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Exiting the Eurozone Crisis Advantage Financial Conference Milan, May 12, 2013 Prof. Harald Uhlig University of Chicago Department of Economics Three Problems 1. Unemployment 2. Debt 3. Banks but there is an even bigger problem. 25.0

  1. Exiting the Eurozone Crisis Advantage Financial Conference Milan, May 12, 2013 Prof. Harald Uhlig University of Chicago Department of Economics

  2. Three Problems 1. Unemployment 2. Debt 3. Banks … but there is an even bigger problem.

  4. 25.0 Unemployment Rates. Source: Eurostat 20.0 15.0 10.0 5.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Germany Ireland Greece Spain Italy Portugal

  5. 140 Unit Labor Costs, 2000=100. Source: Eurostat 135 130 125 120 115 110 105 100 95 90 Germany Ireland Greece Spain Italy Portugal

  6. 100 105 110 115 70 75 80 85 90 95 2000Q1 Nominal Wage 2001Q3 2003Q1 2004Q3 2006Q1 Source: Schmitt-Grohe-Uribe, 2013 2007Q3 2009Q1 Italy 2010Q3 10 11 4 5 6 7 8 9 2000Q1 2001Q2 Unemployment 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2

  7. 105 115 10 12 14 16 18 65 75 85 95 6 8 20… 2000Q1 20… 2001Q1 Nominal Wage Unemployment 20… 2002Q1 Greece 20… 2003Q1 20… 2004Q1 20… 2005Q1 20… 2006Q1 2007Q1 20… 2008Q1 20… 2009Q1 20… 2010Q1 20… 10 15 20 25 2011Q1 20… 100 110 120 Source: Schmitt-Grohe-Uribe, 2013 5 60 70 80 90 20… 2000Q1 20… Unemployment 2001Q1 Nominal Wage 20… 2002Q1 20… Spain 2003Q1 20… 2004Q1 20… 2005Q1 20… 2006Q1 20… 2007Q1 20… 2008Q1 20… 2009Q1 20… 2010Q1 100 105 110 10 12 14 20… 2011Q1 70 75 80 85 90 95 2 4 6 8 20… 2000Q1 20… 2001Q1 Nominal Wage Unemployment 20… 2002Q1 Portugal 20… 2003Q1 20… 2004Q1 20… 2005Q1 20… 2006Q1 20… 2007Q1 20… 2008Q1 2009Q1 20… 2010Q1 20… 2011Q1 20…

  8. 180 Debt/GDP ratio. Source: Eurostat 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Germany Ireland Greece Spain Italy Portugal

  10. Policy Options: if crisis returns 1. Germany pays. 2. ECB pays. 3. Germany exits (“Neuro”). 4. South exits. 5. Stick to original promises.

  11. Policy Options: if crisis abates • “Fiscal stimulus”? No. – GDP change per “accounting” • Reform labor markets. • Decouple country banks from country debt. • Clean up banking system. • Medium/long-term fiscal consolidation. • Open markets. • “Fiscal devaluation” • ECB: 4 percent inflation for five years. • Banking union: proceed carefully.

  12. 150 145 Actual individual consumption per capita in 140 Euro, 2002=100. Source: Eurostat. 135 130 125 120 115 110 105 100 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Germany Ireland Greece Spain Italy Portugal

  13. Conclusions 1. No magic bullet. 2. Don’t promise that northern friends will pay forever or that the ECB will solve it all. 3. Living beyond means must come to an end. Painful, but unavoidable. Clean up, and be prepared. Then, the future will be bright in Europe once again. Thanks

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