The Greek Fiscal Crisis and the Future of the Euro-zone and the Future of the Euro zone - a German View Wi Wim Kösters Kö t 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 on 28 April 2010
Contents Contents 1. Understanding German Concerns 2 2. N t Nature of the Crisis f th C i i 3. Causes of the Crisis 4. Future of the Euro-zone Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 2
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 of 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 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 3
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 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 4
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) Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 5
0 5 .0 5 .2 0 1 0 ratio to GDP Public Deficits -16 -14 -12 -10 Federal Ministry of Finance, Monthly Report March 2010 (status quo: November 2009 ) 16 12 -8 -6 -4 -2 0 Ire land USA A Gre eece Lat tvia UK Lith huania Spa ain Jap pan Por rtugal Fra ance Pol and Slo ovenia Prof. Dr. W im Kösters EU Eur ro Area Cyp prus Rum mania Bel lgium Cze ech Republi c Net therlands Slo ovakia Aus stria Ita ly Ge rmany Ma lta Fin land Lux xembourg Hu ngary De nmark Est tland Sw weden Bul lgaria 6
0 5 .0 5 .2 0 1 0 100 150 150 200 Federal Ministry of Finance; Monthly Report March 2010 (status quo: November 2009 ) 50 ratio to GDP Public Debt 0 0 Japan Greece Italy Belgium Portugal E Euro Area Ireland France United Kingdom Hungary EU Germany Prof. Dr. W im Kösters USA Austria Malta Spain Ne therlands Cyprus Poalnd Latvia Finland Sweden Slovenia Lithuania Czech h Republic Slovakia Denmark Romania Lux xembourg Bulgaria Estland 7
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) Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 8
I nterest-Spreads of Governm ent Bonds Com pared to Germ an Governm ent Bonds 4,5000 France 4,0000 Greece Ireland Ireland 3,5000 Great Britain Portugal 3,0000 Spain 2,5000 Italy 2,0000 1,5000 1,0000 0,5000 0,0000 2.1.08 21.5.08 8.10.08 25.2.09 15.7.09 2.12.09 21.4.10 8.9.10 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 9
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 - rose from 7% of GDP to 14% after joining EMU and is presently about f 7% f GDP t 14% ft j i i EMU d i tl b t 10% Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 0
Current account defizits in selected countries of the Euro Area in % of GDP 10 5 5 0 -5 -10 -15 1995 1997 1999 2001 2003 2005 2007 2009 Germany Greece Ireland The Netherlands Portugal Spain EMU Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 1
Unit Labour Costs in selected countries of the Euro Area the Euro Area 2000 = 100 140 130 120 110 100 90 80 70 1995 1997 1999 2001 2003 2005 2007 2009 Germany Greece Ireland The Netherlands Portugal Spain EMU Germany Greece Ireland Portugal g Spain p Italy y Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 2
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 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 3
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 - convergence criteria and the rules of the SGP it i l f th SGP d th 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 - demanded changes of the European monetary constitution d d d h f th E t tit ti Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 4
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 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 5
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 - to m anage the EMU properly th EMU l t 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 Prof. Dr. W im Kösters 0 5 .0 5 .2 0 1 0 1 6
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