G ERMANY AND THE - ZONE C RISIS Jörg Bibow, Skidmore College & Levy Economics Institute, New York...
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Transcript of G ERMANY AND THE - ZONE C RISIS Jörg Bibow, Skidmore College & Levy Economics Institute, New York...
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
AIM: Explore Germany’s 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
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STRUCTURE OF TALK
1. The “German model” 2. The trouble with exporting the German
model3. The key causes behind Euro-zone crisis4. Unimpressive pre-crisis performance 5. Crisis (mis-)management6. Conditions for proper crisis resolution7. Concluding remarks
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1. THE GERMAN MODEL
“price stability above all else” Lower 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
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A HISTORY OF EXTERNAL SURPLUSES
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2. THE 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
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MIRACULOUS HEALING OF THE SICK MAN
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3. KEY CAUSES BEHIND €-ZONE CRISIS
Deep cause: regime flaws1) Cutting the Treasury-CB nexus of sovereign
states2) 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
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1) TREASURY-CB NEXUS RATHER VITAL
National treasury strengthened by national CB underwriting of financial system liquidity, just as CB strengthened by Treasury’s “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)
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2) NOBODY “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”
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3) CONVERGENCE 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
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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%
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 stimuli13
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LOW GROWTH AND “TAX-PUSH INFLATION”
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DIVERGENCE! EUROPE CONVERGES TO GERMANY’S HISTORICAL STABILITY NORM BY MID ‘90S
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3€ launched
€ crisis1980s 1990s 2000s
BUT GERMANY ITSELF DIVERGES
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‘lost competitiveness’ but Germany
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
= ASYMMETRIC SHOCK!!!
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MAASTRICHT 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
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CURRENT ACCOUNT IMBALANCES
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As flows change stocks,
debts build up …
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 is on the hook! 20
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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 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 = Mario’s magic bullet
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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
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MEANWHILE, RE-LOADING/RE-SOURCING OF GERMAN EXTERNAL SURPLUSES
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6. CONDITIONS FOR PROPER CRISIS RESOLUTION?
Crisis resolution - and sustaining EMU - has three parts to it, and one precondition1) 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
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1) ASYMMETRIC REBALANCING = DEBT DEFLATION
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As convergence to Germany’s historical norm not good enough!
Even France – after staying 2% path – forced into debt deflation
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) 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!
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3) “MORE-OF-THE-SAME” STYLE REFORMS 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
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AS ‘GROWTH-FRIENDLY’ CONSOLIDATION TAKING ITS TOLL, WILL ROW REALLY PUT UP WITH ‘GERMANIZED EUROPE’?
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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
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
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THANK YOU!Background to ‘Germany and the Euro-zone crisis’ ‘The Euroland crisis and Germany’s euro trilemma’,
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
‘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 ‘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 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 30
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