The Euro Crisis
– A German Perspective –
Bertram Wieland
Representative of the Deutsche Bundesbank
Same crisis, different perspectives
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sovereign debt crisis (high public and/or private debt)
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lack of competitiveness
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current account imbalances
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weaknesses in the monetary framework
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weaknesses in the financial system
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Same crisis, different perspectives
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Does speedy consolidation hurt growth prospects?
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Should Germany reduce its competitiveness
for rebalancing current account?
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Should monetary policy do more to solve the crisis?
(price stability, independence, fiscal policy)
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Does a banking union without a fiscal union make sense?
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Solving the crisis on a country level
underlying deficiencies:
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public debt above 100 % of GDP
(Greece, Portugal, Ireland, Italy)
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loss of competitiveness since introduction of the euro:
Greece –12 %, Spain –14 %, Italy –8 %
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Public debt and deficit in per cent of GDP
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Loss of competitiveness in Southern Europe
European labour markets in comparison
unit labour cost development
annual average wage cost changes
2000-2010
2000-2010
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Regaining competitiveness since 2009
Since 2009 competitiveness has improved in crisis countries:
nominal unit labour costs declined in Ireland and Greece by 12%,
in Spain by 6%, in Portugal by 5%
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Instruments of choice for sustainable growth
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governments have to consolidate public finances
• Germany strongly supports the initiative of the Russian
G20 presidency to reach a debt agreement as a more
ambitious follow-on to the plan agreed to in Toronto in
2010 (specific debt to GDP targets)
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... and to embark on structural reforms
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Development of competitiveness in Europe
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TARGET2 imbalances:
symptom of the
balance of payments crisis
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What is TARGET2?
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Target2 is the Real-Time-Gross-Settlement system operated
by the Eurosystem
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Target2 has to be used for
• all payments involving the Eurosystem,
• for the settlement of operations of all large-value net
settlement systems and
• securities settlement systems handling the euro.
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How does TARGET2 work?
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The total Target2 payments and settlements system is a
closed system, in an accounting sense:
• every Target2 transaction by the ECB and the 17 NCBs
that make up the Eurosystem is entered once as a credit
and once as a debit
• Because of this double-entry bookkeeping feature, the
net Target2 balance of the consolidated 17 euro area
NCBs and the ECB is zero.
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It is important to note that the net credit position of any NCB
under Target2 are claims against the ECB
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TARGET2 flows before the crisis
Deutsche Bundesbank
ECB
commercial banks
in Greece
commercial banks
in Germany
Greek importers
German exporters
private financial flows
trade related flows
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TARGET2 flows during the crisis
Deutsche Bundesbank
ECB
commercial banks
in Greece
commercial banks
in Germany
Greek importers
German exporters
private financial flows
trade related flows
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Net credit position of the Bundesbank
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In the monetary union the net credit position of the
Bundesbank vis-à-vis Target2 can be interpreted as the
equivalent of official foreign exchange reserve claims vis-avis the other euro area member states held by the
Bundesbank (in a hypothetical fixed exchange rate regime)
The change in the net credit position of the Bundesbank visa-vis Target2 can be interpreted as the surplus on the official
settlements balance of the German balance of payments
accounts vis-à-vis the other euro area member states
Target2 imbalances can therefore be driven by
• current account deficits of an euro area country
• by private financial account deficits (capital account
deficits)
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Target2 imbalances
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As a matter of accounting logic Target2 imbalances are not
necessarily driven by current account deficits
Experience suggests that drivers of changes in Target2
imbalances are movements in the private financial account
(capital account).
These private capital flows out of the euro area periphery into
Germany and other member states have their counterpart in
the accumulation of Target2 net credit balances by the
Bundesbank and other euro area NCBs
That would have been increases in official foreign exchange
reserve claims of the Bundesbank on the periphery member
states had there still been 17 distinct national currencies in
the euro area
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Balance sheet of the Deutsche Bundesbank
Assets (€ billion)
2012
2011
1 Gold and gold receivables
138
2 Claims on non-euro-area residents in foreign currency
51
3 Claims on euro-area residents denominated in foreign currency
3
4 Claims on non-euro-area residents denominated in euro
–
5 Lending to euro-area credit institutions related to monetary policy 73
6 Other claims on euro-area credit institutions denominated in euro
1
7 Securities of euro-area residents denominated in euro
68
8 Claims on the Federal Government
4
9 Intra-Eurosystem claims
668
9.1 Participating interest in the ECB
(2)
9.2 Claims transfer of foreign reserves to the ECB
(11)
9.3 Claims related to the allocation of euro banknotes
(–)
9.4 Other claims within the Eurosystem (net)
(655)
10 Items in course of settlement
0
11 Other assets
19
133
52
18
–
56
9
72
4
476
(2)
(11)
( –)
(463)
0
18
1,025
838
Total Assets
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Traget2 Net Balances
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The Deutsche
Bundesbank's
TARGET2 claims:
peak in August
2012 with
751,4 bn €
lowest level since
October 2012 in
March 2013 with
588,7 bn €
in April 2013 first
rise in six months to
607.9 bn €
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Redistribution effects of Target2 imbalances
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The quasi-fiscal actions of the Eurosystem since the
beginning of the crisis have redistributed resources between
debtors, investors, tax payers and beneficiaries of public
spending across the periphery and the core countries of the
euro area
The scale and scope of these redistributions has been large:
the Eurosystem balance sheet has more than doubled in
recent years
Again: Target2 imbalances do not represent a separate risk
exposure; they indicate the balance of payment crisis and the
capital flight within the euro area
As the balance sheet size and the exposure of the
Eurosystem grow, the ECB needs to review the the range of
eligible collateral
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Government Bond Spreads against German Bund Yields
before and after Launching Monetary Union
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ECB stock of government bonds under the securities
market programme (SMP) in billion euros
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Does the ECB’s OMT Programme prevent contagion?
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OMT means the implicit mutualization of debt in contrast to an
explicit mutualization of debt by introducing euro bonds.
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The announcement of a possible larger-scale debt mutualization
through the central banks’ balance sheets calmed the markets.
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Calm markets might be treacherous; concerns relate to reforms
both at the national and at the European level.
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The crisis is not over.
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Why the Bundesbank have reservations against the
ECB’s OMT Programme
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Diverging interest rates within the euro region aren’t necessarily
something the ECB should fix.
Different effects of monetary policy within the euro area: not necessarily
a malfunctioning to be addressed by monetary policy
Rising sovereign bond yields: not necessarily an explanation for a
disturbance of monetary policy transmission.
distortion in yield developments for sovereign bonds may be ...
• due to fundamentally justified causes
• potential exaggerations, irrationalities, inefficiencies
ECB bond purchases under OMT would be different from those of other
central banks (eg the Fed)
• Fed targets only top rated government assets
• ECB targets assets of poor credit quality (more risks for ECB)
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Should the ECB prevent a country’s Eurozone exit?
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Emergency Liquidity Assistance (ELA): liquidity disposal from
the Eurosystem to cover financial needs of Greece and
Cyprus through access to ELA is particularly problematic:
• takeover of fiscal responsibilities by monetary policy’s
authorities
• ECB has taken an extremely high risk, as Greece’s and
Cyprus’ exit from the Eurozone cannot be considered
impossible
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The ECB’s main task:
• to guarantee the currency union as a stability union
• not to guarantee the composition of the Eurozone
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Diverging interest rates on loans to companies –
should the ECB react?
Higher refinancing costs for the private sector reflect higher national fiscal risks and the
deterioration in the banks’ situation in peripheral countries. That is not a development
for monetary policy to address, but rather a direct consequence of national fiscal policy.
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Financial Stability:
a) European Banking Union
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Three pillars
• Single Supervisory Mechanism (SSM)
• Single Resolution Mechanism (SRM)
• Single Depositor Guarantee Scheme (SDGS)
SSM will be composed of the ECB and the supervisory authorities in the
member states
German cabinet approved draft law on SSM; paving the way for SSM
regulation by Summer 2013 (operational not before 2014)
When an effective SSM is established, the ESM could have the
possibility to recapitalise banks directly (currently only via member state
treasuries)
Legal foundation of SRM still under discussion
SSM without the SRM means liability and control are temporarily out of
balance.
SDGS only with fully integrated financial systems (fiscal union)
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Financial Stability:
b) Financial Market Regulation
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Plan to introduce Financial Transaction Tax (FTT)
As yet: no exemptions for money market transactions
Colateralised money market transactions unprofitable
Risk: shifting from colateralised to uncolateralised market
segment
• impediment for the implementation of monetary policy of the
eurosystem restricted
• negative regulatory side effects (liquidity coverage ratio)
Lawsuit by UK government against FTT
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Financial Stability:
c) Financial Market Infrastructure
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Since April 2012 Principles for Financial Market Infrastructures (PFMI)
as a framework for responsibilities of systemically relevant FMIs
regarding
• security,
• efficiency and
• resilience
FMIs obliged to apply PFMI:
• payment systems
• central counterparties
• central depositories
In Germany: Review process of national implementation of PFMI
• payment systems (by ECB regulation)
• central counterparties (by Europ. Market Infrastructure Regulation)
• central depositories (by EU regulation)
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How to overcome the crisis?
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How to overcome the crisis?
Es ist niemals zu spät,
vernünftig und weise zu werden;
es ist aber jederzeit schwerer,
wenn die Einsicht spät kommt,
sie in Gang zu bringen.
Никогда не поздно взяться за ум;
но если понимание приходит поздно,
то труднее бывает его использовать.
Immanuel Kant (Prolegomena)
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bertram.wieland@diplo.de