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Why further eurozone integration could hurt Europe’s competitiveness

Why further eurozone integration could hurt Europe’s competitiveness . Europe’s four crises. Financial crisis. Debt crisis. Political crisis. Competitiveness crisis. Bank crisis. The role of the euro. The crisis started in the US but... ...the euro locked it in:

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Why further eurozone integration could hurt Europe’s competitiveness

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  1. Why further eurozone integration could hurt Europe’s competitiveness

  2. Europe’s four crises Financial crisis Debt crisis Political crisis Competitiveness crisis Bank crisis

  3. The role of the euro • The crisis started in the US but... • ...the euro locked it in: • One-size-fits-all interest rates • Perverse incentives • Exposed tremendous imbalances • Political stalemate

  4. Debt levels in the eurozone (% GDP)

  5. Debt crisis: Financing needs PIIGS 2013 - 2015 (€bn)

  6. Bank crisis: Size of banks relative to GDP

  7. Banking crisis: The reliability on ECB cash

  8. Bank crisis / debt crisis: Net Balance within Eurosystem/ Target [€bn]

  9. Competitiveness: Real unit labour cost trends selected euro members (1999=100)

  10. Competitiveness: Internal devaluation

  11. Competitiveness: Unemployment levels (%)

  12. Global competitiveness

  13. Global competitiveness

  14. Is fiscal / banking union the answer? • “Inexorable logic” of the euro? • Joint back stop for banks (deposit guarantee scheme / resolution fund) • Fiscal distribution (eurobonds / transfers)

  15. 1. Can Germany afford it? Superman: "Easy, Miss, I've got you." Lois Lane: "You...you've got me, who's got you?"

  16. Germany’s demographic trends

  17. 2. How to avoid moral hazard in a fiscal / banking union? • Will it be possible to incentivise reforms in a fully fledged fiscal / banking union? • How to avoid déjà vu? • Berlin’s answer: strict central controls

  18. Political crisis: 17 national democracies • 17 national parliaments • Electoral cycles • Constitutional limitations • Public opinion • No demos = Massive risk of political backlash

  19. Support for a transferunion? Sources: Eurobarometer/ZDF

  20. Support for central fiscal controls?

  21. What alternatives? • Muddle through: Cash for austerity • Transfer-union / bank-union: Who’ll be lender of last resort? Political and economic price? • Euro break-up: Greece or more countries?

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