Crisis

of 2008 in the EU

Behind every human act there are three factors : origin, environment and the
moment (Hyppolyte Taine)

The financial and economics crisis of 2008 and its effect on the European integration

The American financial crisis spread to the European core instantaneously.
All countries of the EU were infected.

Lack of credit, loss of stock value, confidence and trust slowed down the European
economy
In February 2009, the euro zones GDP dropped by 1,5% the industrial output declined by
3,5% in a year
Europe declined into a major economic recession in 2008-09.
The previous super performer Baltic countries suffered a dramatic decline
The recession did not last for years and the Baltic countries returned to the pre-crisis
growth pattern
Selling the government bonds became increasingly difficult.
Increasing interest rates extremely expensive loans for the debtor countries.
The possibility of default in two or three euro-zone countries endangered the euro.


Indebtedness became dangerously high in Italy and Portugal, as well as in some CEE
countries (Hungary, Latvia)
Household debts!
Crisis hit countries were located on the eastern and southern peripheries of Europe
PIIGS (Portugal, Italy, Ireland, Greece, Spain)
Sick men of the European Union
The PIIGS countries as peripheral countries were latecomers to industrialization and
economic modernization
They maintained a dual economy and institutional weaknesses
Backwardness means clientalism and corruption
The state is an enemy tax avoidance is a virtue

Tax collection has virtually collapsed in Greece in 2011

In Italy 0,17% (76000 people) declare income over 200 000 and 210 000 luxury cars
are sold a year

Social networking is a strong substitute for efficient institutions

Black economy: 25-28% of the Greek and 22-26% of the Italian GDP

About 30% and 20% of VAT is not paid in Greece and Italy

Thrift and the central value of work are not characteristic

Hidalgo-noble attitude careless spending on borrowed money

Hunger for lavish consumtion

Specialty of the former peripheral countries
Strong attempt to catch up
The peripheral past is in many ways present in the already caught-up countries
What happened on the Mediterranean periphery ?


Greece
Greece joined the European integration in 1981.
In 1996 Athens lost its bid to holed the Olympic Games
In 1997 a much better prepared Greek application was successful
Athens did not start preparations until almost 2000
Athens had to spend record sums on security

Gigantic accomplishment
New main Olympic Stadium
Olympic Sport Complex

Budget:
Original: 2,5 billion => increased to 4,6 Billion
Total expenses neared 10 Billion, 4% or the countries GDP
The expenses were covered from foreign loans !

The legacy of the Games is a public debt likely to hit 100% of GDP this year and the budget
deficit forecast to reach 4%, well beyond the Eurozone 3% limit.


Greece= Total lack of competitive export
The country built a massive social system and public pension payments consumed 11,5%
of the countrys GDP
The engine of higher consumption was largely fuelled by easier access to credit and the
governments public investments

Between 2000 and 2008, government expenditures increased by 87% while revenues
increased only 31%
Total lack of fiscal discipline, corruption, non-taxable black economy ruined the state
household
The deeply rooted Balkan culture considers the state Alien, hostile, an institution not to be
trust but cheat in any way possible

New cultural behavior: to spend and consume non-earned, non existent incomes, thus
spending from credits
In 2009 government expenditures reached 50% of GDP
In reality Greece did not fulfill the requirements for joining the euro
The budget deficit has never below 3% since 1999

Irresponsible borrowing and spening worked during years of prosperity, the financial
crisis stopped the cash flow
All of a sudden, getting fresh money and credit became difficult
The Greek crisis did not come to surface in 2008

As it turned out, in 2008 the budget deficit was 12,7%, 300 billion public debt, 100% of
GDP

Severe austerity measures were forced on the country as a prerequisite for assistance and
bailout
Violent public demonstrations flooded Athens
The government became paralyzed and a deep political crisis emerged
The small and relatively far away Greece shocked the entire European Union and the
common currency

The EU and the IMF put together a 1,4 trillion $ bailout fund
Greece has a bad record regarding indebtedness and repayment
In January 2012 the countrys debt totaled roughly 160% of GDP
Greece was unable to repay the matured securities

Since then the sword of Damocles has been hanging above the country with the prospect of
dropping out from the euro-zone and the EU

Crisis caused by overextented and hazardous bank activities: reckless international
borrowing and extensive lending
Ballooning and then bursting of an oversized real estate bubble

Ireland:

Ireland was the most successful economic performer in the European Union
Since the mid 1990s the economy has grown by a robust 6%-12% per annum
FDI rushed to Ireland
Huge capital inflow, low interest rates and a 50% tax cut pumped investment into the
economy

Ireland became one of the richest European countries
Between 1996 and 2006 the real disposal income was more than twice the average of the
EU15 level
First, export-led growth was the engine of growth
Later the domestic demand of the enriched population took over and pushed the economy
ahead

Historic euphoria: the population wanted to enjoy and exploit the great historical luck of
development
They started consuming and buying in never-seen ways
They moved into their own houses, huge building boom
The government eliminitated (texte manquant)

Residental mortgage lending grew by an annual 25% in the early 2000s
The enriched population started spending recklessly
Household indebtedness jumped from 60% to 160% of GDP with 80% of personal credits
secured by property
The housing boom elevated Ireland

The share of housing in employing the population doubled and increased to 20% - 30% of
the work force
In 1996 the construction sector represented 5% of the GDP, in 2006 it was 10%
After a point there was not sufficient demand for the extremely expensive houses
The house prices started decreasing significantly

After the American financial crisis, new credits were no longer available
The house priced dropped by half and bank shares by 90%
The Irish banks were overextended; their liabilities were equal to 304% of the GDP
In 2009 national income declined by 7,1% and unemployment reached 13% and GDP per
head dropped.

People were traumatized
The top six banks lost more than 90 billion in deposits after the crisis erupted
Ireland had to bail out its banks with 64 billion and a European and IMF rescue package
of 85 billion
With drastic austerity measures the budget deficit was strongly cut and a modest recovery
started in 2012

Hungary

The market transformation started the earliest in Eastern Europe
Hungary has attracted a lot of FDI since the 1990s
Rapid development between 2001 and 2006 with an annual GDP growth rate of 4,2%
The country progressed impressively and its per capita GDP reached the 63%
Behind the remarkable growth,, imbalances and negative economic trends also gained
ground
The economy became overheated
Anders Aslund maintained that for ten CEE countries economic problems were looming

Multiple preconditions of crisis
Excessive current account deficit
Large foreign debts
Small currency reserves
Huge credit expansion
Sharp real estate price rises and rising inflation
More devastating mistakes than many of the other CEE countries
In a heated political campaign the parties tried to outbid each others promises
Hungary never cut its budgetary deficit back to the Maastricht requirement of 3% of
GDP
In the 1990s, export-led growth, fueled my by foreign investments and demands was the
engine of economy development in Hungary
From the turn of the century, domestic demand became the prime mover
Population income increased much faster and higher than productivity and national
income did.
The Hungarian governments turned to demand-stimulating measures of wage and pension
increases
Monetary policy one-sidedly concentrated on anti-inflationary measures by raising interest
rates and overvaluing the currency
Hungarys indebtedness had increased sharply to 78,7% by 2009


Before the crisis became manifest in 2008, Hungary had already declined into a severe
economic and political crisis
Hungary turned to the IMF for a huge loan
The stabilization program and the lack of counter-cyclical resources let to a recession
Foreign currency borrowing, 95% of it in Swiss francs, accounts for two-thirds of total
lending.

The public debts increased to 81% of the GDP and two-thirds of debts are in foreign
currencies
Because of the devalued Hungarian currency, paying back the household loans has more
than doubled the repayment burden on the population
The government turned to the IMF again and the credit rating of the country dropped
below junk level

The country had to pay nearly 10% interest in their bonds
Since than the country has been experiencing a sluggish and fragile recovery


Spain

The state was in good order, public debts were less than 40% of GDP in 2007
The banks were better regulated and solvent
However, regional budgets are significant and produced huge deficit
In September 2010 regional debts totaled 140 billion $ and in one year increased by 22%
to 176$ billion

The real story was the rise and demise of the housing bubble
The construction of houses reached and unheard level
In 2004 and 2005 1,370 000 units were built
Between 1996 and 2006 prices in some years increased by 17-18% annually
People felt enriched by the dynamic development

Per capita GDP trebled between 1973 and 2005
The income level rose from roughly half to 81% of the average level of the euro-zone
countries
80% of the population became homeowners
Banks offered 40 and 50 years loans
Construction loans almost doubled between 2005 and 2009
Families bought houses with loans


Mortgage debts jumped by 25% per year between 2001 and 2005 and reached the heights
of 651,168,000,000 by 2005
Family indebtedness increased by 115% in a decade around the turn of the century
The real estate boom transformed the construction industry into one of the leading sectors
of the economy.

Its share increased from 8% at the end of the 1990s to 12,3% by 2007
Nearly 20% of GDP was related to real estate and construction
The sector employed one-sixth of the work force

Overbuilding was evident, as every fourth newly built unit remained vacant between 2001
and 2007


When the bubble burst, 1,5 million unfinished and unsold units remained behind and 1,4
million units were on sale
Prices declined sharply
The construction industry collapsed
In one year (2007-2008) unemployment increased by 37% and reached 17,4% of the labor
force
The GDP declined by 4% in 2009, savings halved
Gross capital formation declined by 4,8%, 16,0% and 7,6% in 2008, 2009 and 2010
respectively
Spain and Italy accumulated a 3,3 Trillion $ debt burden by the end or 2011
In the summer of 2012, the EU had to bail out the Spanish banks

PORTUGAL


The Portuguese economy was genuinely weak
In 1986, its per capital GDP level was only 57% of the West European average
By 2000, it increased to 65%, but the economic growth slowed down to an average of 0,7%
Unemployment rose to 10% in 2009
The country had weak competitiveness

In the growth period, people bought on credit and the government spent from loans
As a consequence, private and public debts accumulated in Portugal to finance its western
life style
In Portugal they claimed:.. We are not Greece
Meanwhile, debt level totaled 76% of GDP in 2009, by 2010-11 surpassed 100% of GDP

By 2012 it amounted to 112% of GDP
The economy spiraled out of control and declined by 2,7% in 2009
In November, the public and private debt reached 360% of GDP
Bond yield increased from 5,8% to 8,54% in a few months
The government bonds were rated at a junk bond level

As a consequence, for new loans, 13% and even 17% interest had to be paid, the second
highest in Europe
In early 2011, the country was on the verge of bankruptcy
Portugal became the third euro-zone country to be bailed out by the IMF and the EU (80
bn)

ITALY

The countrys previously rapid growth slowed down by almost half during the 13 years
around the turn of the century
Stagnation between 1992 and 2005
The north grew by 3%, the south declined by 2%
Meanwhile, private consumption and the net capital formation increased faster, by 1,3%
and 1,5% per annum.


Public debt successively accumulated and accompanied Italys development
In the mid-1990s, it already 120% of GDP
Italy had the worlds third largest public debt level
The debt situation was a ticking time bomb and the country was pushed to the brink of a
sovereign debt crisis.

In November 2011, the debt level increased to 121,5% of GDP

It reached an extraordinary amount of $2.758 trillion
Half of it was held by Italians within the country
The gap between the German and Italian bond increased from 38 base points to 144 bas
points by December 2008

The towering Italian debt overshadowed the euro-zone
Its amount was more than five times bigger than the Greek
After a time, banks refused to lend which pushed the yields or Italian government bonds up
to 6,20%
Paying higher interest for the bonds added $4,1 billion in interest payments annually
The more than 6% interests rate was already high and rising

This development generated a political crisis and led to resignations
The austerity measures implemented made the economic revival difficult and from the last
quarter of 2011 on, Italy declined into recession again and the government initiated a new
stimulus program

The financialized capitalist system

According to Joan Robinson: .. Where enterprise leads, finance follows.
Unfortunately, the financial sector stepped out of its role serving the real economy

Features of economy changed a lot before and after the crisis

The financialization of the Western capitalism emerged in the framework of globalization
The flow of foreign exchange transactions skyrocketed and became many times bigger than
the output of the real economy and hugely surpassed the financial strength of the nation
stated



The Structural tribulations of the European Union and the euro-zone

Global capitalism transformed the European market system
However, integrated Europe has its own special features
The structural weaknesses have an outstanding role and responsibility in the sovereign
debt crisis of the euro-zone

The structural tribulations of the EU and the euro-zone

Borders have been shifted from their national borders to the external borders of the Union
The Europes integration was the significant broadening of the Union

The euro was not welcomed enthusiastically everywhere in the EU

The past of the peripheries is still alive in many ways in the present of the countries
Dual economic character of some countries
Event at an advanced economic level, clientalism, networking, corruption, different work
ethic and lifestyle etc. are deeply embedded in some societies

The European peripheries made the euro-zone fragile
Structural weakness of the monetary unification
For peripheral countries, the euro led to much lower interest rates- inflow of cheap credit
and they lost the important weaponry to decrease deficit and increase competitiveness

The monetary unification was planned for prosperity
The monetary unification was not accompanied by fiscal unification of the member
countries of the euro-zone

The rules of SGP were not taken seriously
A one-size fits-all system with diverse economic levels might be explosive
Fiscal integration as the next step?


Changing patterns of consumption and reckless borrowing in the EU

Globalization and consumption:

Imitating the previously never-heard consumption patterns
Consumption as a value in itself
Consumption has become a pleasure
Product as a pleasure, pleasures of the advertisements, and purchase
The EU as a special region

- 1880-1945: mass production and standardized goods modern consumer in the
West
- 1945-1970: mass consumption society, goods available for every social group
- 1970 - : Society is organized of consumption

Geoffrey Miller: Spent: Sex, Evolution and consumer Behavior

Marketing did not promote materialism. Quite the opposite It promotes a narcissistic
pseudo spiritualism based on subjective pleasure, social status, romance, and lifestyle as a
products mental associations become more important than its actual physical qualities

Brendon Sheehan: The economics of Abundance

..Shopping and spending is the main form of construction and reconstruction of self-identity
. A personalized self-identity can be communicated to others through the use of various
symbols



Consumerism in Europe:

A relatively new phenomenon that began in the 1970s-80s

The USA had a tremendous demonstration effect on the European countries
The latecomer and poorer countries wanted to follow suit

Anthony Giddens

.. The consumption of every-novel goods becomes in some part a substitute for the genuine
development of self, appearance replaces essence

Mental illness of narcissism, the intense need for admiration, a strong status-seeking desire..
to display wealth, status and taste.

Marc Davis: Commercialization

Every aspect of Human-social life across the life course has been commercialized
including Music, sports, childhood, education, marriage, health food, the human body and
even death

Marc davis: Commercialization
Today capitalism produces not only goods and services, but new desires what to have. The
new product, besides satisfying new pleasures, also have a mental association that is
sometimes more important than the physical qualities

Eric Hobsbawm
Even an average person could live as only the very wealthy had lived in their parents day

Jonh Kenneth Galbraith
-.. Managed-market
-..Corporate-guided market
Demand depends on corporate production and manipulation of the consumers and the ..
invisible hand plays a very limited role

Spain and Portugal:
So called noble societies where the small noble elite and the gentrys attitude formed the
national characteristics living beyond oness means, spending more than one earns, was
an old tradition that expressed elegance. Thrift was looked down upon.

the 20th century is recognized as a moment when traditional fears of debt and feelings
about the value of thrift were overtaken by the appeal of a hedonistic lifestyle

Continuous innovation:

Seneca:
There are only two tragedies in life: one is not getting what one wants and the other is
getting it

Galbraith (1958)
the advertising can have such a huge effect on the stimulation of consumption that people
are willing to shoulder significantly debts in order to satisfy their artificially generated
needs.


The aggregate advertisement has a huge impact on the aggregate consumption

Balzac
The most successful business built on vanity, egoism and narcissism attitude. These
feelings never die

Credit consumerism

Consumption as a way of life and source of prestige, inspired by ever-newer consumer
goods easily let to overspending
People became able and were attracted to spend more than they earned
Credit consumerism was the most extreme in the USA


Lessons learned and the long-term impact of the crisis on the EU member countries

Future alternatives for the EU and the euro-zone
- Mistaken policy might lead to the collapse of the entire European Union and the
euro
- After the crisis, the Union has created safety nets for the member countries
- European Financial Stability Facility
- European Financial Stabilization Mechanism
- Movement toward fiscal unification cautiously progresses

The return to a regulated market system:
Europe had do dig deep into the roots of the crisis and eliminate them
The EU cannot introduce regulations alone
Regulation and supervision belong together, the creation of new institutional framework
signals further institutional and structural changes.

Crisis management: stimulus packages and bailouts

Several governments turned to the old Keynesian method and attempted to revitalize the
ailing economy
In November 2008? The EC initiated a 200 billion stimulus plan
The EU temporarily suspended SGP regulations


Crisis management: austerity measures

After the first year of stimulus packages, the EU countries did not return to his policy
Some countries pushed the EU toward a budgetary deficit and debt reduction policy
Austerity measures to reconstruct balanced fiscal order

The measures served the reduction of the deficit, but they decreased domestic
consumption and economic growth
The EU now has to take steps to end stagnation and decrease unemployment and generate
growth
Crisis management means austerity and stimulus

Have we learned from our mistakes?

The postwar history of Europe clearly demonstrates it

Europes last two-thirds of a century clearly verified that Georg Wilhelm Friedrich
Hegel was wrong

Hegel:

What experience and history teach is .. That people and governments have never learned
anything from history















Summarize:

We tried to better understand the crisis and the impact on European integration,
The Europe integration is the most successful in Europe (term of trades agreements)
Cases studies to better understand, different countries
Differences in the countries, in some cases, problems emerge even before the crisis, the
crisis just make them appearing. USA was not prepared also for the crisis
Take into account the reaction to the crisis
It was very easy for the crisis to find weak points the Europe structure. Cheap credit (ready
to receive them), structure in itself, poor people, especially in the south and in the east
peripheries of the Europe
We cant compare Germany and Greece for example
Every player is important in the integration; weakest players could be the most important
because they can be the foundations of the integration. For the future we now that we have
to be very careful with these countries, because they are the more weak of all.


Structure adjustments, reshaping, the crisis is a good thing to highlight them.
We need to react to save the integration and gain competitiveness in the future.