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.

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

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 Economics Research 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 Economics Research 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 Economics Research 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 Economics Research Centre for Economics and Regional Studies of the Hungarian Academy of Sciences

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 Economics Research Centre for Economics and Regional Studies of the Hungarian Academy of Sciences

Germany’s euro trilemma – Perpetual export surpluses – No transfer/no bailout monetary union – A “clean” independent central bank Maastricht regime designed by Germany: no bailout 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 Economics Research Centre for Economics and Regional Studies of the Hungarian Academy of Sciences

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 Economics Research Centre for Economics and Regional Studies of the Hungarian Academy of Sciences