Managing the Crisis
Manfred J.M. Neumann
University of Bonn
Munich, 30. April 2010
2 Remarks on Bank Regulation and Supervision
1. Core capital
relative to non-weighted assets: 10 %
2. European Systemic Risk Board (ESRB)
for monitoring macro-prudential risk:
ECB/ESCB-council can take care of that
Economic indicators Averages 2000-2008
Greece Euro 16 Germany
GDP growth, % 4.0 2.0 1.5
Total consumption (private + public) % of GDP 89.1 77.3 77.2
Personal savingsratio 0.5 11.5 16.1
-14
-12
-10
-8
-6
-4
-2
0
2
-14
-12
-10
-8
-6
-4
-2
0
2
00 01 02 03 04 05 06 07 08 09 10
Deficit/GDP ratiosDeficit/GDP ratios
Germany
Euro 16
Greece
Eurostat data
Twin deficits
2000 2008 2009
% of GDP
Deficit - 3.7 - 7.7 - 13.6
Current account - 7.7 - 14.6 - 11.2
EUR billion
Deficitprimary - 5.0 - 7.4 - 20.3interest expend. - 0.1 - 10.9 - 12.0
total - 5.1 - 18.3 - 32.3
Current account - 10.6 - 34.8 - 26.6
Back on the envelope (EUR billion):
Suppose the Greek deficit will be cut by EUR 10 billion (4 % of GDP) each year:
If half Debt redempt. + fresh deficit = demand for support comes true
2010 24.5 20.8* 45.3 50.3
2011 31.3 11.6 44.9 49.9
2012 31.7 1.6 33.3 123.5 38.3 138.5
2013 24.8 - 8.4 16.4 21.4
2014 31.6 - 18.4 13.2 153.1 18.2 178.1
* Plan of 1. April 2010
The support-package for Greece
builds on deficit cuts of 4 % of GDP each year
plus
devaluation by command “your wages will be cut by 25 %”
John Maynard Keynes
Credible?
How long will the Greek government be able to deliver ??
If the Greek government cannot deliver - the Euro-EU will transform into a transfer union
having to push up transfers year after year
- danger of moral hazard
why not imitate ?
How long would the game be tolerated in the rest of euro 16 ?
Note:
Each aid package is a combination of
a bail-out of investors
plus a bail-out of Greek government
Question:
Why not have investors take their share in the bail-out ?
The rejected alternative solution:
1. Debt moratorium with partial cessation
Losses (EUR billion)
Suppose a hair cut of 20 % 33 %
France 10.0 16.7
Germany 5.6 9.3
Italy 4.0 6.7
Belgium 3.4 5.7
Netherlands 3.0 5.0
2. Deliberate exit from the euro to effect real devaluation
5 years
well-defined re-entry (criteria)
The choices for Greece are
a few years of costly restructuring with a new currency plus devaluation
or long-run stagnation with overvaluation under the euro regime
Domino ?
- unlikely but cannot be ruled out given other overindebted countries
- if the fundamental conditions for a domino exist, it will happen, anyway,
as the EuroEU will hardly be ready to put up rescue packages for more countries.
Stability and Growth Pact
needs rewriting
Problem:
how to achieve incentive compatibility?
More biting sanctions - loss of financial aid - temporary loss of voting rights- temporary loss of euro-membership ?
Automatic start of sanctions ?
rules with trigger points
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