by jörg bibow levy economics institute of bard college may 2012 the euro debt crisis and...
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by Jörg Bibow Levy by Jörg Bibow Levy Economics Institute of Economics Institute of
Bard College May 2012 Bard College May 2012
The Euro Debt Crisis and Germany’s Euro Trilemma by Jörg Bibow Levy Economics Institute of Bard College May 2012
AIM: Investigate the causes behind the euro debt crisis, particularly Germany’s role in it
MESSAGE: Not primarily a “sovereign debt crisis”, but rather a (twin) banking and balance of payments crisis
Germany is facing a trilemma, led by it’s decisions regarding: Breaking the golden rule of a monetary union: commitment to a
common inflation rate Misdiagnosis and the wrongly prescribed medication of austerity
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012
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1. Euroland in global perspective2. A look inside Euroland3. Divergencies and intra-area imbalances4. Miraculous healing of the “sick man of the Euro”5. Germany’s “Euro trilemma”6. Unconditional austerity and it’s implications7. Concluding remarks
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 6
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 7
Denial of the authorities made things worse:• False belief that Euroland was a victim of an external crisis• October 2008: Half-hearted participation in globally
coordinated stimulus• Fresh illusion: Euroland has fallen victim to a “sovereign
debt crisis”
ECB’s stability-oriented monetary policy:
1) Inflation below but close to 2 percent
2) Budget deficits below 3 percent
A look at budget balances made it obvious that it was the economic union part of the “EMU” that had failed
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 8
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 9
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 10
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 11
Current account imbalances in the Euroland, due to: Competitiveness positions running out of kilter Divergent domestic demand growth rates
Evolution of competitiveness at the national level shaped by: The rate of increase in wages, relative to the rate of
productivity growth (unit labor cost) The exchange rate (not an option in a currency union)
Coordination needed to prevent national wage trends from becoming the source of assymetric shocks
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 12
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 13
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 14
1998: Germany barely met the 3-percent (critical in getting the euro off) deficit hurdle
Pillars of German policymaking: Unconditional fiscal consolidation – austerity measures Wage restraint
Result: Germany among the first countries to breech the SGP’s magic number of 3-percent deficit hurdle in the early 2000s (“the sick man of the euro”)
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 16
The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 17
The crisis is benefiting Germany in two ways: By depressing the euro and hence stimulating non-euro net
exports By depressing German interest rates, owing to the market
convention of Germany as a safe haven
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 19
European Commision report (2012): Intra-area rebalancing will have to involve both surplus and deficit countries alike
Germany: runs persistent current account surpluses – is thereby improving its net international investment position either by paying off foreign debts or acquiring foreign assets
IMF study (2010): Germany’s global financial intergration is especially concentrated within Euroland
TARGET2: Automated transfer system of Bundesbank, linking wholesale payment systems and money markets across Euroland
It is essential to the implementation of area-wide monetary policy and interbank refinancing activities. It’s balance arises endogenously when EMU members’ balance of payments are not otherwise balanced over a certain period
TARGET2 balances could not arise without Eurosystem lending
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Germany’s euro trilemma: Germany cannot have all three: perpetual export surpluses, a no transfer/no bailout monetary union, and a “clean” independent central bank. Therefore, its perpetual export surpluses can only be sustained if offset by fiscal transfers
Germany designed the Maastricht regime, so as to exclude both transfers and bailouts of partners, but ignored that running perpetual trade surpluses would bankrupt its trade partners and make application of the forbidden medicine inevitable.
Simple choice: Bail out its bankrupt EMU partners or its own banks (hit by EMU partners’ defaulting on their debts)
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Typical German position: Deficit countries must adjust and address their structural problems. They must reduce domestic demand, become more competitive and increase their exports
2 percent inflation growth target: It’s not on the table, cause the adjustment path will make Germany less competitive
Germany intends to stay the course and force everyone else to converge to its new zero percent stability norm instead
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The Euro Debt Crisis and The Euro Debt Crisis and Germany’s Euro Trilemma, by Germany’s Euro Trilemma, by Jörg Bibow Levy, May 2012 Jörg Bibow Levy, May 2012 23
Causes behind the euro debt crisis: Critical flaws in the design of the Maastricht regime Regime-antagonistic policies pursued by the monetary
union’s largest member, Germany
Possible solutions: Bank recapitalization and symmetric internal rebalancing Reforming EMU in the direction of a full-blown fiscal
union
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