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G ERMANY AND THE - ZONE C RISIS Jörg Bibow, Skidmore College & Levy Economics Institute, New York World Economic Roundtable, New America Foundation & World.

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Presentation on theme: "G ERMANY AND THE - ZONE C RISIS Jörg Bibow, Skidmore College & Levy Economics Institute, New York World Economic Roundtable, New America Foundation & World."— Presentation transcript:

1 G ERMANY AND THE - ZONE C RISIS Jörg Bibow, Skidmore College & Levy Economics Institute, New York World Economic Roundtable, New America Foundation & World Policy Institute, NYC, 12 June 2013

2 A IM & MESSAGE AIM: Explore Germanys 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 2 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

3 S TRUCTURE OF TALK 1. The German model 2. The trouble with exporting the German model 3. The key causes behind Euro-zone crisis 4. Unimpressive pre-crisis performance 5. Crisis (mis-)management 6. Conditions for proper crisis resolution 7. Concluding remarks 3 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

4 1. T HE G ERMAN MODEL price stability above all else Low er 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 4 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

5 A HISTORY OF EXTERNAL SURPLUSES 5 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

6 2. T HE 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 6 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

7 M IRACULOUS HEALING OF THE SICK MAN 7 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

8 3. K EY C AUSES BEHIND - ZONE CRISIS Deep cause: regime flaws 1) Cutting the Treasury-CB nexus of sovereign states 2) Nobody minding the store 3) 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 8 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 Treasurys 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) 9 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

10 2) N OBODY 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 10 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

11 3) C ONVERGENCE 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 11 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

12 4. U NIMPRESSIVE 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 12 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

13 N OTORIOUS G ROWTH 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 13 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

14 L OW GROWTH AND T AX - PUSH INFLATION 14 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

15 D IVERGENCE ! E UROPE C ONVERGES TO G ERMANY S HISTORICAL STABILITY NORM BY MID 90 S 15 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13 launched crisis 1980s1990s2000s

16 B UT G ERMANY ITSELF DIVERGES 16 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13 OFFICIALLY, everybody lost competitiveness but Germany

17 N ASTY 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!!! 17 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

18 M AASTRICHT 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 18 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

19 C URRENT ACCOUNT IMBALANCES 19 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13 As flows change stocks, debts build up …

20 G ERMANY S EURO TRILEMMA As Germanys CA surplus and NIIP balloon, partners see their position deteriorate Pre-crisis Germanys 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! 20 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

21 5. CRISIS ( MIS -)M ANAGEMENT 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 = Marios magic bullet 21 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

22 E SSENTIALLY, O FFICIAL 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 Bubas TARGET2 position are NOT new net exposures Measures just allowed banks to pull out 22 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

23 M EANWHILE, R E - LOADING / RE - SOURCING OF G ERMAN EXTERNAL SURPLUSES 23 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

24 6. C ONDITIONS FOR PROPER CRISIS R ESOLUTION ? Crisis resolution - and sustaining EMU - has three parts to it, and one precondition 1) Rebalancing the currency union Restoring intra-area equilibrium (transition; flows) 2) Fair deal on debt legacies Balance-sheet cleanup (past; stocks) 3) Fixing (Maastricht) EMU regime Establish viable EMU regime (future) Precondition : robust GDP growth 24 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

25 1) ASYMMETRIC REBALANCING = DEBT DEFLATION 25 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13 As convergence to Germanys historical norm not good enough! Even France – after staying 2% path – forced into debt deflation

26 2) D EBT DEFLATION & GROWTH CRISIS M AGNIFY NEED FOR D EBT 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 ! 26 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

27 3) MORE - OF - THE - SAME STYLE R EFORMS 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 … 27 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

28 A S GROWTH - FRIENDLY CONSOLIDATION TAKING ITS TOLL, W ILL R OW REALLY PUT UP WITH GERMANIZED EUROPE ? 28 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

29 7. C ONCLUDING 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!!! 29 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13

30 T HANK YOU ! Background to Germany and the Euro-zone crisis The Euroland crisis and Germanys euro trilemma, Levy Working Paper no. 721, May 2012, http://www.levyinstitute.org/pubs/wp_721.pdf 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 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 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=1740http://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.htmhttp://www.skidmore.edu/~jbibow/research.htm At Levy Economics Institute http://www.levyinstitute.org/scholars/?auth=20http://www.levyinstitute.org/scholars/?auth=20 30 J Bibow: Germany & Euro-zone Crisis, NYC, 12 June 13


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