Download The Euroland Crisis and Germany`s Euro Trilemma

GERMANY AND THE €-ZONE CRISIS
Jörg Bibow, Skidmore College & Levy
Economics Institute, New York
World Economic Roundtable, New America
Foundation & World Policy Institute,
NYC, 12 June 2013
AIM & MESSAGE

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

J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

AIM: Explore Germany’s central role in the
ongoing Euro-zone crisis
2
STRUCTURE OF TALK
1.
3.
4.
5.
6.
7.
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
2.
The “German model”
The trouble with exporting the German model
The key causes behind Euro-zone crisis
Unimpressive pre-crisis performance
Crisis (mis-)management
Conditions for proper crisis resolution
Concluding remarks
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1. THE GERMAN MODEL

“price stability above all else”


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Independent Buba as referee: to check labor unions
and fiscal policy
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COMPETITIVENESS
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
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
Lower inflation actually caused growth in Germany
in environments of fixed nominal exchange rates
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A HISTORY OF EXTERNAL SURPLUSES
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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2. THE TROUBLE WITH EXPORTING IT

Maastricht meant export of Germany model

Some temporary factors in 1990s
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
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+ 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
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

Meant trouble for Germany because key trade
partners now required to be like Germany
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MIRACULOUS HEALING OF THE SICK MAN
GDP G
GDP euro
unemployment G
unemployment euro
14
percent change // in percent
10
8
6
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-2
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
12
-4
-6
Source. IMF World Economic Outlook database (April 2013)
Notes. real GDP annual growth rates, unemployment rates
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3. KEY CAUSES BEHIND €-ZONE CRISIS

Deep cause: regime flaws
1)
3)

More immediate cause: German misbehavior

How wage repression, structural reform, & mindless
austerity in Germany undermined currency union
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
2)
Cutting the Treasury-CB nexus of sovereign states
Nobody “minding the store”
No proper policy coordination to ensure convergence
and cohesion of union
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1) TREASURY-CB NEXUS RATHER VITAL


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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)
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
National treasury strengthened by national CB
underwriting of financial system liquidity, just as
CB strengthened by Treasury’s “deep pockets”

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2) NOBODY “MINDING THE STORE”

No demand management foreseen in good times

“Stability-oriented” monetary policy asymmetric

“Disciplined” fiscal policy asymmetric too

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“Below 3%”: deficits can be “excessive” but never too small
Policy mix? No, as coordination threatens CBI!

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“Below 2%”: Quick to hike, slow to ease = anti-growth bias
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”
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

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3) CONVERGENCE NOT ENSURED

Euro-zone members commit to common inflation rate

“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

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Diverging national ULC trends undermine union
Divergences cumulative, lastingly distort competitiveness
positions, causing current account imbalances
 And persistent CA imbalances involve debt buildups
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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ECB: “below but close to 2%”

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4. UNIMPRESSIVE 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%


J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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Buildup of massive divergences and imbalances
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NOTORIOUS GROWTH 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

J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

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LOW GROWTH AND “TAX-PUSH INFLATION”
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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DIVERGENCE! EUROPE CONVERGES TO GERMANY’S
HISTORICAL STABILITY NORM BY MID
‘90S
(West) Germany
Austria
Netherlands
Italy
Spain
historical NORM
France
18
1980s
1990s
2000s
14
12
in percent
10
8
6
4
2
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
16
0
-2
-4
Source. AMECO, Destatis
Note. Nominal unit labor costs, total economy
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BUT GERMANY
ITSELF DIVERGES
OFFICIALLY, everybody
‘lost competitiveness’
but Germany
160
Spain
150
Italy
Euroland ex Germany
130
2% ECB norm (= pre-Maastricht
Germany)
France
120
Germany
Greece
110
Portugal
100
Ireland
90
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
140
Netherlands
80
Finland
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources. Eurostat Ameco database; own calculations
Note. Nominal unit labor costs, total economy
Austria
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NASTY 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

J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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= ASYMMETRIC SHOCK!!!
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MAASTRICHT REGIME AMPLIFIES TROUBLE

As Germany suffocates domestic demand, macro
conditions become relatively tighter

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
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
Financial conditions, credit, property prices …
 More SGP prompted austerity … vicious circle …

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CURRENT ACCOUNT IMBALANCES
10
Germany
France
Italy
Portugal
Spain
Greece
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
5
0
percent of GDP
Ireland
-5
-10
-15
19
-20
Source. IMF World Economic Outlook database (April 2013)
GERMANY’S “EURO TRILEMMA”
As Germany’s CA surplus and NIIP balloon,
partners see their position deteriorate
 Pre-crisis Germany’s 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
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

is on the hook!
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5. CRISIS (MIS-)MANAGEMENT

Fiscal policy
Brief ‘Keynes moment’ in 2009
 Followed by mindless austerity since 2010

Fiscal support to financial sectors
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ECB monetary policy

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Foolish hikes, delayed easing (i.e. business as usual)
ECB as LOLR to banking systems
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Guarantees, recapitalizations, deposit insurance etc.
Various, culminating in LTROs
ECB as LOLR to governments (indirectly)
 SMP, finally: OMTs = Mario’s magic bullet
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

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ESSENTIALLY, OFFICIAL 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 Buba’s TARGET2
position are NOT new net exposures

Measures just allowed banks to pull out
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

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MEANWHILE, RE-LOADING/RE-SOURCING
OF GERMAN EXTERNAL SURPLUSES
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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6. CONDITIONS FOR PROPER CRISIS
RESOLUTION?

1)
Rebalancing the currency union
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2)
Fair deal on debt legacies
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3)
Balance-sheet cleanup (past; stocks)
Fixing (Maastricht) EMU regime
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Restoring intra-area equilibrium (transition; flows)
Establish viable EMU regime (future)
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
Crisis resolution - and sustaining EMU - has
three parts to it, and one precondition
Precondition: robust GDP growth
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1) ASYMMETRIC REBALANCING
= DEBT DEFLATION
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13


As convergence to Germany’s historical norm not good enough!
Even France – after staying 2% path – forced into debt deflation
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2) DEBT DEFLATION & GROWTH CRISIS
MAGNIFY NEED FOR DEBT 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)

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
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Even nominal GDP is shrinking! (2013 relative to pre-crisis peak, IMF WEO
April 2013)
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Greece: minus 23%
Ireland, Italy, Portugal, Spain, Cyprus, Slovenia: minus 5-10%
France: zero // Germany: plus 3%
Greece: minus 20%
Ireland, Italy, Portugal, Spain, Cyprus, Slovenia: minus 1-10%
Unemployment skyrocketing, investment plunging, debt
ratios soaring!
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

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3) “MORE-OF-THE-SAME” STYLE REFORMS
MEAN PERPETUAL AUSTERITY

Strengthened SGP cum ‘Fiscal Compact’
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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)


J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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)

Structural reform NOT a growth strategy though

As distributional impact further undermines domestic demand
… continent-wide …
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AS ‘GROWTH-FRIENDLY’ CONSOLIDATION
TAKING ITS TOLL, WILL ROW REALLY PUT
UP WITH ‘GERMANIZED EUROPE’?
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
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7. CONCLUDING 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


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Recent shift in strategy, i.e. faster structural reform
for delayed austerity, no growth strategy either!
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

Global tensions? Currency wars, trade wars …
Need for Euro Treasury and spending from center!!!
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THANK YOU!
Background to ‘Germany and the Euro-zone crisis’

‘The Euroland crisis and Germany’s euro trilemma’,


‘At the crossroads: The euro and its central bank guardian (and savior?)’,
Cambridge Journal of Economics, 2013


‘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=1740
‘Germany and the euro crisis: The making of a vulnerable haven’


Levy Economics Institute, Working Paper no. 738, November,
http://www.levyinstitute.org/pubs/wp_738.pdf
Levy WP no. …, June, coming soon
See my homepage http://www.skidmore.edu/~jbibow/research.htm
At Levy Economics Institute http://www.levyinstitute.org/scholars/?auth=20
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

Levy Working Paper no. 721, May 2012,
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
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