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Europe under stress - A German perspective
Dr. Jürgen Pfister
Finance seminar at Aarhus University
Aarhus, 4 December 2013
© 2013 phz Economics| 4 December 2013, Aarhus
Agenda
 Introductory remarks
 Adjustment in crisis countries: taking stock
 The role of the ECB
© 2013 phz Economics| 4 December 2013, Aarhus
page 1
The practitioner‘s approach to economic
analysis
 1st layer
 2nd layer
 3rd layer
academic research (universities)
international organizations (supranational,
intergovernmental, e.g. ECOFIN/Eurogroup),
research institutes, governments, central banks,
advisory bodies (e.g. The German council of
economic experts)
practitioners (e.g. bank economists)
general public (directly or via media)
© 2013 phz Economics| 4 December 2013, Aarhus
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Monetary union: The historical background
 A central idea from the beginning
 Monetary union and political union
 The D-mark and German unification: myth and reality
 An experience of life: „one mistake brings on the next“
 No political union
 lax interpretation of the convergence criteria in 1998
(eleven countries)
 insufficient surveillance by the EU Commission from the
start
 watering down of the Stability and Growth Pact (SGP) in
2005
 …
© 2013 phz Economics| 4 December 2013, Aarhus
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Is there a German view on EMU and the
sovereign debt crisis?
 Denmark said no to the Maastricht Treaty (2 June 1992),
the Germans were not asked.
 The D-mark already fulfilled all the promises of the euro: a
stable currency, an international role, an independent
central bank.
 The non-negotiable core principles: price stability, central
bank independence, no-bailout.
 Should the Treaty (and the SGP) be observed literally (e.g.
3%, 60%)?
 The German Constitutional Court.
© 2013 phz Economics| 4 December 2013, Aarhus
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Euro area: Split economic situation
Inflation and seasonally-adjusted GDP, first quarter 2008=100
Euro area (excl. GR, IE, PT, ES, IT)
GR, IE, PT, ES, IT
102.0
100.0
98.0
96.0
94.0
92.0
90.0
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313
© 2013 phz Economics| 4 December 2013, Aarhus
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Crisis countries: Fiscal consolidation on track
General government fiscal balance in percent of GDP
2009
2012
2013
15.7
13.5
13.7
[2.9]
11.1
10.2
9.0
8.2
[8.6]
10.6
[7.1]
7.4
6.4
6.8
5.9
5.5
[5.8]
3.0 3.0
[3.1]
GR
IE
PT
ES
IT
[Excluding recapitalization of banks]
© 2013 phz Economics| 4 December 2013, Aarhus
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Crisis countries: Marked improvements in
current account balances
In billions of euros
2008
15.3
14.7
6.8
-4.3
2013
1.5
-10.2
-21.7
-41.9
-44.9
-104.3
GR
© 2013 phz Economics| 4 December 2013, Aarhus
IE
PT
ES
IT
page 7
Competitiveness: Considerable progress
Real exchange rate deflated by GDP deflator, January 1999=100
Spain
Ireland
Greece
Portugal
Italy
France
Germany
Source: Joint forecast of leading research institutes, October 2013.
© 2013 phz Economics| 4 December 2013, Aarhus
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Government debt: Sharp increase due to
recession and financial crisis
Gross debt as percent of GDP
2006
2013
176
133
108
128
106
124
95
94
80
69
64
68
40
25
GR
IT
© 2013 phz Economics| 4 December 2013, Aarhus
ES
PT
IE
FR
DE
page 9
Euro area:
Massive rise in private debt in crisis countries
Liabilities of non-financial firms and private households as percent of GDP
1995
2012
Memorandum item:
1995:
2012:
DE
108.4
106.7
306.4
223.7
194.4
156.8
129.1
126.4
71.4
76.8
76.7
41.6
GR
© 2013 phz Economics| 4 December 2013, Aarhus
IT
ES
PT
IE
page 10
Fiscal consolidation: The right way?
Change in the government outlay- and revenue-to-GDP ratios, 2013
compared with 2004-08, in percentage points
outlays
revenues
11.6
6.0
5.4
3.9
2.8
5.0
3.9
3.2 3.2
2.3
0.9
-0.7
-1.7
DE
FR
© 2013 phz Economics| 4 December 2013, Aarhus
IT
ES
-1.2
IE
PT
GR
page 11
Private wealth: Is the South richer than thought?
Average net wealth per household in thousands of euros, Eurosystem
Household Finance and Consumption Survey, April 2013
275.2
291.4
233.4
195.2
152.9
DE
FR
IT
ES
PT
147.8
GR
DE, FR, IT, PT: 2010, GR: 2009, ES: 2008
© 2013 phz Economics| 4 December 2013, Aarhus
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Foreign debt: No improvement yet
Net foreign investment position in percent of GDP
2006
Memorandum item:
2006:
2012:
2012
DE
27.9
40.5
-5.3
-22.2
-20.7
-65.8
-78.8
-85.4
-93.0
-95.8
-114.1
GR
-116.5
IE
PT
ES
IT
1)
1) 2011.
© 2013 phz Economics| 4 December 2013, Aarhus
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Monetary union: Shift in focus
 Growing impatience of people with the economic situation leads to
political changes. The election in Germany in September might tip
the balance to the anti-reform side.
 Increased participation in rescue operations of owners, bond
holders and depositors – instead of tax payers – is appropriate
(principle of owner liability). But it should follow clear and preannounced rules.
 The shift of emphasis from austerity to growth is basically
welcome. Unfortunately, often “growth” is misinterpreted as higher
government spending (less consolidation).
 The debate on who should bear the burden: No progress in 30
years!
 The struggle between shared liability and shared responsibility in
fiscal policy must not be won by the former.
© 2013 phz Economics| 4 December 2013, Aarhus
page 14
Euro area: Danger for cohesion
Unemployment rate 2013 in percent (Eurostat)
26.6
27.0
ES
GR
17.4
11.0
7.0
5.1
5.4
AT
DE
NL
© 2013 phz Economics| 4 December 2013, Aarhus
8.2
8.6
FN
BE
FR
12.2
IT
13.3
IE
PT
page 15
Reform programmes:
Three preconditions for success
 Communication between governments and the
people/voters must be transparent.
 There has to be a “light at the end of the tunnel”.
 The distribution of the burden needs to be considered fair
by the (overwhelming) majority of the people/voters
© 2013 phz Economics| 4 December 2013, Aarhus
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ECB: Euro rescue approaching its limits
 “Ordnungspolitik” vs. pragmatism.
 The ECB is compensating for insufficient action by governments.
 Cyclical divergence is impairing a uniform interest rate policy.
 Securities purchases (SMP, OMT) are in a grey area of the ECB’s
mandate.
 The exit from an extremely expansive monetary policy is easy from
an instrument point of view. But may not be possible from a
political perspective.
 For 2014/15 low inflation danger (including asset prices).
© 2013 phz Economics| 4 December 2013, Aarhus
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2007-12
2008-02
2008-04
2008-06
2008-08
2008-10
2008-12
2009-02
2009-04
2009-06
2009-08
2009-10
2009-12
2010-02
2010-04
2010-06
2010-08
2010-10
2010-12
2011-02
2011-04
2011-06
2011-08
2011-10
2011-12
2012-02
2012-04
2012-06
2012-08
2012-10
2012-12
2013-02
2013-04
2013-06
2013-08
Euro area: Strong growth of monetary base,
weak money supply
Monetary base and broad money M3, December 2007=100
M3
© 2013 phz Economics| 4 December 2013, Aarhus
Monetary base
220
200
180
160
140
120
100
page 18
Outlook: From an existential crisis to a
chronic problem
 Citizens in the crisis countries won’t start to benefit from the recovery
until 2015. Will the political/social consensus last that long?
 The political shift from “austerity to growth” won’t lead to greater
efforts for structural reforms, but rather to a lengthening of the time
period of the consolidation. This may provoke a reaction on the bond
markets and increase pressure on the ECB.
 Of the two major reform projects – banking union and fiscal union –
the main aspects of the former are disputed (Which banks? Role of the
ECB? Structure of the SRM? Deposit insurance?), the latter is probably
unachievable in the foreseeable future.
 The survival of the euro with all (large) countries is still more likely
than a collapse. Sovereign debt restructuring in the large countries is
not expected.
 The euro will remain internally stable – medium-term inflation rate
around 2% p.a.; a somewhat higher rate in Germany than in the past –
and stable against the dollar – unsolved fiscal problems in the US,
(much) higher inflation risk than in the euro area.
© 2013 phz Economics| 4 December 2013, Aarhus
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Thank you for your attention!
Dr. Jürgen Pfister
www.juergenpfister.com
© 2013 phz Economics| 4 December 2013, Aarhus
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