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The European ( Debt ) Crisis : Who is the Worse Guy – Germany or Greece ?

The European ( Debt ) Crisis : Who is the Worse Guy – Germany or Greece ? Ukrainian Academy of Banking of the National Bank of Ukraine International Competition in Banking: Theory and Practice Sumy , 24. May 2012 Prof. (FH) Dr. Stephan O. Hornig

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The European ( Debt ) Crisis : Who is the Worse Guy – Germany or Greece ?

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  1. The European (Debt) Crisis: Who istheWorse Guy – Germany orGreece? UkrainianAcademy of Banking of the National Bank of Ukraine International Competition in Banking: TheoryandPractice Sumy, 24. May 2012 Prof. (FH) Dr. Stephan O. Hornig Fachhochschule Kufstein Tirol, University of Applied Sciences Kufstein, Austria

  2. Contents Introduction Actual Situation of Public Debt Macroeconomic Stabilisation Policies Conclusion

  3. 1. Introduction

  4. 1. Introduction The present crisis is not a currency crisis The present crisis is a debt crisis 3 statements: Greece is a problem Germany is a mayor problem Main problem: The European project lost its compass …

  5. 1. Introduction The presentcrisisis not a currencycrisis The presentcrisisis a debtcrisis 3 statements: Greeceis a problem Germany is a mayorproblem Main problem: The European project lost itscompass … ... whatcreatesseriousproblemsfortherestoftheworld

  6. 1. Introduction The presentcrisisis not a currencycrisis The presentcrisisis a debtcrisis 3 statements: Greeceis a problem Germany is a mayorproblem Main problem: The European project lost itscompass … ... whatcreatesseriousproblemsfortherestoftheworld Intention of thispresentation: Howdidwegetintothismess? Bright light on two of theplayersinvolved

  7. 2. Actual Situation of Public Debt

  8. 2. Actual Situation of Public DebtI/III Worldwide situation (2010): gross public debt in % of GDP

  9. 2. Actual Situation of Public DebtII/III Situation in Europe (2010): gross public debt in % of GDP

  10. 2. Actual Situation of Public DebtIII/III Gross public debt in % of GDP (Schnabl, Zemanek 2010, p. 6).

  11. 3. Macroeconomic Stabilisation Policies

  12. 3. Macroeconomic Stabilisation Policies Threetypesofmacroeconomicstabilisationpolicies: Fiscalpolicy (government) Monetarypolicy (centralbank) Wage policy (tradeunionsandemployerassociations) Imbalance in theeurozone: Fullcentralisationofmonetarypolicy Fiscalpoliciesand wage policies on national levels Problem: Absolutelyfixed nominal exchangerates Dramatically divergent real exchangerates Dramatically divergent real interestrates

  13. 3.1 Monetary Policy I/II Within a currencyunionnopossibilityfor national monetarypolicies No problem with symmetric shocks Huge problems with asymmetric shocks Main goal of the European Monetary Union (EMU): covergence

  14. 3.1 Monetary Policy II/II Long term interest rates in the EMU (Flassbeck, Spiecker 2011, p. 185)

  15. 3.2 Wage Policy A monetaryunionisprimary an agreement on inflation Most importantdeterminantofinflationisunitlabourcostgrowth (Flassbeck, Spiecker 2011, p. 181)

  16. 3.2.1 Wage and Price Differences I/V Wage andpricedifferencesareatthecoreofthetrouble Accumulate over time Higher inflation real exchange rate appreciation loss in competitiveness currentaccountdeficit real interestrates fall Lowerinflation real exchange rate depreciation gainin competitiveness currentaccountsurplus real interestratesraise

  17. 3.2.1 Wage and Price Differences II/V Crucial construction error of EMU: inflation convergence in one point of time (1997 for the founding members)

  18. 3.2.1 Wage and Price Differences II/V Crucial construction error of EMU: inflation convergence in one point of time (1997 for the founding members) Relative unit labour costs in the eurozone (De Grauwe 2010, p. 4)

  19. 3.2.1 Wage and Price Differences III/V Comparisonunitlabourcosts (Flassbeck, Spiecker 2011, p. 182)

  20. 3.2.1 Wage and Price Differences IV/V Comparisoninflationrates (Flassbeck, Spiecker 2011, p. 183)

  21. 3.2.1 Wage and Price Differences V/V Short reflection: Inflation targetofthe ECB: 2 % averageunitlabourcostincrease per year: Greece: 2.7 % Germany: 0.4 %

  22. 3.2.2 Current Accounts I/V Effectofthese wage/inflation-differences: increasingcompetitiveness-gap Competitivenessgains: Germany, Austria Competitivenesslosses: Ireland, Greece, Italy, Spain, Portugal Consequence: raisingimbalances in currentaccounts

  23. 3.2.2 Current Accounts II/V European currentaccountbalances (Schnabl, Zemanek 2010, p. 12)

  24. 3.2.2 Current Accounts III/V European currentaccountbalances (Flassbeck, Spieker 2011, p. 181)

  25. 3.2.2 Current Accounts IV/V Current account imbalances accompanied by low interest rate policy Bust of the new economy bubble Low interest rates in the USA, then also in Europe Global credit boom Huge capital flow to the deficit countries Boom in construction sector General investment boom 2 ways out: Surplus countries become deficit countries and vice versa Deficit countries reduce imports and pass recession; problem: Keynes (1920)

  26. 3.2.2 Current Accounts V/V Divergencies in competitivenessleadtobudgetarydivergencies (De Grauwe 2010, p. 3) (1999 – 2008)

  27. 3.3 Fiscal Policy I/II Favourableinterest rate/ debtconditionsappliedtoboth, Private debtors Public debtors Hugecapitalflowtothedeficit countries Boom in constructionsector General investment boom Growth of thepublicsector Effectivemechanismsforlimitingpublicandprivetedebtlacking

  28. 3.3 Fiscal Policy II/II Boom in constructionsectordevelopsspeculativebubbles The burstingofthesebubblesisthreateningthesolvencyofbanks This leadstoconsiderablerisksforthepublicfinances Ireland Portugal Spain Greece

  29. 3.3.1 Public DebtI/IV Gross public debt in % of GDP (Schnabl, Zemanek 2010, p. 6).

  30. 3.3.1 Public DebtII/IV 2008: govern. bonds began to include premiums for default risks Risk premiums much smaller than in the pre-euro era

  31. 3.3.1 Public DebtIII/IV 2008: government bonds began to include premiums for default risks Risk premiums: Much smaller than in the pre-euro era Help impose fiscal discipline that had been lacking Necessary for the functioning of the eurozone capital market Capital flows are slowed down Government debtors are effectively disciplined Overheating is avoided

  32. 3.3.1 Public DebtIV/IV Source ofexplodingpublicdebtlevels: unsustainablelevelof private debtpriortothefinancialcrisis Duringthe boom years: private sectoradded a lotofdebt After thebust: governmentspickedupthepieces: Economiesweredrivenintorecession Governmentrevenuesdeclined Socialspendingincreased Part ofthe private debt was implicitlyguaranteedbythegovernments (bankdebt in particular)  Governmentswereforcedtoissueowndebttorescue private institutions

  33. 3.3.2 Role of Financial MarketsI/II De Grauwe (2010, p. 1): Financial Marketshave a destabilisingrole Periodsofeuphoria Periodsofdepression  overshooting in assetpricesthatis not relatedtounderlyingfundamentals Central roleofratingagencies in thisdestabilisationprocess

  34. 3.3.2 Role of Financial MarketsII/II Rating agenciesamplifythedestabilisingmovements in financialmarkets Systematic „type I“ errors in periodsofeuphoria Fail todetectcrisisfactors, whentherearecrisisfactors Systematic „type II“ errors in periodsofdepression Detectcrisisfactors, whenthereisnothingtodetect

  35. 4. Conclusion I/II The eurois a keyelement of European integration. Wage growthandinflationconvergenceis a keyfactor. European integration will beendangeredifthereisnosuccessfulestablishment of morefiscaldiscipline. Thereis an urgent need of a betterbalance of growthforces in Europe. The structuralproblem in theeurozoneisthatthemonetaryunionis not embedded in a politicalunion.

  36. 4. Conclusion II/II 3 statementsfromthebeginning: Greeceis a problem Germany is a mayorproblem Main problem: The European project lost itscompass Who nowistheworseguy? Inflation target of the ECB: 2 % averageunitlabourcostincrease per year: Greece: 2.7 % Germany: 0.4 %

  37. Thank you for your attention Stephan O. Hornig

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