Monetary vs Fiscal Policy - What Policy does the Eurozone Need?

1. Monetary
&
Fiscal Policy
What does the Eurozone need?

2. Inflation in the Eurozone
• The annual inflation
is -0.1% (2015)
• Inflation has been
falling since 2012
due to?
• Economic
contraction
• Banks holding
onto cash
-1
0
1
2
3
4
5
2000Jan
2001Jan
2002Jan
2003Jan
2004Jan
2005Jan
2006Jan
2007Jan
2008Jan
2009Jan
2010Jan
2011Jan
2012Jan
2013Jan
2014Jan
CPI%
Source: Bloomberg

3. GDP Growth (%)
• GDP average in
the Eurozone is
1,55% from 1995-
2014
• Lowest -5,5 %
• GDP remains low
after the crisis
-6
-4
-2
0
2
4
6
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
GrowthPercentage
Source: Bloomberg

4. Change in GDP Growth (%)
2013 -2014
• Ireland
• A year after 3-yr
bailout program
• Debts still remain
after bail out of
banking sector
• Software and
pharmaceutical
• Tax
Source: Bloomberg

5. Unemployment %
2008 Vs. 2014
• Eurozone: 11% -
12%, from 8%
• Spain and Greece
– high
unemployment
• Germany – less
unemployment
• Labour reform
0,00
5,00
10,00
15,00
20,00
25,00
30,00
Euro unemployment by country 2008 Euro unemployment by country 2014
%Unemployment
2008 2014
Source: Bloomberg

6. Government Imbalance
• Deficit
• Spain, Greece
• Germany
zero/near zero
balance
Source: European Commission

7. EU Fiscal Policy
Government Spending
• Initially Greece
highest
• Currently lowest
after austerity
• Portugal correction
Tax rates
• Relatively stable
• Portugal reduced
slightly
• Greece forced to
increase
-10,0%
-5,0%
0,0%
5,0%
10,0%
15,0%
2009 2010 2011 2012 2013
Germany France Greece Spain Portugal Italy Ireland
Government Spending as a % of GDP
%ofGDP

8. EU Monetary Policy
• Rates:
• Lending: 0,3%
• Refi: 0,05%
• Deposit: -0,2%
• Open market
operations (3
tranches – 2009
€60bn, 2012 €529bn
and 2014 €250bn)
• Reserve ratio is 1%
(2%)
• Mario Draghi –
“whatever it takes”
0
0,5
1
1,5
2
2,5
3
-0,6
-0,4
-0,2
0
0,2
0,4
0,6
0,8
2008 2009 2010 2011 2012 2013 2014
EffectivePolicyRates
YOY%GDPChange
EUR Interest Rates vs. GDP Growth
Euro-zone Real GDPRate ECB Effective Policy Rates

9. US Fiscal Policy
• Decrease in
government
spending
• Tax Rates (2013)
• Inc higher
brackets
• Dec lower
brackets
• result =
redistribution
• Government: 80%
• Household: -5%
14
14,5
15
15,5
16
16,5
17
17,5
18
2008 2009 2010 2011 2012 2013
%GovernmentSpending
US Government Spending as a % of GDP
Gov´t Spending (% of GDP)
$0,00
$2,00
$4,00
$6,00
$8,00
$10,00
$12,00
$14,00
$16,00
$18,00
$20,00
Trillions
US Government Debt vs. Public Debt
Government Debt Public Debt
2008 2009 2010 2011 2012 2013 2014

10. US Monetary Policy
• Stable low US rates
• Introduction of QE in
2008
• Total QE spend:
$4,5T
• GDP growth
recovered since the
crisis
0,00
0,20
0,40
0,60
0,80
1,00
1,20
1,40
1,60
-3,00
-2,00
-1,00
0,00
1,00
2,00
3,00
2008 2009 2010 2011 2012 2013 2014
US Interest Rates vs. GDP Growth
Real GDP (yoy %) Policy Rates
Interest
GDPGrowth%
QE1 Dec08-March10 QE2 Nov10-June11 QE3 Sept12-Oct14
TS 0,3 0,6 0,9
MBS & AD 1,35 0,79
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1,8
$Trillion
Quantitative Easing

11. EU vs US
EUROZONE US
Central Bank
Mandate
Inflation Inflation and
Unemployment
Fiscal Policy Fragmented Centralized
Reserve Ratio 1% 10%
QE Start ($1,4T – 2015 –
2016)
End ($4.5T – 2008 –
2014)

12. Unemployment vs Inflation
• US policies have
been effective:
• CPI
• Unemployment
• Rates
-4
-2
0
2
4
6
8
10
12
14
EUR Unemployment Rate (%) US Unemployment Rate (%)
EU CPI US CPI
Percentage

13. EUROZONE
Potential Solutions
Solutions Pro’s Con’s
Quantitative
Easing
• Confidence
• Decrease unemployment
• Alleviate deflation
• Targeted
• Policy Lag
• Exit strategy
• Hyperinflation
Fiscal Union • Centralized fiscal policy • Realistic?
Structural
Reform
• Low unemployment • Vague
Austerity • Reduce deficit • Contractionary policy cycle?

14. Our Recommendation
Quantitative Easing with Targeted Structural Reforms
• Cautious in implementation
• Exit planning
o Method
o Timing
• Structural reforms implemented alongside
o Labour market
o Innovation

15. Our Recommendation
Quantitative Easing
• Cautious in implementation
• Exit planning
o Method
o Timing
• Structural reforms implemented alongside
o EG: Spanish labour market rules
o Innovation
o Benefits