Draghinomics a new economic policy of EU and lessons for vietnam

Keywords:Draghinomics;EUeconomy;Vietnam... Source:NYSEArca2 014 Figure3.Europeisweakening Eurozoneyieldshavebeenstilllowerthan3%frompre-recessionpeakinearly2008.Therefore,i t isnotsurpr

PoliciesandSustainableEconomicDevelo

Draghinomics:ANew Economic PolicyofEUandLessonsforVietnam

VUTHANHTUNG

UniversityofFinanceand Banking-billvutung@yahoo.com

Abstract

Duringrecentyears,Europehasfacedmanyeconomicproblems.E U (EuropeanUnion ),itsmembercountries,andECB(EuropeanCentralBank)havetriedalltheirbesttofindso lutionstoovercomethishardperiod.Th e PresidentoftheE C B , MarioDraghi,has built‘‘

TargetedLonger-termRefinancingOperation’’(TLTRO),whichisconsideredasoneofthemostimportante conomicplansinthemodernworldinordertorecoverEuropeeconomy.Thiseventhasaff ectedn o t o n l y EUb u t alsotheworld,includingVietnam.B y studyingcontentofDraghin omics,usingqualitativemethodtoanalyzesuccessesandlimitsofthetheory,thisp a p e

r drawssomeexperiencedlessonsf or Vietnamwheno u r countryison thew a y o f restru cturingtheeconomy.

Keywords:Draghinomics;EUeconomy;Vietnam

1 Introduction

Europeisalargecontinent,andEUisoneofthebiggesteconomiczoneinthew orld.EU’sGDPwas22%ofglobalGDP(16.2trillioneuros)in2015.Inthelistoftopte ncountrieswhoseGDParehighestin

theworld,EUhasItalia,England,France,andGermany.Therefore,EUeconomy’s healthgreatlyaffectsthewholeworld.Afteralongwayofdevelopment,Europegr owthhasbeenslowergradually.ThatGDPofEuropeaccountedfor32%oftotalth eworldGDPin1980wasjustanicememory.Beginningin2012,EU’srecession haslasteduntilnow.ThishasbeencausedbytheUSfi n a n c i a l crisis2009a ndinternalproblemsofEUsuchasgovernmentdebts,highunemployment,mark etsdown,conflictsbetweenmembers…

Recently,Brexit(BritainexitsEU)hasmadeEurope’ssituationmuchworse OnJuly8,2016IMF(International

MonetaryFund)forecastGDPoftheEurozone(containing19members)wouldonl

yreach1.6%thisyear,comparedwith1.7%itmadeintheprevioustime,andG D P in2017wouldfellto1.4%.GeneralDirectorofIMF,Christine

Lagarde(2014),haswarnedthattheEuropeancrisiswouldhavebeenoutofcontrol ofECB.IfsixmembercountriesofEUinfinancialdifficultiesdonotget enough support,EUwillcollapseandpeaceinEuropewilldisappear.ThomasBarnett(201 5),theleadingstrategistofthefamousconsultancyfirmWikistratintheUS,judged that“theUS,whichisconsideredtobeoneofthemostimportantpillarsofglobal ization,isenteringahardperiodandfocusingonlocalindustries.Andnow,Europe,a notherkeypillaroftheworld,wouldh a v e exploded.”

NotonlyEUbutalsoallEuropehavebeentryingtofindpossiblesolutionsto“bre akthebackoftheBeast.”As the Presidentof ECB,MisterMarioDraghi(2012),

takes”tosavetheeuroandtheEUeconomy.Theman,called“SuperMarioofE urope”bythemagazineLibération(France)forhissuccessinpersuadingtheECBB oardofDirectorstodemolisha“taboo”—

recordedintheEuropeagreements,nottofundthebudgetdeficitbyprintingmon ey,hasactuallydonewhathehadsaid.HenowusesDraghinomic tomakeEUr

e s tore d toitsnormallife.IftheEasternworldhasAbenomics,theeconomythe oryoftheJapanMinisterShinzoAbe,theWesternworldisalsowelcomingDraghin omics

ThispaperusesqualitativemethodtoexplainbasiccontentofDraghinomics.B ylisting,c o m p a r i n g , andcontrastingthesecondarydata,thepaperpoints outwhataresuccessesandlimitso f

thiswell-knowntheory.Althoughthiseconomicpolicyisrathernewintheworldandwesho uldhavebeenwaitingf or itsresultspatiently,theauthorh o p e s todrawsomego odlessonsfor theVietnam’seconomy

PoliciesandSustainableEconomicDevelo

2 Overview onDraghinomics

Draghinomicsmeans

registereda birthbytheillustriouseconomistNourielRoubini,theprofessorofN ewYorkUniversity'sSternS c h o o l ofBusinessandthechairmanofRoubiniGl obalEconomics,aneconomicconsultancyfirm.Actually,Draghinomicsreprese nts“Targeted Longer-termRefinancingOperation” plan

Theterm‘‘Name-nomics’’appearedin1980swhenAmericancalledtheeconomictheoryoftheU

S PresidentRonaldReagan“Reaganomics”.LikeAbenomics,thee c o n o m i c r e

v i v a l programo f J a p a n e s e , TLTROistheinitialsignofaneconomicstimul usprogramfortheEurozone.Itplaysakeyroletopromotethenecessaryrestructu ringforthepotentialgrowthofEurozone,andtogetthiszoneoverthedangeroffa llingintodeflation.TLTROisappreciatedtheshockingsolutionofECBdirectingto Europeanbanks

2.2.BackgroundofDraghinomics

Economicstagnation

Europeanbankswereengaginginaninevitableandrapiddeleveragingprocess thathadbeenanexpectedrepercussionofthecreditbubble.Nowthatdeleverag

ingisabank-specificinitiative,theE C B cannotinfluenceitsscale.ItwasinthiscontextthatE CBdidacompleteassessmentofbanks’stateofhealthbeforemakingthemdirectl ysupervised.Sincethesummerof2013,thebanksthatfallu n d e r ECB’slivesuper visionhavestrengthenedtheirbalancesheetsbyalmost203billioneuros.Thec r i

s i s ofbankingsectorandenormousgovernmentdebtsdegeneratedintogrowth slump4yearsagos o thatitthreatened3biggesteconomiesofEurozone,Ger many,France,andItalia.The“dominoeffect”cametrueinEU.Germanyiso ntheedgeofregression,whereasFranceiscomingtothedeadlock,andItaliagr owthisnearlythesameas15yearsbefore

In2014,growthintheEurozonestalledinthesecondquarter,followingfourquar tersofsluggishr e c o v e r y fromacrisisoverhighgovernmentdebt.Unemploym entremainsat11.5%afterincreasingf o r alongtime

014)

Figure1.Unemploymenthas increasedin2008-2013

Eurozonehasseverelylowinflation,whichcanslowgrowthformanyyears.Ther ewasasuddendeclineinexportsandindustrialactivitiesinGermany,thedomina ntEurozoneeconomy.Marketshavegonedownm o r e andm o r e Bothinternal problemsandtheglobalm a r k e t turmoilm a d e investorsintheEuropeanecono

recession.TheStoxx50indexoftopEurozonestocksfelldownbyabout5.7%overt

hepastthreemonths.Exchange-tradedfundssuchastheVanguardFTSEEuropeETF(VGK),theiSharesMSCIEMUI ndexFund(EZU),theiSharesMSCIGermanyIndexFund(EWG),theiSharesMSCI EAFEETF(EFA),andtheiSharesMSCIItalyI n d e x Fund(EWI)flutteredtotrackEur opeanequities

Source:EuroStat(2

014)

Figure2.Eurozonegrowthin2004-2015

PoliciesandSustainableEconomicDevelo

Recently,investorsinEuropeanmarkets

hasrecognizedthespreadsforItalianandSpanishten-yeargovernmentbondswidenrelativetoGermanbonds.Thiswideningshowedf alteringinvestorc o n fi d e n c e inthefutureofnotonlyleadingeconomiesinEU butalsootherEuropeancountries

indexfellby1.2%,strengtheningthemarket’sbeliefthatEuropew e r e weakenin g.W o r s e n i n g e c o n o m i c

data,anextravagantdebt-to-grossdomesticproductratio,aburgeoningunemploymentrate,andaverylowin flationratearesomeofthekeyfactorsthathaveinstillednegativesentimentsinin vestorsinETFs(exchange-tradedfunds)thattrackEuropeanequities

Source:NYSEArca(2

014)

Figure3.Europeisweakening

Eurozoneyieldshavebeenstilllowerthan3%frompre-recessionpeakinearly2008.Therefore,i t isnotsurprisingthatinflationarypressu resareabsent.ThatmarketbeliefintheinflationtargetoftheEurozoneinthenext5 yearshadbeenerodedcausedfinancialmarketstofearthatinveteratedisease AlthoughEurozonemighthaveovercomethe

worstperiodofthedebtcrisis,butlendingtosmallandmediumenterprises(SME s)arestillweak.Thatiswhythiszonecannotgetabreakine c o n o m i c growth

Hugegovernmentdebts

TheEurozonecrisis,inparticular,resultedindebtcrisesinseveralEUmemberst ates,andmanyc o u n t r i e s hadthecollapseoffinancialinstitutions,increasing unemploymentrates,andhighgovernmentdebts.AccordingtoEUrules,membe rcountriesthatusetheEuroarenotallowedtor u n annualdeficitsofmorethan3

%ofGDP;Spain,Italy,andFranceallrandeficitsabovetheceiling

014)

Figure4.EUGovernmentdebthasincreasedin2002-2013

Notably,Greece’sfinancial collapserequiredIMFandECBbailoutpackag esof$147billionand

$173billionin2010and2012respectively.However,Eurozone’sgrowthcontinue stostagnateduetohighunemploymentanddeflation.GDPofthesecondquarterin

2014remainedsluggish.Thethird-quarterforecasthadnothingpositiveduetotheUkrainecrisis

Source:Eurostat(2014)

Deflationandlowinfl

ation

Figure5.RealGDPofEUin2002-2013

Coreinflationwas0.8%monthi n Ja nua ry 2014,whichwaso nl ym a r gi na ll y betterthantherecordedlow

levelof0.7%attheendof2013.Insomecountries,inflationwaslow,butitwasmore

w o r r y i n g thaninotherswhosedeflationpushedrealinterestratesgoup.Itca usedconcernsthatEurozonewouldfallintodeflation.Alongwithincreasesingove rnmentborrowing,risinglaborcostsandtradedeficitshaveresultedineconomicdi stressforEU.Inordertokeepthedebtburdennottogoupandrepaydebts,banks,ho useholdsandgovernmentsmustcuttheirhugeexpenditure;lendersandconsum ersalsocutspendingattheexpenseofinvestorconfidence

EconomicsituationoftheEurozonestagnationcannotblameECB’sharshfinancial policiesaswellasthefragilityo f theb a n k i n g system,botho f whichh a v e crippl edgrowth.B u t E C B m u s t beresponsiblefortheominouslowrateofinflation,w hichwas0.4%andmuchlowerthantheECB’s2 % target.ECBhasdealtwithban ks’problemsslowly.Theinspectionsandmonitoringwhichhadbeencarriedout in2104broughttheopportunityofclearingcreditrecordsandrecapitalizewea kbanks,buttheyprovedquitelate.Thisdelayledtothecreditcrunch sothatb anksmustcurtaillending

Topromotecreditgrowth,ECBinjectedover1000billionEurosinto the bankingsystemin2011and2012inordertodealwiththeliquiditycrisiswhenthede btcrisiswasatitspeak.Insteadofusingthislargeamountofcashtolendbusinesses, commercialbankstendedtodepositmoneyatECB.W h e n thecrisisgotover,b ankshadtorepayLTROborrowings.NowbanksoweECBonly435billioneuros,or45

%oftheinitialLTROloans.Interestratesinthemoneymarketincreased,therebyraisi ngE u r o andthepressureofdeflation.Topreventthissituationfromhappeninga gain,atthemeetingi n June2014,ECBloweredinterestratesondepositsbynegati ve.IfcommercialbankswanttodepositatECB, theymustpayfees

Somereasonsofcrisis

TherootcauseoffinancialdiseasesinEuropeistoldtobethreeissueswhichare closelyrelatedtogether:

(i)EUleadersdonothaveenoughcouragetopromotestructuralreformsstronglyt oraisee c o n o m i c growth;

(ii)Europeanvotersandresidentshavenotreallyseentheurgentneedtoreformra dically;and(iii)Sotightmonetaryandfiscalpolicystrangledgrowth,andmaderefor mmuchmoredifficulttobedone

TheEurozonehasbeenplaguedbynear-zerogrowth,highunemployment,anddeflationinthewakeoftheGreatRecession Ifmonetaryuniondidnotbringnothingbutstagnation,unemployment,anddeflatio n,eventuallysomeotherBrexitwillcometrueagain.Thesituationwillbeverydiffic ultwithoutapushfromtheEUleaders.Theexistenceoftheseproblemsprompte dSuperMariotoimplementhiseconomicprogramin2014

2.3.ContentsofDraghinomics

Inhisplan,MisterMarioDraghihassetforthathree-partstrategyincluding:

EU economy ’s recovery

Structural reforms

Three Arrows of Draghinomics

Fiscal Stimulus

Massive monetary policy

Pro-businessreformstocutbureaucracyand

Addedgovernmentspendingfromcountriesthatcan

Monetarystimulusfromthe ECB

Figure6.ThreestepsofDraghinomics

OnSeptember18,2014ECBofficiallystartedtorunTargetedLonger-termRefinancingOperationwhoseinitialcapitalwas400billioneuros.Itstarget istopromoteeconomicrecoveryacrossthecontinentafteryearsofcrisis.Miste rMarioDraghi(2014)expressedhisconfidencethatTLTROandE C B ’ s

r e c e n t policieswouldhelp Eurozone economy‘”re-standon itsfeet.”

Draghi’sthree-parteconomicprogramfocusesonaggressivestructuralreforms,fiscalpolicy,an

dm a s s i v e monetarypolicythroughquantitativeandcrediteasing.Theyma

ybecalledDraghi’sthree-pillaredstrategyorhisthreearrowspolicy(similartoAbnenomics)

Figure7.ThreearrowsofDraghinomics

Structural fiscal

consolidation

Framework for fiscal governance

Draghinomics's Fiscal Policy Measures

Structuralreforms

Whilemonetaryandfiscalpolicyplantopromoteshort-termgrowth,structuralreformsaimtoc r e a t e

long-termgrowthonthesupplyside.ThefirstcoreprincipleofDraghinomicsistheadopti ono f rapidstructuralreformstoimproveoutputgrowthacrosstheEurozone.Dra ghihasstressedthei m p o r t a n c e ofeconomicreformstodriverecovery.Inarec entspeechattheBrookingsInstitutioninWashingtononOctober9,2014theECBC hiefargued,“Withoutreform,therecanbenorecovery.”Hemeantreformsweret heonlywaytoliftgrowthratesbecauseproblemsofEUtendedtobemorestructural thancyclical,relatingtothestructureofeconomyasopposedtobusinesscycles ECBc a n on ly directlycontrolmonetarypolicies,soEUmembersm u s t imple mentstructuralr e f o r m s inordertostimulateeconomicactivity.Labormarket sareakeyareaoffocusforreforms.LikeAbenomicsofJapan,Eurozoneiscreating moreflexiblelabormarketsandencouragingwomentojoininlaborforce.Therei sscopetoraiselaborparticipationratesinEurope’scase.However,giventheun favorabledemographictrendsinmostEuropeaneconomies,structuralgrowthwill havetorelyonproductivity.Increasingproductivitywillalsohelpmatchaggrega tedemandboostedbymonetarypolicy

Fiscalstimulus

Thesecondprinciple,fiscalpolicy,aimstomaintaindebtsustainabilityandlong

-termgrowth.D r a g h i givesprominencetopositivefiscalpolicythroughtheuse oftaxcutsratherthanincreasedspending.Actually,expansionarypolicymayin creaseincomeandthepropensitytoconsume.Thee c o n o m i c multipliereff ectsuggeststhataninjectionofextraincomewithgreateruseofaggregatefisca lpolicywillleadtoimprovedspending

Therearetwokeyconditionsforthefiscal

policytobeeffectiveinitsstabilizationrole.First,EUgovernmentsmusthavefiscal spacelestbudgetaryconstraintsrestricttheimplementationofcertainpolicies.Se cond,thefiscalpolicymusthaveensuredthesustainabilityofpublicfinances

Figure8.TwokeysoffiscalpolicyinDraghinomics

Rate cut and

open market purchases Forward

Guidance

Draghinomics's Monetary Policy Measures

Onceconfidenceinpublicfinancesisrestored,EUmembersisfreetoexploitt hefiscalspacesothatfiscalpolicycancooperatewithmonetarypolicyinimproving aggregatedemand.Governmentsalwayshavetheoptionofregeneratingtheirfis calspacebyexpandingsource

ofrevenue.Forthosen o t havingfiscalspace,fiscalpolicycanstillsupportdema ndbyalteringthecompositionofthebudget,i n particular,bycuttingdistortionar ytaxesandunproductivee x p e n d i t u r e Moreover,structuralreformsinEuro zonecanhelpthegovernmentsachievehigherpotentialoutput,andraisef u t u r e governmentrevenues

Monetarypolicy

SinceEuropeanbankshaveloweredtheirloan-to-depositratiosandrestructuredtheircapital,theyhavenotbeeninapositionto passonlowinterestratestocustomers.Thus,Draghinomicsusedthemonetarypoli cytoactontwokeys:Carryoutanexpansionarypolicytocombatconditionsoflowi nflationandsubstantialslackintheeconomy;fixthetransmissionprocessofmon etarypolicysothatthiswayactuallyreachesfirmsandhouseholds.Thethirdarro wofDraghinomicsrelatestoquantitativeandcredit easingwhicharetheforms ofbuyinggovernmentbondsandpromotingc r e d i t growthfortheprivatesect or

Figure9.MeasuringECB’smonetarypolicy

Underquantitativeeasing(QE),ECBwillbuylargeamountsofsovereignbonds toincreasetheamountofmoneyinfinancialmarkets.QE,whichcreatesmoneyfor buyingfinancialassetswithoutcentralbanksprinting,andotherunconventional monetarypolicieshavebeenimplementedtobooste c o n o m i c activities.E CBisevenopentotheoptionofquantitativeeasing,ifneedbe.Inflationoutlookcoul dhavebeeno n e o f thek e y r e a s o n s f o r makingQEthatwassimilartowhatF E D (FederalReserveSystem),B O J (theB a n k ofJapan)o r B O E (Banko f England)ha ddonebefore—buyinggovernmentbondsonalargescale

SinceJune2014,ECBhaslaunchedtheTLRTO,which

hasabuilt-inincentive mechanismtoencourageloanstocompanies.ECBwasreadytooffe rcheaplong-termloanstobanksiftheylendthemoney ontofirms.TLTROis aprogramthatallowsbankstoborrowfundsatlowrediscountedinterestrate,onl y0.05%until2018,soastoprovidecredittotheeconomy.Ifbankscannotreacht

topaybacktheamountborrowedi n 2016.WithTLTRO,ECBaimstolend1trillioneur osoverthenext3yearsinordertomakeinflationr e a c h targetlevelsandsupportt heeconomybydirectingtheflows ofcreditintobusinesses.Thishugeprogramh asbeenimplementedinto2 p h a s e s : I n thefi r s t o n e , f o r thep e r i o d betw een