
What can Germany do for Europe? 1. Stronger joint rules: fiscal policy, no bail-out Move from inter-governmental to more federal structure of decisions 2. EU insurance system (vs. transfer union): more self-reliance, ex ante fairness 3. More stability orientation E.g. on inflation, economic activity, sovereign debt 4. Louder voice E.g. ECB decision-making; is compromise possible? 5. Investment productivity - growth Germany as big beneficiary; e.g. via trade 14
15 Appendix
16 1. Growth expectations decline further
2. Huge decline in FDI in Europe Source: OECD, DIW calculations
3. Rising financial fragmentation Staatsanleihen des Heimatlandes (% der Bilanzsumme der Banken) Staatsanleihen des Heimatlandes (% des Eigenkapitals der Banken) 0,12 0,1 0,08 0,06 0,04 0,02 Deutschland Portugal Italien Irland Griechenland Spanien Eurozone 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 Deutschland Portugal Italien Irland Griechenland Spanien Eurozone 0 2006 2007 2008 2009 2010 2011 2012 2013 0 2006 2007 2008 2009 2010 2011 2012 2013 Quelle: Europäische Zentralbank. Letzte Beobachtung: Oktober 2013. Quelle: Europäische Zentralbank Letzte Beobachtung: Oktober 2013.
4. Massive debt overhang 19
20 Debt overhang not adjusting (yet)
5. Massive private investment gap Abbildung 2: Bruttoanlageinvestitionen ohne Wohnungsbau, nominal in % des BIP 20 19 18 17 16 15 14 13 12 11 10 16,2 15,1 14,6 12,9 11,9 1970 1975 1980 1985 1990 1995 2000 2005 2010 West Deutschland Deutschland Quelle: EU-Kommission 21
Deflation already reality
Trade-off limited probability high cost Risk 1. Secular stagnation and deflation Probability (medium-term) High Cost High 2. Political crisis Medium High 3. Bank default Medium High 4. Sovereign debt crisis Low High 5. Emerging market slow-down Low Medium 6. Geopolitical conflict Low Medium 7. Slow reforms Medium Medium
II. Trend decline in investment
Investment gap, esp. for municipalities