The Euro Debt Crisis and Germany’s Euro Trilemma

Abstract

This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it.It is argued that the crisis is not primarily a "sovereign debt crisis" but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s.Germany broke the golden rule of a monetary union: commitment to a common inflation rate.As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all -perpetual export surpluses, a no transfer / no bailout monetary union, and a "clean," independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global "too big to fail" threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

Comparative Institutional Advantage in the European Sovereign Debt Crisis

“…Indeed several among the latter question whether some governments that are current targets of heavy market speculation, such as Spain and Ireland, could be defined as 'fiscally reckless' given their consistent budget surpluses prior to the crash. Examining imbalances between the current accounts of EMU member-states, this camp suggests that the problem can be attributed to divergences in competitiveness and total borrowing (including most importantly private borrowing) (Wihlborg et al, 2010;Belke and Dreger, 2011;Bibow, 2012;Gros, 2012).…”

“…Because of the absence of a nominal exchange rate between Euro-zone member-states, competitiveness becomes a function of the real exchange rate, determined by relative inflation rates: countries with lower inflation rates hold a more advantagous real exchange rate than those with higher inflation rates. Under a fixed monetary system, where the majority of trade is intra-regional, wage moderation pursued by one group of countries (the North), serves as a 'begger-thyneighbour' policy vis-à-vis those (the South) that have not pursued such wage moderation (Perez-Caldentey and Vernengo, 2012;Bibow, 2012). Current account balances, however, are zero-sum games under a beggar-thy-neighbor approach; in order for surplus nations to hold a trade surplus vis-à-vis deficit nations 2 , the former must lend money to the latter via the capital account.…”

“…While peripheral countries witnessed a consumption (and real-estate) boom, their competitiveness further deteriorated vis-à-vis the core where wage moderation was strictly enforced. Since currency devaluations are impossible in a monetary union, the burden of balance of payments adjustment falls predominantely on labour costs (Holinski et al, 2012;Stockhammer, 2011;Bibow, 2012;Gros, 2012). In other words, the south's failure to adjust its labor costs, and hence its public and private borrowing imbalances, vis-à-vis the North preceeding the crisis, prompted markets to attach a higher interest rate premium to sovereign bonds in the periphery once the crisis was in full swing.…”

Kemer Sikma Poli̇ti̇kalarindan Mali̇ Tuzağa: Ab Çevre Ülkeleri̇ Bağlaminda Bi̇r İnceleme

“…Ücretlerdeki azalmanın yarattığı deflasyonist etki, borcun nominal değeri değişmezken tüm gelir akımı azaldığı için hem iç hem de dış borçların reel değerinin artmasına sebep olmaktadır. Ancak iç devalüasyondan beklenen, emek piyasasının deregülasyonu; ücretlerin düşürülmesi, çalışanları koruyan düzenlemelerin kaldırılması ya da azaltılması yoluyla birim emek maliyetinin düşürülmesi ve böylece rekabet gücünün artmasıyla ihracatın, toplam talebin ve üretimin artması, cari dengenin düzelmesidir 2 (Bibow, 2012). Fakat bu görüş yapısal ya da fiyat dışı rekabet gücüne ilişkin durumları (ihraç mallarının çeşidi, coğrafik uyumu, firmaların büyüklüğü, ürünlerin çeşidi ve kalitesi, işgücünün eğitim düzeyi, endüstriyel ilişkilerin biçimi gibi), ücretlerdeki azalmanın yurt içi talebe etkisini dikkate almamaktadır.…”

Conflicting claims in the eurozone? Austerity's myopia and the need for a European Federal Union in a post-Keynesian eurozone center–periphery model

“…Interest rates in the periphery and center-periphery spreads have increased astonishingly. Figure A4 shows the asymmetric reaction of financial markets in the peripheral eurozone countries with respect to central economies, and other advanced countries in the aftermath of the 2007-2008 financial shock.All these events seem to describe a standard center-periphery balance-of-payments crisis taking place inside the eurozone (Hein et al 2011;Perez-Caldentey and Vernengo 2012;Bibow 2012 (2011), a look at macroeconomic data does not explain why financial turbulence is afflicting a peripheral euro country like Spain and not the UK. Since 2007, economic growth in the UK has been disappointing; public balance deficits have been generally higher than those observed in Spain; the UK current account has persistently recorded deficits; and the UK debt-to-GDP ratio is closely similar to the Spanish one.…”