Dividendo do BCP escala no “ranking” dos mais atrativos da banca europeia

[Karamba]

Bom dia !
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A Debate on the Stability Pact

Stephen Roach (from Berlin)



Stephen Roach: In a recent Forum dispatch ("Euro-Wreck" dated 2 June), I raised what I believe are some serious concerns about the state of the European economy, fearing that an asymmetrical shock in Germany could tip this key region into outright deflation. I also raised the related point that the EMU-based recipe of fiscal and monetary policy, which focuses on average performance in the euro-zone, may be inappropriate to deal with severe country-specific shocks in the region's biggest economy. This has stirred up a heated debate amongst our global economics team, the highlights of which follow:

Eric Chaney:

There is an asymmetric shock in Emuland, and it's a big one. Your conclusions Steve are fairly consistent with my own (see State of Emergency Calls for Emergency Remedy, May 16, 2003) proposals: giving Germany (and only Germany) its fiscal freedom temporarily (this is possible under the Stability Pact provisions) under the condition of a complete overhaul of the wage negotiation system. These ideas have circulated among policy makers circles and somebody I met at the G30 last Friday told me: "It's a good idea, Eric, which makes a lot of economic sense, but — this is a big but — it is impossible to sell it to politicians". I will try again.

Riccardo Barbieri:

I agree with the points you make in your article, Eric, but I believe it would be unfair and dangerous to grant Germany a derogation from the Stability Pact — a mechanism it imposed on its European partners as a condition to form EMU and to include high-debt countries. What hope can we have of changing Europe if at the first (or second) recession we throw away a project that was the subject of long discussions and negotiations — and is there for good reasons? Can we reform our pension systems if politicians are allowed to once again delay needed reforms and to expand public spending? When will Germany reform its labour market and its overly generous transfers to the Eastern Landers if its EU partners give it a go-ahead to expand its deficit? How do we prevent Italy from building up more public debt if the EU standard bearers bend the rules? Eric, I understand that your idea is to give Germany derogation in return for reforms — but how can we make this “time consistent?” In addition, do we realise what risk this poses in terms of the new EU members using this relaxation of the rules to get into EMU before their economies are ready to do so? Like Steve, I personally believe that the ECB should cut rates aggressively and, moreover, that the EU should strongly resist any further euro appreciation (as it probably signalled at the G8 meeting). Fiscal loosening should be considered only as a Eurozone-wide move (that is, with all countries temporarily allowed to exceed the 3% threshold for budget deficits) in the event of the recession continuing into 2004. Anything else must be structural, in my view. Finally, Europe should urge our friends in Asia to let their currencies appreciate against the dollar, reflecting their huge trade surplus. This “global rebalancing” is looking very unbalanced to me.

Eric Chaney:

Thanks very much for your thoughts, Riccardo. You were very closely involved in these EMU debates before D-day, and I shared your (strong) views on fiscal policies and the necessity of “intelligent” fiscal discipline (I remember that you made an interesting point about the absurdity of a zero deficit rule). Re Germany, your point on time consistency is, I have to concede, the weak link in my proposal. Another point you are making and often stressed by Vincenzo is the incentive one and, once again, I cannot but agree. All that said, the risk I see is that we are not witnessing just another recession. Instead, we might well be crossing the gate of Deflationland, without knowing whether this will be benign and temporary (maybe necessary, as Joachim thinks) or the first symptom of the “quagmire” described by Paul Krugman, the last thing Europe needs. In addition, I am very far from advocating a fiscal stimulus in Germany. I am just saying that circumstances are indeed exceptional and that Germany should only recover the full use of its fiscal stabilisers, instead of trying pathetically to plug gaps in order to get a satisfecit from Brussels. At the end of the day, Germany will enter deeper in deflation and have an ever bigger public deficit. That is the cruel lesson of the Japanese debt deflation. The Pact (this brainchild of Theo Waigel, as you had wittily named it, if I remember well), mentions an outright recession, measured on an annual basis, as a case for not capping deficits. I am sure that you would agree with me on the fact that what matters is not the annual growth number, but the cumulated change in the output gap. German GDP growth was 0.6% in 2001, 0.2% in 2002 and, on our estimates will be around 0% this year. Even assuming that German potential growth is only 1%, then the increase in the output gap since the end of 2000, will be 2.2% at the end of this year. If all that had happened in one year, it would have been much more spectacular and even our dear Mr. Solbes would have conceded “extraordinary circumstances.” The most unrealistic part of my story is to free up Germany while keeping France and others under the Caudine Forks of the Pact. Impossible to sell it to politicians, I am told in Paris. The law is Nash, not co-operative equilibrium. Don't ask me why, maybe because there is another law saying it is forbidden to be intelligent. That is why I think we will go to deflation, and live a re-foundation crisis. Either the EMU will break up, or we will be wise enough to re-think the macro management of EMU. The theoretical solution to cases of externalities is to create a market where the causes of externalities can be traded. A refunded and innovative Stability Pact would allow governments to trade “rights to pollute,” sorry, I meant “rights to run excessive deficits.”

Riccardo Barbieri:

Eric, maybe the way out then is to re-define recession — or as you suggest to move away from a simple GDP-based measure to something that captures the degree of unused resources, such as a cumulative output gap and some unemployment measure. In my opinion, however, this should simply give a country a longer period of time to reign in its budget deficit: it should not represent a source of permanent overshooting of the deficit ceiling. That said, I am still worried about sanctioning the fact that slow-growing economies that fail to implement structural reforms should be allowed to run large budget deficits for an extended period of time.

Vincenzo Guzzo:

Actually, the word "output gap" is not unheard in Brussels. Excerpts from the Pact clearly refer to the case of below trend growth. In the Stability and Growth Pact circumstances are qualified as exceptional if the deficit slippage is determined "either by an unusual event beyond the control of the member state or by a severe recession", i.e., an annual fall in real GDP of at least 2%. A smaller decline in real GDP can be considered by the ECOFIN Council when it is supported by evidence of the "abruptness of the downturn or the accumulated loss of output relative to past trends." In this case, member states will take as a reference point an annual fall in real GDP of at least 0.75%. With the risk of GDP growth slowing down further this year beyond initial expectations and considering the accumulated loss of output relative to trend, the Commission and the Council may simply give a somewhat more flexible interpretation of this rule. But what would be the risk of freeing up Germany while keeping France, Italy and Co. trapped? Is it simply a matter of political tastes? I don't think so. Let us assume for a second that fiscal policies were fully discretionary and Germany were allowed to raise its deficit to counteract the downturn in the cycle. How could France or Italy digest the idea of keeping their deficits below 3% while watching Germany relaxing its own rules? You don't even need to go that far. More in general, in a monetary union, where countries share the same currency and set common interest rates, if fiscal policies are run in a discretionary fashion, countries simply do not trust each other's moves. An outcome where country A sticks to a moderately tight stance, while B promises the same tight stance but then delivers a much looser outcome would be politically unbearable for A. Politicians from A would also be forced to give up on their promises, if they aim to be re-elected. This leads to the worst possible outcome of spiralling deficits and eventually EMU collapse. The founders of EMU were well aware of this risk and knew that an equilibrium based on rules was the only remedy for the lack of credibility implied in discretionary policies. Unfortunately those rules that fit so nicely in the old days have now turned into a straightjacket. But unless/until Europe capitulates (severe recession with major job destruction), politicians will still regard the Pact as a second best.

Joachim Fels:

Let me add my Teutonic views to this debate. I think Steve's and Eric's proposal that the ECB should target Germany and that Germany should be exempted from the Stability Pact requirements would in fact be counterproductive. I've always seen (and supported) EMU as a Trojan horse which, by exposing member states to a tough competition for real capital and taking short-run tools such as discretionary fiscal and monetary policy away from them, forces them to address the real issues: rigid labour markets, excessive welfare spending and payroll taxes to finance it, and, in the case of Germany, excessive labour costs. And now, just as Germany is finally starting to address these problems, you propose to relax the rules that forced the German government into tackling the real issues head-on. I think that's a bad idea, if you are really interested in a stronger, more competitive German economy in the longer term (as opposed to the next one or two years). We are now seeing the German wage cartel is starting to crumble and that the government is opening up the labour market for outsider competition. My concern is that these attempts will fail if the ECB starts to target Germany and Germany is allowed to apply fiscal stimulus to paper over the structural problems. As strange as it may sound, recession, deflation and a lack of traditional macro policy tools are exactly what is needed to shock the German political system into action. Apart from that, I fully agree with Riccardo and Vincenzo's concerns about the corrosive implications of relaxing the rules for Germany for the Pact as a whole. It sets a bad precedent for other EU members, old and new, and would spell the beginning of the end of the Stability Pact and, possibly, EMU.

Riccardo Barbieri:

Joachim, I wholeheartedly agree (and agreed back in 1996-97) with your argument on EMU being the straitjacket that can force change and integration in a stagnant and complacent Europe. Thinking about the past four years, it looks like we were over-optimistic on how much EMU would change Europe. I am also having growing doubts on whether a central bank modelled on the Bundesbank is what Europe needs moving forward. However, it is too early to throw in the towel. Furthermore, crucial structural reforms such as the one of pension systems are unlikely to go through unless they are part of a Europe-wide effort. In my view, a relaxation of fiscal constraints could lead to further postponement of these reforms.

Stephen Jen:

I find this debate fascinating, and would like to add the following thoughts.

· This is reminiscent of the debate on Japan, in which I took the side of less macro stimulus and more reform. The assumption that many in the market made (some still harbour this presumption) that there should be a “parallel track” approach where massive macro stimulus should complement structural reform was/us just not realistic. The fact is that reforms are only possible under pain. Japan is in its 13th year of post-bubble recession. They tried massive fiscal stimulus, unprecedented monetary stimulus, and now a weak currency policy. All of these measures have merely postponed the inevitable. These measures have had a worse effect on the NPLs and the structural problems in Japan than a policy of forbearance in the US regarding the S&Ls throughout the 1980s. Perhaps Japan is finally determined now to embark on the reforms they should have undertaken 13 years ago. But a precious 13 years, 100% of GDP worth of debt, and, importantly, the credibility of the policy makers have been lost. Europe, in a way, is facing the same question that Japan faced 13 years ago.

· The EMU project should be judged not on the macroeconomic performance of Euroland since 1999, but for what it means structurally for Europe since the Treaty of Rome. It should also be seen from a “generational” perspective. Thirteen years from now, looking back, no one would remember a couple of years of recession in Euroland, but they would celebrate the decision back in 2003 to preserve the structural integrity of the EMU and resist the temptation to take the easy way out. Just think if Japan could do this all over again ... With the benefit of hind sight, Japan would most likely have tried harder to embark on reform early on, rather than being tempted to opt for Keynesian stimulus to solve problems that are fundamentally structural. The point here is precisely that the Euroland HAS the benefit of hindsight: from looking at the experience of Japan.

· Having said all this, the rules-based policy framework in Euroland is probably flawed. Because of the lack of monolithic sovereignty, (i.e., countries in Europe don't trust each other) policies have to be rule-based here in Europe. In contrast, in the US, discretion-based policy making is possible mainly because of the sovereignty issue. This is why we have the stark contrast of “dogmatism” versus “pragmatism” between the two economies across the Atlantic. If Euroland has to live with “dogmatism” and rule-based policy making, then the rules have to be correctly designed, and flaws in the rules rectified over time. The trick here, however, is that these “fixes” of the rules not be done “in times of difficulty,” to avoid the appearance of taking the easy way out for Euroland. This point is especially important in the early stages of the EMU.

· Bottom line: Two years of recession is a price worth paying if Euroland can embark on reforms now. However, the fundamental monetary and fiscal rules are flawed, in my view, and will need to be fixed when the economy recovers; but they should not be tinkered with now.

Robert Feldman:

I could not agree more with Stephen Li Jen's points here. The lags between reform and performance create CRIC cycles. This is just as true in Europe as in the US or Japan. The length and severity of the CRIC cycle will depend on (a) the depth of crisis that is needed to generate a supply-side response (in Japan it was Y80/US$) and on the lags between policy action and economic response. It has been a long time since my days in the European Department at the IMF, but my sense is that the labor-market practices remain so inflexible that both the depth and the lag could be very long.

Takehiro Sato:

Just a few thoughts on Robert Feldman's idea. I do not think that the appreciation of the yen to Y80/US$ was a catalyst of the supply-side response. Rather, it was the catalyst of big demand stimulus measures by PM Hashimoto in late 1995, which delayed the supply side reforms even more. My view is that the JGB crisis would constitute a real crisis instead of the super strong yen. It would trigger the real supply-side reforms driven by the force of the market by the elimination of the life of all zombies. Currently, since the patchworks of the government seem quite perfect, resulting in the reinforcement of the safety net not only for the financial institutions but also for the non-financial institutions, all of the market risks and credit risks in the private sector are now transferring to the central government. But, as the funding risk of the government has been so far well contained by the solid saving-investment balance of the private sector which is coming from the deflation equilibrium, it seems increasingly tougher to see the real crisis which would promote real policy responses in terms of CRIC cycle.

Richard Berner:

Sato-san's point is important: We're all hoping that the strong euro will crack denial in Europe and produce overdue reforms. But politics trumps economics when ultimately a change in culture is needed — unless there's a tipping point. Thatcher and Reagan get credit for change but they succeeded because they sensed that the electorate was ready — the economy provided the tipping point. Robert has made a strong case for Koizumi's resolve, but there's an equally strong case for the forces resisting change. Can Schroeder and Europe learn from Japan? This all has obvious relevance for the US. We will have huge fiscal issues to address in the next decade, and the sooner the better. But we're not close to dealing with them. We are not Europe or Japan but can we learn from them?

Stephen Roach:

What a great debate. The intensity of the exchange is very gratifying. It shows how much we all agree on the importance of this problem and the stakes it holds for Europe and the broader global economy. In the great spirit of free and open intellectual engagement that we have long cherished at Morgan Stanley, you certainly won't find the pabulum of consensus thinking in this group. While I don't pretend to have the final word, I would like to offer just one point of clarification:

The German-specific policy efforts that I support reflect my deep concerns over the risk of a serious asymmetrical shock that could quickly spread to the rest of Europe. They do not represent a wholesale retreat from the long-term discipline of EMU. But one-size policies do little to deal with the extremes that are now evident if Germany is treated the same as Ireland. I would welcome runaway inflation in the latter if that is what it takes to pull Germany away from the abyss. The American analogy that is often used to assess the stresses and strains of Europe is not appropriate. The United States of Europe is very different from the United States of America. California, America's largest state, accounts for 10% to 11% of the US economy. Germany is fully one-third of Euroland and accounts for about 30% of the cross-border linkages that knit Euroland together. As Germany goes, so goes Europe. The risk of a destabilizing shock in Germany is growing larger, in my view. As insurance against that risk, the rules of EMU should be temporarily suspended while Germany gets some powerful medicine. My sympathies to the "Irelands" of Europe, but under the circumstances I'm afraid that such a concession may be well worth the price.