1 / 30

Germany and the €-zone Crisis

Germany and the €-zone Crisis. Jörg Bibow , Skidmore College & Levy Economics Institute, New York World Economic Roundtable, New America Foundation & World Policy Institute, NYC, 12 June 2013. Aim & message. AIM: Explore Germany’s central role in the ongoing Euro-zone crisis

dyan
Download Presentation

Germany and the €-zone Crisis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Germany and the €-zone Crisis JörgBibow, Skidmore College & Levy Economics Institute, New York World Economic Roundtable, New America Foundation & World Policy Institute, NYC, 12 June 2013

  2. Aim & message • AIM: Explore Germany’s central role in the ongoing Euro-zone crisis • MESSAGE: Having misinterpreted its own economic history, Germany is forcing an unworkable policy regime upon Euro-zone • Posing great risk to global recovery • Germany blind to its own vulnerability J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  3. Structure of talk • The “German model” • The trouble with exporting the German model • The key causes behind Euro-zone crisis • Unimpressive pre-crisis performance • Crisis (mis-)management • Conditions for proper crisis resolution • Concluding remarks J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  4. 1. The German model • “price stability above all else” • Lower inflation actually caused growth in Germany in environments of fixed nominal exchange rates • COMPETITIVENESS • Independent Buba as referee: to check labor unions and fiscal policy • DISCIPLINE • Asymmetric MP; no job in stimulating demand • Relying on export engine worked for Germany because and as long as others behaved differently • Easier to balance budget alongside external surplus J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  5. A history of external surpluses J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  6. 2. The trouble with exporting it • Maastricht meant export of Germany model • Meant trouble for Germany because key trade partners now required to be like Germany • Some temporary factors in 1990s • + Interest-rate convergence, “new economy” boom • - “burden” of German unification (“transfer union”) • So Germany became “sick man of the euro” • German response: more wage repression, fiscal austerity, and structural labor market reforms J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  7. Miraculous healing of the sick man J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  8. 3. Key Causes behind €-zone crisis • Deep cause: regime flaws • Cutting the Treasury-CB nexus of sovereign states • Nobody “minding the store” • No proper policy coordination to ensure convergence and cohesion of union • More immediate cause: German misbehavior • How wage repression, structural reform, & mindless austerity in Germany undermined currency union J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  9. 1) treasury-CB nexus rather vital • National treasury strengthened by national CB underwriting of financial system liquidity, just as CB strengthened by Treasury’s “deep pockets” • Treasury-CB nexus vital to safeguard liquidity and solvency of banking system • Euro decoupled member states’ national CB and national Treasury, while ECB not meant to be LOLR and Euro Treasury nonexistent • Strength! Says German model of central banking • CB independence “above all else” (Buba as referee) • Hyper-fears of “fiscal dominance” (Weimar, MEFOs) J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  10. 2) Nobody “minding the store” • No demand management foreseen in good times • “Stability-oriented” monetary policy asymmetric • “Below 2%”: Quick to hike, slow to ease = anti-growth bias • “Disciplined” fiscal policy asymmetric too • “Below 3%”: deficits can be “excessive” but never too small • Policy mix? No, as coordination threatens CBI! • Fiscal stance random, macro policy mix set by ECB • No LOLR foreseen in bad times • “Market-policy domain problem”: common market but no common policy = fragility, as markets “off the leash” and without backstop • Today: Common financial market without “banking union” J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  11. 3) Convergence not ensured • Euro-zone members commit to common inflation rate • ECB: “below but close to 2%” • “Golden rule of currency union”: National ULC trends must be aligned with common inflation norm • As nominal exchange rates eliminated, relative ULC trends determine intra-area competitiveness positions • While € determines extra-area competitiveness • Diverging national ULC trends undermine union • Divergences cumulative, lastingly distort competitiveness positions, causing current account imbalances • And persistent CA imbalances involve debt buildups J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  12. 4. Unimpressive pre-crisis performance • Business cycle • Brief booms, long (domestic demand) stagnations • Remarkably export-dependent for large economy • Growth and policy outcomes • Declining trend growth rate • HICP (headline) inflation mostly above 2% • Budget deficits mostly above 3% • Buildup of massive divergences and imbalances J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  13. Notorious Growth laggard • Lack of domestic demand management • Persistent high unemployment • Budget pressures, so SGP provokes tax hikes • While ECB thinks it is not responsible • Alas, MP and FP shoot each other in the foot! Both missed their magic numbers! • Official blame on “structural problems” • Hence “structural reform” as panacea • Strangely, Germany never had a problem growing on strong export stimuli J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  14. Low growth and “Tax-push inflation” J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  15. Divergence! Europe Converges to Germany’s historical stability norm by mid ‘90s 1980s 1990s 2000s € crisis € launched J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  16. But Germany itself diverges OFFICIALLY, everybody ‘lost competitiveness’ but Germany J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  17. Nasty consequences! • One-size-does-NOT-fit-all ECB policy • Too tight for Germany … domestic demand flat • Too loose for periphery … ‘hello’ bubbles … • Germany turns “über-competitive” • Internally, Euroland seriously unbalanced • Externally, euro exchange rate too weak for Germany, too strong for rest = ASYMMETRIC SHOCK!!! J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  18. Maastricht regime amplifies trouble • As Germany suffocates domestic demand, macro conditions become relatively tighter • Financial conditions, credit, property prices … • More SGP prompted austerity … vicious circle … • While ECB stance becomes too easy for periphery • Financial conditions, credit, property prices … • Fiscal ease as public finances seemingly healthy • Feedback loops sustain & amplify divergences, smoothly financed by liberalized & integrated markets; fragilities build up; supervisors dozing J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  19. Current account imbalances As flows change stocks, debts build up … J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  20. Germany’s “euro trilemma” • As Germany’s CA surplus and NIIP balloon, partners see their position deteriorate • Pre-crisis Germany’s CA surpluses concentrated in EU, and so are financial exposures! • Germany cannot have all three: perpetual CA surpluses, a no-transfer/no bail-out currency union, and a “clean” independent CB • Germany is on the hook! J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  21. 5. crisis (mis-)Management • Fiscal policy • Brief ‘Keynes moment’ in 2009 • Followed by mindless austerity since 2010 • Fiscal support to financial sectors • Guarantees, recapitalizations, deposit insurance etc. • ECB monetary policy • Foolish hikes, delayed easing (i.e. business as usual) • ECB as LOLR to banking systems • Various, culminating in LTROs • ECB as LOLR to governments (indirectly) • SMP, finally: OMTs = Mario’s magic bullet J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  22. Essentially, Official flows replacing private flows as bop crisis unfolds • Private exposures turning into official exposures • Bilateral loans (Greece bailout no. 1 etc) • EFSM/EFSF, ESM • ECB bond holdings (SMP … OMTs …) • Intra-Eurosystem (TARGET2) • Note: So-called ‘bail-outs’ and Buba’s TARGET2 position are NOT new net exposures • Measures just allowed banks to pull out J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  23. Meanwhile, Re-loading/re-sourcing of German external surpluses J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  24. 6. Conditions for proper crisis Resolution? • Crisis resolution - and sustaining EMU - has three parts to it, and one precondition • Rebalancing the currency union • Restoring intra-area equilibrium (transition; flows) • Fair deal on debt legacies • Balance-sheet cleanup (past; stocks) • Fixing (Maastricht) EMU regime • Establish viable EMU regime (future) • Precondition: robust GDP growth J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  25. 1) asymmetric rebalancing = debt deflation J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13 • As convergence to Germany’s historical norm not good enough! • Even France – after staying 2% path – forced into debt deflation

  26. 2) Debt deflation & growth crisis Magnify need for Debt relief • “The more the debtors pay, the more they owe” (I. Fisher 1933). • Real GDP (2013 relative to pre-crisis peak, IMF WEO April 2013) • Greece: minus 23% • Ireland, Italy, Portugal, Spain, Cyprus, Slovenia: minus 5-10% • France: zero // Germany: plus 3% • Even nominal GDP is shrinking! (2013 relative to pre-crisis peak, IMF WEO April 2013) • Greece: minus 20% • Ireland, Italy, Portugal, Spain, Cyprus, Slovenia: minus 1-10% • Unemployment skyrocketing, investment plunging, debt ratios soaring! J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  27. 3) “more-of-the-same” style Reforms mean perpetual austerity • Strengthened SGP cum ‘Fiscal Compact’ • Balanced budgets forever, implies public debt ratio converging to (near) zero • Either private sector has to seize being net saver or ROW tolerate perpetual, large €-zone CA surpluses (=German model) • Banking Union & Macroeconomic Imbalance Procedure • BU concerns future crises (“market-policy domain problem”) • MIP about acquittal of Germany, turning key blunder into virtue (to justify more structural reform) • Structural reform NOT a growth strategy though • As distributional impact further undermines domestic demand … continent-wide … J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  28. As ‘growth-friendly’ consolidation taking its toll, Will Row really put up with ‘germanizedeurope’? J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  29. 7. Concluding remarks • Asymmetric rebalancing by lethal mix of mindless austerity and structural reform = debt deflation • Ultimate cost of crisis & need for debt relief rising • ‘More-of-the-same’ regime reforms counterproductive • Recent shift in strategy, i.e. faster structural reform for delayed austerity, no growth strategy either! • Global tensions? Currency wars, trade wars … • Need for Euro Treasury and spending from center!!! J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

  30. Thank you! Background to ‘Germany and the Euro-zone crisis’ • ‘The Euroland crisis and Germany’s euro trilemma’, • Levy Working Paper no. 721, May 2012, http://www.levyinstitute.org/pubs/wp_721.pdf • International Review of Applied Economics, online version, October 2012, http://www.tandfonline.com/doi/abs/10.1080/02692171.2012.721757 • ‘At the crossroads: The euro and its central bank guardian (and savior?)’, Cambridge Journal of Economics, 2013 • Levy Economics Institute, Working Paper no. 738, November, http://www.levyinstitute.org/pubs/wp_738.pdf • ‘On the Franco-German euro contradiction and ultimate euro battleground’, Contributions to Political Economy, 2013 • Levy WP no. 762, April, http://www.levyinstitute.org/publications/?docid=1740 • ‘Germany and the euro crisis: The making of a vulnerable haven’ • Levy WP no. …, June, coming soon • See my homepage http://www.skidmore.edu/~jbibow/research.htm • At Levy Economics Institutehttp://www.levyinstitute.org/scholars/?auth=20 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

More Related