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A German Economist’s View on the Crisis.

Prerequisites for Returning to Stability

Rolf J. Langhammer

Kiel Institute for the World Economy, Kiel Germany

September, 20, 2010

Centre d’Analyse Stratégique, Paris

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I. Four elements of the crisis: state of coping with them

II. Real adjustment

III. Fiscal adjustment

IV. Measures for returning to stability

A German Economist’s View on the Crisis Prerequisites for Returning to Stability

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

I. Four elements of the crisis : state of coping with them

Recession (cyclical): behind us Financial market crisis: not yet solved, fragility and vulnerability of

financial institutions and markets still exist Real adjustment: intra-sectoral excess capacities not yet reduced,

inter-sectoral adjustment unfinished Fiscal and monetary exit strategies : not yet done, monetary easing

continues, fiscal adjustment postponed

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II. Real adjustment

Assumptions medium term global economic growth (including China) lower than

2000-2008 new relevant prices like after 1973 plus other factors

(demographics, technological improvements) will spur sectoral structural change and change in factor mix (more labour intensity?)

global imbalances will slowly decline, big concerns about real adjustment in the US

A German Economist’s View on the Crisis Prerequisites for Returning to Stability

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

III. Fiscal adjustment : Challenges

“Deterministic” governance in a “stochastic” world with tail risks (Pisani-Ferry)

Return to pre-crisis debt level is time-asymmetric: In Germany, it takes three years for the debt level to rise from 65% to 80% compared to expectedly twelve years to return to 65% (see German Council of Experts’ scenario and EU Sustainability Report 2009)

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

Long-term development of the German debt level following Maastricht criteria under different assumptions on nominal growth rates

Source: German Council of Economic Experts, 2009

Debtlevel

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

EU Sustainability Report 2009

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

Implicit debt levels (unfunded entitlements) increasingly receive public attention and cause concerns.

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

r = Discount rateg = Growth rateSource: Hagist, Moog, Raffelhüschen, Vatter (2009)

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

IV. Measures for returning to stability

Real adjustment- Enhancing EU cross-border labour market flexibility- Germany : structural reforms, liberalising service markets, shifting parts

of public services expenditures to the private sector- Deficit countries : strengthening the export base

Fiscal adjustment- Establishing national debt commissions for setting binding medium-term

upper limits for explicit debt levels- Expenditure side: Cutting subsidies and consumptive expenditures- Revenue side : Broadening the tax base, reform the tax base from direct

to indirect taxation- Coordination at EU level : stricter surveillance of Maastricht debt and

deficit levels including sanctions (denying voting rights or access to EU funds)

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A German Economist’s View on the Crisis Prerequisites for Returning to Stability

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