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
3
1. THE GERMAN MODEL

“price stability above all else”



Independent Buba as referee: to check labor unions
and fiscal policy



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
4
A HISTORY OF EXTERNAL SURPLUSES
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
5
2. THE TROUBLE WITH EXPORTING IT

Maastricht meant export of Germany model

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
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

Meant trouble for Germany because key trade
partners now required to be like Germany
6
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
7
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
8
1) TREASURY-CB NEXUS RATHER VITAL



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”

9
2) NOBODY “MINDING THE STORE”

No demand management foreseen in good times

“Stability-oriented” monetary policy asymmetric

“Disciplined” fiscal policy asymmetric too


“Below 3%”: deficits can be “excessive” but never too small
Policy mix? No, as coordination threatens CBI!


“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

10
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


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

ECB: “below but close to 2%”

11
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

Buildup of massive divergences and imbalances
12
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

13
LOW GROWTH AND “TAX-PUSH INFLATION”
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
14
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
15
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
16
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

= ASYMMETRIC SHOCK!!!
17
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 …

18
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!
20
5. CRISIS (MIS-)MANAGEMENT

Fiscal policy
Brief ‘Keynes moment’ in 2009
 Followed by mindless austerity since 2010

Fiscal support to financial sectors


ECB monetary policy


Foolish hikes, delayed easing (i.e. business as usual)
ECB as LOLR to banking systems


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

21
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

22
MEANWHILE, RE-LOADING/RE-SOURCING
OF GERMAN EXTERNAL SURPLUSES
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13
23
6. CONDITIONS FOR PROPER CRISIS
RESOLUTION?

1)
Rebalancing the currency union

2)
Fair deal on debt legacies

3)
Balance-sheet cleanup (past; stocks)
Fixing (Maastricht) EMU regime


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
24
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
25
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)




Even nominal GDP is shrinking! (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%
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

26
3) “MORE-OF-THE-SAME” STYLE REFORMS
MEAN PERPETUAL AUSTERITY

Strengthened SGP cum ‘Fiscal Compact’

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 …
27
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
28
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!
J Bibow: Germany & Euro-zone Crisis,
NYC, 12 June 13

Global tensions? Currency wars, trade wars …
Need for Euro Treasury and spending from center!!!
29
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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The Euroland Crisis and Germany`s Euro Trilemma