Germany’s Role in The Euro Crisis Management Ágnes Orosz “POST-CRISIS ECONOMIC DEVELOPMENT OF EU AND BULGARIA” 18 th – 19 th October 2012, Sofia Institute

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


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.


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


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


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


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)


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)


Documents

Germany’s Role in The Euro Crisis Management Ágnes Orosz “POST-CRISIS ECONOMIC DEVELOPMENT OF EU AND BULGARIA” 18 th – 19 th October 2012, Sofia Institute