A presentation by Sandro Scocco at the Global Utmaning seminar "Inequality and crises"in Stockholm on the 2nd of November 2011

1. Stabilization Policies
- Drowning in Debt?
Sandro Scocco
Chairman of Global Utmaning’s
Economic Council

2. High Unemployment:
Great need for further countercyclical policies!
30
25
20
Germany
Greece
Ireland
15 Italy
Portugal
Spain
10 United Kingdom
United States
5
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

3. Relatively strong rebound due to early focus
on countercyclical policies
Global industrial production Global stock market development
Source: Barry Eichengreen Kevin H. O’Rourke 8 March 2010 www.voxeu.org

4. Countercyclical policies are expensive…
Source: OECD Economic Outlook
200 Statsskuld som andel av BNP 1997 Statsskuld som andel av BNP 2007
150 Statsskuld som andel av BNP Skillnad
100
50
0
-50
-100
250 Statsskuld som andel av BNP 2007 Statsskuld som andel av BNP 2011
200 Statsskuld som andel av BNP Skillnad
150
100
50
0
-50
-100

5. … and the traditionally weakest are in crisis (PIIGS)
10 year bond rates

6. The Real Villain:
European saving imbalances as a result of interest
rate convergence in the EMU
10
5
0
Germany
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Greece
Ireland
-5
Italy
Portugal
Spain
-10
-15
-20

7. … and China joining the WTO in 2001
Global Saving imbalances USD (IMF)
600
400
200
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
China, People's Republic of
-200 United States
Euro area
-400
-600
-800
-1000

8. 100
120
140
160
20
40
60
80
0
1880
1883
1886
1889
1892
1895
1898
1901 WW2
1904
WW1
1907
1910
1913
1916
1919
1922
1925
1928
1931
1934
1937
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
Public debt in the G20 at a historical high
2000
2003
2006
2009

9. Who will pay the public debt?
“In addition to providential rapid growth, there are three, and only three, ways
of bringing down public debts.
• The first one is to run primary surpluses for a sufficiently long time.
• The second one is to default on all or part of the debt.
• The last one is to let inflation reduce the real debt value, assuming that the
debt is not indexed and of sufficiently long maturity. Households
In the end, the question is who will pay: taxpayers in the first case, creditors in
the second case, citizens who are not well protected against inflation in the
third case.”
Public Debts: Nuts, Bolts and Worries 2011
Barry Eichengreen, Robert Feldman, Jeffrey Liebman, Jürgen von Hagen and Charles Wyplosz

10. High household indebtedness starts to fall…

11. …and housing prices follow

12. Can housholds and the public sector deleverage
simultaneously without hurting growth?
• No, not ceteris paribus – obvious risk of vicious
circles. Austerity programmes increase households’
wish to deleverage
• Yes, if income redistribution policies target
propensity to consume. Increased demand without
increased public or private indebtedness

13. 30 years of targeting propensity to save/invest
Top one per cent’s share of total income

14. The two stories of the US post-war era

15. Financial bail-outs reversed wealth tax
“… a €200 billion subsidy to sovereign creditors is a gigantic wealth transfer from the taxpayer to
essentially the richest 5% of the world. In the US, the 5% richest households control roughly 70% of
all financial wealth, and this percentage is not much different in the rest of the world. Ultimate … we
should characterise the bailout subsidy as an "impôt pour la fortune" (“a tax for wealth”) – a wealth
tax supporting the rich.”
Harald Hau
Professor of Economics and Finance, University of Geneva

16. "The Chinese use two brush strokes to
write the word 'crisis'. One brush stroke
stands for danger; the other for
opportunity. In a crisis, be aware of the
danger-but recognize the opportunity."
John F. Kennedy