Germany’s Role in The Euro Crisis Management Ágnes Orosz “POST-CRISIS ECONOMIC DEVELOPMENT OF...

Germany’s Role inThe Euro Crisis Management

Ágnes Orosz

“POST-CRISIS ECONOMIC DEVELOPMENT OF EU AND BULGARIA”

18th – 19th October 2012, Sofia

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

Outline

Outline

• Importance, relevance of the topic• The nature of sovereign debt crisis • Competitiveness imbalances• Current account imbalances• Germany’s euro trilemma• Final remarks

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

Why is Germany important?

• Strong commitment to stabilise the euro area• Ruling of the German Constitutional Court on

September 12 „green light” for ESM (with a few recommendation)

• Engagement to rule-based fiscal policy (pioneer, role model)

• Biggest contributor to crisis management• Historical reasons• Trade, economic performance, etc.

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

On the issue of „sovereign debt crisis”

• Not primarily a “sovereign debt crisis” banking and balance of payments crisis– Competitiveness imbalances – Current account imbalances– Increasing corresponding debt flows

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

Competitiveness problem of the periphery

• Particularly important for: Greece, Ireland, Italy, Portugal, and Spain

• Devaluation is not possible because of the euro ULC (increased the most in the „problematic area, while the least for Germany) competitiveness gap with Germany (solution = downward adjustment of wages???)

• Differences is export basket decreasing wages no solution

• Export structure issues

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

About current account imbalances

About current account imbalances

• Trade surpluses of Germany more regionally concentrated to Europe

• Loss: decreasing export demand within Europe• Benefits: (1) depressing the euro stimulating non-euro

net exports, (2) depressing German interest rates Germany as a safe haven for investments

• Early warning mechanism of EC (CA above 6% of GDP = danger for overall stability in Europe) = rather consequence than cause

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

Germany’s euro trilemma

Germany’s euro trilemma

– Perpetual export surpluses– No transfer/no bailout monetary union– A “clean” independent central bank

• Maastricht regime designed by Germany: no bail-out and no transfers (result: bankrupting its trade partners)

• Trilemma must be solved steps towards more bail-out (contradict to the German voters)

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences 

Final remarks

Final remarks

• Importance of the presidential elections in September 2013 European policy would be a part of the election campaign

• Need for additional crisis management measures financial relief and political support from Germany (incremental steps)

• Political union debate has started (potential constitutional changes)

• Changes in Merkel’s communication (Greece’s visit)

Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences