Oberbank Day Linz, May 28 2010. Economic Drivers of the European Future – – 15 Propositions – (one proposition every four minutes) Wolfgang Wiegard University of Regensburg and German Council of Economic Experts. Economic Drivers of the European Future. Table of contents.
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Oberbank Day Linz,May 282010
Table of contents
I. Looking back: European policy reactions during the financial crisis
II. Looking forward: Euro at risk?
II.1. Sovereign debt problems in the euro area
II.2. How to reduce public debt burdens
II.3. A brief evaluation of current policy reactions to
the euro crisis
II.4. Still lacking: Reform of the Stability and
II.5. Monetary policy and inflation
II.6. Will the euro survive?
II.7. Taxing financial transactions or activities?
III. Final remarks
In 2009, European economies as well as other industri-alized countries have been hit by the deepest recession since the Great Depression.
Only in the emerging and developing economies did the GDP increase during the crisis.
Source: IMF, World Economic Outlook, April 2010
Middle East/North Africa
Annual percentage change in real GDP (2009)
Source: IMF, WEO, April 2010
Source: IMF, WEO, April 2010
Fiscal and monetary policy interventions on an unpre- cedented scale prevented an even worse slump in economic activity.
Massive fiscal stimulus packages in the euro area helped to stabilize aggregate demand.
I. Monetary policy reactions: central banks’ key interest rates
Due to fiscal policy interventions, public debt in- creased considerably during the crisis, and will con-tinue to increase dramatically if fiscal policy does not change.
Source: European Commission, Sustainability Report 2009, p. 40
In the short run, higher deficit-spending stabilizes aggregate demand and dampens economic fluctu-ations.
In the long run, higher debt-to-GDP ratios will
increase long-term interest rates and reduce economic growth
narrow the room for growth-enhancing public investment expenditure
burden future generations.
A higher growth rate could help to solve the debt
problem, but will not suffice to consolidate public
GDP growth rate is endogenous and not a policy instrument; it is hard to boost growth rates in a lasting manner by tax or expenditure policies.
The growth rate effects of the German “Growth Acceleration Law”, implemented in 2010, are
In northern “core” countries of the euro area (DE, FR, AT, NL, BE, LU) fiscal sustainability has to be restored by a long-term fiscal tightening.
Public expenditures have to be cut and/or taxes increased in order to achieve (structural) primary surpluses in public budgets.
Unfortunately, so far almost nothing has been done in
DE, AT, FR.
II.3. Evaluation of the Greek “rescue package”
With the “rescue package” of May 2 2010, euro area member states and the IMF agreed to bail out Greece, conditional on Greece meeting strict consolidation requirements.
The alternative – a Greek default or “haircut” – could have been even more expensive for euro area countries.
Even after the three-year financial support program, Greece will not be able to manage its debt crisis alone and will need additional help or have to restructure its debt.
II.3. Some details of the Greek “rescue package”
110 bn euro
Relative Shares in ECB‘s capital
(excl. Greece share)
€ 80 bn
€ 30 bn
and the no-bail-out clause of the TFEU? ?
In addition to the Greek rescue package, on May 10 2010, EU finance ministers established a European Stabilization Mechanism (ESM) with a total volume of 500 billion euros.
The IMF will participate and provide a further 250 billion euros.
The package provides financial support to member states
in financial difficulties and is subject to strong conditiona-lity.
Even if the legal basis for the program is weak, it will help to stabilize financial markets.
II.3. Details of the “European Stabilization Mechanism”
European Stabilization Mechanism:
an even larger rescue shield
750 bn euro
€ 60 bn
loans and credit lines
from EU Commission
€ 440 bn
by euro area
members via SPV
€ 250 bn
The rules of the Stability and Growth Pact (SGP) were neither strict enough nor enforced strictly enough to prevent the European debt crisis.
Hence, it is essential for the Greek rescue package and the European Stabilization Mechanism to be complemented by a strengthening of the SGP.
A recent proposal by the European Commission is a first step; the proposal of a “European Consolidation Pact” launched by the German Council of Economic Experts is even better.
Despite the purchase of sovereign debt by the ECB there will be no inflation in the euro area during the next few years.
The probability of inflating away the real burden of public debt is higher in the United States and, to a lesser degree, in the United Kingdom.
Source: ECB, Monthly Bulletin, May 2010
The euro area will not break up, nor will the euro collapse.
A country cannot simply leave the euro area.
It could, however, leave the EU and then re-apply for EU membership. Incentives are weak, even if a country could depreciate its currency in the meantime.
A country cannot be expelled from the euro area, or from the EU.
The only real threat to the euro area is that Germany or France will leave the EU, because of the fear of becoming the principal bail-outers. But this will not happen!
(a somewhat optimistic outlook)
Economic recovery is underway in the euro area,
even if only gradually and only for the “core” countries.
European Commission Spring Forecast
Source: European Comission, Spring Forecast, April 2010
Source: OECD, Economic Outlook, May 2010
Thanks for listening ..
and have a nice evening