The Greek Fiscal Crisis and the Future of the Euro-zone and the - - PowerPoint PPT Presentation

The Greek Fiscal Crisis and the Future of the Euro-zone and the Future of the Euro zone

• a German View

Wi Kö t Wim Kösters Ruhr-Universität Bochum and Rheinisch Westfälisches Institut für Wirtschaftsforschung Essen Statement in the Hellenic Observatory Panel Debate at the London School of Economics and Political Science at the London School of Economics and Political Science

• n 28 April 2010

Contents Contents

1. Understanding German Concerns 2 N t f th C i i 2. Nature of the Crisis 3. Causes of the Crisis 4. Future of the Euro-zone

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1 . Understanding Germ an Concerns 1 . Understanding Germ an Concerns

• Because Germ any was hit twice in the last century by big inflations the

aversion against inflation is especially high.

• The low Germ an rates of inflation in the post WW II era were due to

The low Germ an rates of inflation in the post WW II era were due to this aversion and the Germ an m onetary constitution ( independent central bank, no monetary financing of public debts and legal obligation

• f the Deutsche Bundesbank to keep prices stable)
• The European m onetary constitution of the Maastricht Treaty

mirrors this Germ an m onetary constitution:

• because it was considered to be the best solution for the EMU (Delors

Committee) and Committee) and

• to gain the assent of Germ an voters in favor of the EMU

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1 . Understanding Germ an Concerns 1 . Understanding Germ an Concerns

• German voters had to be convinced to give up the Deutsche Mark (DM)
• which was the anchor currency of the EMS “German monetary

hegemony” at that time and hegemony at that time and

• which was in the eyes of German the sym bol of a successful econom ic

recovery after WW II

• The fear of m any Germ ans is that they will get a w eak Euro in

The fear of m any Germ ans is that they will get a w eak Euro in exchange for their stable DM because the rules of the Maastricht Treaty and the Stability and Grow th Pact ( SGP) will not be kept

• and in addition they will have to pay for those who get in trouble

because they did not keep the rules

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2 . Nature of the Crisis 2 . Nature of the Crisis

• The present Greek crisis is not only a fiscal crisis
• although the Greek public budget deficit and public debt are

among the highest in the Euro Area (EA) among the highest in the Euro Area (EA)

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Public Deficits

ratio to GDP

c land A eece tvia huania ain pan rtugal ance and

• venia

ro Area prus mania lgium ech Republi therlands

• vakia

stria ly rmany lta land xembourg ngary nmark tland weden lgaria

• 2

Ire USA Gre Lat UK Lith Spa Jap Por Fra Pol Slo EU Eur Cyp Rum Bel Cze Net Slo Aus Ita Ge Ma Fin Lux Hu De Est Sw Bul

• 6
• 4

12

• 10
• 8
• 16
• 14
• 12

16

Federal Ministry of Finance, Monthly Report March 2010 (status quo: November 2009)

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Public Debt

ratio to GDP 150 200 100 150 50

Japan Greece Italy Belgium Portugal Euro Area Ireland France Kingdom Hungary EU Germany USA Austria Malta Spain therlands Cyprus Poalnd Latvia Finland Sweden Slovenia Lithuania h Republic Slovakia Denmark Romania xembourg Bulgaria Estland E United Ne Czech Lux Federal Ministry of Finance; Monthly Report March 2010 (status quo: November 2009)

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2 . Nature of the Crisis 2 . Nature of the Crisis

• and the financial m arkets demand ever higher interest rates (last

week more than 5 percentage points higher than for German government bonds)

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I nterest-Spreads of Governm ent Bonds Com pared to Germ an Governm ent Bonds

4,0000 4,5000 France Greece Ireland 3,0000 3,5000 Ireland Great Britain Portugal Spain 2,0000 2,5000 Italy 1,0000 1,5000 0,0000 0,5000 2.1.08 21.5.08 8.10.08 25.2.09 15.7.09 2.12.09 21.4.10 8.9.10

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2 . Nature of the Crisis 2 . Nature of the Crisis

• It is also very much a crisis of international com petitiveness
• This is indicated by a high current account deficit of Greece which

f 7% f GDP t 14% ft j i i EMU d i tl b t rose from 7% of GDP to 14% after joining EMU and is presently about 10%

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Current account defizits in selected countries of the Euro Area in % of GDP

5 10 5

• 5
• 15
• 10

1995 1997 1999 2001 2003 2005 2007 2009 Germany Greece Ireland The Netherlands Portugal Spain EMU 0 5 .0 5 .2 0 1 0 1 1

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Unit Labour Costs in selected countries of the Euro Area the Euro Area

2000 = 100

130 140 110 120 90 100 70 80 1995 1997 1999 2001 2003 2005 2007 2009 Germany Greece Ireland The Netherlands Portugal Spain EMU Germany Greece Ireland Portugal Spain Italy g p y 0 5 .0 5 .2 0 1 0 1 2

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3 . Causes of the Crisis 3 . Causes of the Crisis

• Foremost, Greece did not take its EMU m em bership serious
• It forged budget figures in order to be adm itted in 2 0 0 1
• As an EMU m em ber it continued to do so year after year
• By this it deceived the other EMU m em bers as well as itself and

created uncertainty on the true econom ic situation of the country up to now up to now

• It first enjoyed the benefits of its EMU m em bership by financing

governm ent debt at much low er interest rates than before The rapidly extended government debt was used to preserve

• The rapidly extended government debt was used to preserve

existing econom ic structures which made the country less com petitive internationally

• As it seems, Greek politicians did not understand that EMU

, p m em bership means significantly m ore system s com petition making a policy adjustm ent necessary in order to benefit in the medium to long run

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3 . Causes of the Crisis 3 . Causes of the Crisis

• But not Greece alone caused the crisis
• The European Com m ission did not demand a strict keeping of the

it i d th l f th SGP convergence criteria and the rules of the SGP

• This was already true for the start of EMU in 1 9 9 9
• I n 2 0 0 2 , one year after the admittance of Greece to the EMU in the

second round the then president of the European Com m ission second round, the then president of the European Com m ission, Romano Prodi, called the SGP stupid.

• After that, could there still be expected a strict m onitoring of

the rules by the Com m ission? the rules by the Com m ission?

• When Germ any violated the deficit criterion in 2 0 0 3 the early

w arning of the European Commission w as rejected by the Schröder governm ent

• Germ any and France did not accept the deficit procedure of the

SGP but instead put through a dilution of the rules

• In the last presidential election cam paign in France all candidates

d d d h f th E t tit ti demanded changes of the European monetary constitution

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3 . Causes of the Crisis 3 . Causes of the Crisis

• In sum, the basic rules of the European m onetary constitution

agreed upon in the Maastricht Treaty were not respected, neither by many member countries nor by the European Commission many member countries nor by the European Commission

• After all, neither the European Com m ission nor m em ber states

stopped the gam e, but the financial m arkets did!

• The results of this bad governance in the past show up now and let

The results of this bad governance in the past show up now and let EMU enter a state of deep crisis

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4 . Future of the Euro-zone 4 . Future of the Euro zone

• At the moment, the future of the Euro-zone is very uncertain
• The present crisis demonstrates to the world that Europe is unable

t th EMU l to m anage the EMU properly

• The I MF had to be called for help
• Financial assistance of the EU to Greece means that the rules of

the Maastricht Treaty and the SGP have to be broken (no bail out the Maastricht Treaty and the SGP have to be broken (no bail out clause)

• By this, the credibility of the EU is seriously dam aged and m oral

hazard problem s are created hazard problem s are created

• Which rules will be broken next, which country is the next to ask

for financial assistance?

• After all it is very doubtful, whether the financial rescue program

y , p g for Greece will stabilize Greece and the Euro-zone

• First, it is not sure that the Greek governm ent can put through its

am bitious consolidation program

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4 . Future of the Euro-zone 4 . Future of the Euro zone

• Second, what will happen to the mainly home driven Greek grow th

rate in the next years if the public budget deficit quota will be cut by more than 10% and the w ages even more by more than 10% and the w ages even more

• Therefore, many observers expect that in a few m onths Greece will

have to ask for even m ore help above the presently envisaged 45

• bill. Euros
• Greece needs a devaluation to become internationally

com petitive again.

• W ithin EMU only real depreciation is possible but hard to realize
• In the end, it could turn out to be better for Greece or it could be

forced by the financial markets to leave EMU and solve its debt problem by “haircuts” and give international banks a share in the costs costs

• Since not only Greece but also other EMU m em bers might demand

financial assistance the EMU could turn into a transfer union

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4 . Future of the Euro-zone 4 . Future of the Euro zone

• It is hard to im agine that this could be a sustainable solution
• Other proposals for stabilization, e.g. European Monetary Fund

(EMF) E b d i t d (EMF), com m on Euro bonds, econom ic governm ent and m ore coordination in my view do not solve the governance problem s of EMU convincingly

• They would low er the pressure that the rules of the Maastricht

They would low er the pressure that the rules of the Maastricht Treaty were intended to put on all EMU m em ber states to care for policy adjustm ent and higher international com petitiveness

• Only by this, a higher w elfare in Europe will be brought about

which guarantees the assent of people to European integration

• For the future of the Euro-zone, therefore, a recollection of the
• riginal rules of the Maastricht Treaty is of utm ost im portance

A ibl dibl d lf i f

• As soon as possible a credible agreem ent and self com m itm ent of

all EMU members to fully respect and keep the Maastricht Treaty and the SGP is urgently needed

• BACK TO THE RULES!

BACK TO THE RULES!

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