Presentation Transcript

1. The European Sovereign Debt Crisis and the Imbalances in the Eurozone: Is Germany to Blame?

   Prof. Brigitte Young, PhD, University of Muenster, Germany Willi Semmler, New School, New York Is Germany to Blame?
2. Puzzle Outline of the presentation: „Is Germany to Blame“ for the Asymmetries in the Eurozone (Keynesian argument Martin Wolf, Wolfgang Münchau; Christine Lagarde) Germany does not benefit from the Eurozone? Hans-Werner Sinn, ifo Institute, Munich Is the „Pact for Competition“ the Answer to the instabilities in the Euro-zone? Is this what the French understand under gouvernement économique? Is Germany to Blame?
3. Outline of the Paper The Sovereign Debt Crisis and Germany‘s Muted Response Is Germany to Blame for the Debt Crisis in the Eurozone? Counter Argument: Germany has not benefitted from the Eurozone: German export competitiveness is not due to price factors, product segments show little price elasticity, export boom is due to Asian demand (China, Middle East) Possible Reasons for Germany‘s Euro-scepticism - generational change; different financial cultures (German frugality vs. lack of fiscal discipline); personal friction between Angela Merkel and Nicolas Sarkozy. Is Germany to Blame?
4. I. Is Germany to BlameCompetitive advantage of Germany in the Eurozone is due to wage moderation Macroeconomic asymmetries in the eurozone are at the root of the sovereign debt crisis in the PIIGS countries German export performance plus sustained pressure on nominal unit labor costs have given Germany the competitive advantage – equal to a real devaluation relative to other Eurozone members Germany‘s current account surpluses are financed through the deficits of the peripheral countries Peripheral countries entered the Eurozone at an uncompetitive exchange rate Eurozone has become a „beggar-thy neighbor policy“ for Germany Is Germany to Blame?
5. Is Germany to Blame? Keynesian Argument: German low wage growth strategy Germany: Nominal labour costs (nominal labour renumeration divided by real output) moved identical with productivity Peripheral countries: nominal labour costs risen faster than productivity Reduction of unit labour costs has meant a real devaluation of unit labour costs relative to the other euro trading partners German competitiveness not based on efficiency gain, but low wage growth Is Germany to Blame?
6. Figure 3: Differences in unit wage cost.Compensation per employee, labour productivity and nominal unit labour costs (1999 – 2008), average annual changes in per cent. 6 Is Germany to Blame? Source: European Commission 2010
7. Hans-Werner Sinn Paper: Rescuing Europe (August 2010) Focus is on finance and integrated Euro capital markets Thesis: Germany has not benefitted from the Euro –despite trade surpluses Trade surplus is essentially the same as capital exports and a country‘s capital exports benefit other countries Because the German current account turned into a surplus, Germany experienced a huge net outflow of capital Is Germany to Blame?
8. Source: European Commission 2010: Quarterly Report on the Euro Area. Special Issue: The Impact of the global crisis on competitiveness and current account divergences in the euro area. Volume 9 No. 1 (2010) p.17, Graph III.1 Is Germany to Blame?
9. Source: European Commission 2010: Quarterly Report on the Euro Area. Special Issue: The Impact of the global crisis on competitiveness and current account divergences in the euro area. Vol. 9 No. 1 (2010), p.9, Graph I.4. Is Germany to Blame?
10. Figure 2: Current account surplus, Germany and China 10 Is Germany to Blame? Source: Aizenmann et al., 2010
11. Current Accounts Germany‘s current account surpluses 5.5% of GDP (2009) from peak of 8% in 2007 Eurozone surpluses= € 244 bn (€185 bn Germany 2007) Eurozone deficits = € 280 bn 2008 Is Germany to Blame?
12. Eurozone: Instead of Convergence, there is Divergence Divergence: Economic growth and current accounts Since the introduction of the Euro, current account differences increased sharply (peak 2007) Explanation: countries with strong domestic demand import more, increase current account deficits Differences in export performance and therefore price competitiveness Germany: Export volume grew between 1996-2008 twice as fast as that of the other members in the Eurozone, domestic demand of private German households declined 1.5 % per year against the rest of the Eurozone members Is Germany to Blame?
13. Table 1: Macroeconomicand Fiscal Differences in the EU Source: OECD, Eurostat (2009) 13 Is Germany to Blame?
14. Hans-Werner Sinn: Current Account Surpluses turned into huge outflow of capital Outflow was only possible, because the euro created a common European capital market levelling the previous divergences in nominal interest rates through interest rate conversion Outflow of capital boosted in the peripheries output, increased national income and employment boom that benefitted the bulk of the people (demand driven boom), „while it reduced German GDP and hurt most of the German people“. Is Germany to Blame?
15. Keynesian: Current Account Deficits are the other side of Current Account Surpluses Levy Institute: „ist is thus doubly ironic that Germany chastises ist neighbors for their profligacy but relies on their living beyond their means to produce a trade surplus that then allows its government to run smaller budget deficits“. Eurozone – no mechanism for tax and transfer policies as in US federal system Eurozone: member states‘ current account surplus has to be compensated for by deficit of another Eurozone could not function „if we all behave like Germans“ Is Germany to Blame?
16. Hans-Werner Sinn Paper: Pathological Export Boom and the Bazaar Effect: How to Solve the German Puzzle (2006) Standard trade model of factor price convergence with wage rigidities Argues against Keynesian that German problem is due to lack of domestic demand – Export boom and weak domestic growth are two sides of the same coin due to labour market rigidities Germany –growth laggard from 1995-2005 Is Germany to Blame?
17. GDP Growth Rates 1995-2009 Germany 16 % Ireland 108 % Greece 58 % Spain 50 % Germany fell from 3rd to 10th ranking in terms of GDP per capita in the period 1995-2009 2008 - Germany exported 60 % of ist savings while domestic investment was only 40% Capital exports by definition are synonymous with the current account surpluses Is Germany to Blame?
18. Argument: Bazaar Economy World wide low wage competition from E.E. and Asia and German high wage costs – result products are prefabricated abroad and reimported for assembly to Germany Germany becomes a hub Instead of „Made in Germany“, it is „Designed, assembled and sold in Germany“ Production depth of German manufacturing declined rapidly to the import of intermediate products Germany is turning into a bazaar economy Value of goods no longer produced in Germany Redundant Labour set „free“ – firms dismiss their workers Firms remain competitive, workers are the losers of the low wage competition from abroad Is Germany to Blame?
19. Source: European Commission 2010: Quarterly Report on the Euro Area. Special Issue: The Impact of the global crisis on competitiveness and current account divergences in the euro area. Volume 9 No. 1 (2010) p.18, Graph III.3 Is Germany to Blame?
20. Who is Right: Are German wages responsible for the asymmetries in the Eurozone? Keynesian: unit labour costs are too low relative to the peripheral countries and are the decisive factor in German export competitiveness Sinn: German high-wage costs (hourly wage??) have led to pathological export boom German Government: not low wages, but production more competitive, innovation, rationalized labour market and social welfare system (Agenda 2010); budget consolidation Is Germany to Blame?
21. „What explains Germany‘s Rebounding Export Market Share“ Danninger and Joutz 2007: No significant support for wage moderation nor „bazaar effects“ Driving force for Germany‘s increase in market share was trade with fast growing countries such as China and the oil exporting countries Is Germany to Blame?
22. Small Price Elasticity European Commission 2010: Germany‘s and Austria‘s export exhibit comparatively small price elasticity, meaning that in the long run price factors are comparatively less important for the competitiveness of German and Austrian exports Is Germany to Blame?
23. Non-Price Factors Non-price factors: product differentiation technology content Product quality Appreciation of Euro between 2002 and 2008 did not reduce German exports as was the case for France and Italy. German exports grew despite euro appreciation Is Germany to Blame?
24. Two different types of boom-bust cycles in the Eurozone Germany/Austria with low wage cost, rising export surplus, capital exports, and low consumption growth Peripheral countries (Portugal, Spain, Greece, and Italy) – wages rose faster than productivity, visible consumption boom, partly based on borrowing, which showed up in the current account deficit Is Germany to Blame?
25. Figure 4: Different types of boom-bust cycles Change of domestic consumption and change in external balance (Different types of boom-bust cycles) 25 Is Germany to Blame? Source: Source: European Commission 2010.
26. So what is the Answer Whether the blame for the diverging unit labor costs lie with Germany or with peripheral countries is an open question But the diverging unit labor costs between Germany and peripheral countries lead to dysfunctional competition Diverging wages are due to different wage systems in the Eurozone The answer is more coordination in the Eurozone. Is Germany to Blame?
27. II. Part: Economic Coordination 4th February 2011: Franco-German Plan coordinating their economic policies Pact for Competitiveness to coordinate Tax Pension Labour Budgetary policies In order to increase the competitiveness of the Eurozone Herman Van Rompuy is to report back with concrete steps on converging national fiscal and tax policies Strong opposition from countries such as Austria, Ireland and Belgium, the EU Commission, and EU Parlament Is Germany to Blame?
28. Six point Programme for increased competitiveness Elimination of inflation-indexed wages (Belgium is against) Mutual recognition of diplomas and training programmes Creation of a common base for taxes (Ireland, Slovakia against it) Pension system modified to account for demographic trends; retirement age to increase (France against) Crisis resolution mechanism for the banking sector Constitutional amendment on debt limit (virtually all countries except Germany are against this) Is Germany to Blame?
29. What is the Bargain? No new competences for the EU: Coordination between Government leaders and head of states, not the EU-commission. Merkel calls it the union-method as opposed to the community method (Jacques Delors) Requiring member states to introduce a German style „debt brake“ in their national constitutions that limits its structural budget deficit to 0.35 percent of GDP by 2016 Merkel agrees to increase the lending ceiling in the Permanent European Stability Mechanism from its present €440 bn to €500 bn after 2013. Is Germany to Blame?
30. Questions Will this Pact solve the instabilities in the Eurozone? Does the Pact coordinate the different wage systems? Does the Pact signal a deepening of institution building so that monetary union is accompanied by economic union? Why has France agreed to this Pact which seems to have the German handwriting? What does France gain by this? Is this gouvernement économique as championed by the French since the 1980s? Is the Pact a means to force other economies to follow Germany‘s monetary and fiscal austerity? Why has Angela Merkel agreed to economic coordination which she has always resisted? Is Germany to Blame?