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Same crisis, different perspectives

The Euro Crisis – A German Perspective – Bertram Wieland Representative of the Deutsche Bundesbank. Same crisis, different perspectives. sovereign debt crisis (high public and/or private debt) lack of competitiveness current account imbalances

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Same crisis, different perspectives

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  1. The Euro Crisis – A German Perspective – Bertram WielandRepresentative of the Deutsche Bundesbank

  2. Same crisis, different perspectives sovereign debt crisis (high public and/or private debt) lack of competitiveness current account imbalances weaknesses in the monetary framework weaknesses in the financial system Bank of Russia

  3. Same crisis, different perspectives Does speedy consolidation hurt growth prospects? Should Germany reduce its competitiveness for rebalancing current account? Should monetary policy do more to solve the crisis? (price stability, independence, fiscal policy) Does a banking union without a fiscal union make sense? Bank of Russia

  4. Solving the crisis on a country level underlying deficiencies: public debt above 100 % of GDP (Greece, Portugal, Ireland, Italy) loss of competitiveness since introduction of the euro: Greece –12 %, Spain –14 %, Italy –8 % Bank of Russia

  5. Public debt and deficit in per cent of GDP Bank of Russia

  6. Loss of competitiveness in Southern Europe European labour markets in comparison unit labour cost development annual average wage cost changes 2000-2010 2000-2010 Bank of Russia

  7. Regaining competitiveness since 2009 Since 2009 competitiveness has improved in crisis countries: nominal unit labour costs declined in Ireland and Greece by 12%, in Spain by 6%, in Portugal by 5% Bank of Russia

  8. Instruments of choice for sustainable growth governments have to consolidate public finances Germany strongly supports the initiative of the Russian G20 presidency to reach a debt agreement as a more ambitious follow-on to the plan agreed to in Toronto in 2010 (specific debt to GDP targets) ... and to embark on structural reforms Bank of Russia

  9. Development of competitiveness in Europe Bank of Russia

  10. TARGET2 imbalances:symptom of thebalance of payments crisis 10 Bank of Russia

  11. What is TARGET2? Target2 is the Real-Time-Gross-Settlement system operated by the Eurosystem Target2 has to be used for all payments involving the Eurosystem, for the settlement of operations of all large-value net settlement systems and securities settlement systems handling the euro. Bank of Russia

  12. How does TARGET2 work? The total Target2 payments and settlements system is a closed system, in an accounting sense: every Target2 transaction by the ECB and the 17 NCBs that make up the Eurosystem is entered once as a credit and once as a debit Because of this double-entry bookkeeping feature, the net Target2 balance of the consolidated 17 euro area NCBs and the ECB is zero. It is important to note that the net credit position of any NCB under Target2 are claims against the ECB Bank of Russia

  13. TARGET2 flows before the crisis Deutsche Bundesbank ECB Bank of Greece commercial banksin Greece commercial banksin Germany Greek importers German exporters private financial flows trade related flows Bank of Russia

  14. TARGET2 flows during the crisis Deutsche Bundesbank ECB Bank of Greece commercial banksin Greece commercial banksin Germany Greek importers German exporters private financial flows trade related flows Bank of Russia

  15. Net credit position of the Bundesbank In the monetary union the net credit position of the Bundesbank vis-à-vis Target2 can be interpreted as the equivalent of official foreign exchange reserve claims vis-a-vis the other euro area member states held by the Bundesbank (in a hypothetical fixed exchange rate regime) The change in the net credit position of the Bundesbank vis-a-vis Target2 can be interpreted as the surplus on the official settlements balance of the German balance of payments accounts vis-à-vis the other euro area member states Target2 imbalances can therefore be driven by current account deficits of an euro area country by private financial account deficits (capital account deficits) Bank of Russia

  16. Target2 imbalances As a matter of accounting logic Target2 imbalances are not necessarily driven by current account deficits Experience suggests that drivers of changes in Target2 imbalances are movements in the private financial account (capital account). These private capital flows out of the euro area periphery into Germany and other member states have their counterpart in the accumulation of Target2 net credit balances by the Bundesbank and other euro area NCBs That would have been increases in official foreign exchange reserve claims of the Bundesbank on the periphery member states had there still been 17 distinct national currencies in the euro area Bank of Russia

  17. Balance sheet of the Deutsche Bundesbank Assets (€ billion) 2012 2011 1 Gold and gold receivables 138 133 2 Claims on non-euro-area residents in foreign currency 51 52 3 Claims on euro-area residents denominated in foreign currency 3 18 4 Claims on non-euro-area residents denominated in euro – – 5 Lending to euro-area credit institutions related to monetary policy 73 56 6 Other claims on euro-area credit institutions denominated in euro 1 9 7 Securities of euro-area residents denominated in euro 68 72 8 Claims on the Federal Government 4 4 9 Intra-Eurosystem claims 668 476 9.1 Participating interest in the ECB (2) (2) 9.2 Claims transfer of foreign reserves to the ECB (11) (11) 9.3 Claims related to the allocation of euro banknotes (–) ( –) 9.4 Other claims within the Eurosystem (net) (655) (463) 10 Items in course of settlement 0 0 11 Other assets 19 18 Total Assets1,025838 Bank of Russia

  18. The Deutsche Bundesbank's TARGET2 claims: peak in August 2012 with751,4 bn € lowest level since October 2012 in March 2013 with 588,7 bn € in April 2013 first rise in six months to 607.9 bn € Traget2 Net Balances Bank of Russia

  19. Redistribution effects of Target2 imbalances The quasi-fiscal actions of the Eurosystem since the beginning of the crisis have redistributed resources between debtors, investors, tax payers and beneficiaries of public spending across the periphery and the core countries of the euro area The scale and scope of these redistributions has been large: the Eurosystem balance sheet has more than doubled in recent years Again: Target2 imbalances do not represent a separate risk exposure; they indicate the balance of payment crisis and the capital flight within the euro area As the balance sheet size and the exposure of the Eurosystem grow, the ECB needs to review the the range of eligible collateral Bank of Russia

  20. Government Bond Spreads against German Bund Yieldsbefore and after Launching Monetary Union Bank of Russia

  21. ECB stock of government bonds under the securities market programme (SMP) in billion euros Bank of Russia

  22. Does the ECB’s OMT Programme prevent contagion? OMT means the implicit mutualization of debt in contrast to an explicit mutualization of debt by introducing euro bonds. The announcement of a possible larger-scale debt mutualization through the central banks’ balance sheets calmed the markets. Calm markets might be treacherous; concerns relate to reforms both at the national and at the European level. The crisis is not over. Bank of Russia

  23. Why the Bundesbank have reservations against the ECB’s OMT Programme Diverging interest rates within the euro region aren’t necessarily something the ECB should fix. Different effects of monetary policy within the euro area: not necessarily a malfunctioning to be addressed by monetary policy Rising sovereign bond yields: not necessarily an explanation for a disturbance of monetary policy transmission. distortion in yield developments for sovereign bonds may be ... due to fundamentally justified causes potential exaggerations, irrationalities, inefficiencies ECB bond purchases under OMT would be different from those of other central banks (eg the Fed) Fed targets only top rated government assets ECB targets assets of poor credit quality (more risks for ECB) Bank of Russia

  24. Should the ECB prevent a country’s Eurozone exit? Emergency Liquidity Assistance (ELA): liquidity disposal from the Eurosystem to cover financial needs of Greece and Cyprus through access to ELA is particularly problematic: takeover of fiscal responsibilities by monetary policy’s authorities ECB has taken an extremely high risk, as Greece’s and Cyprus’ exit from the Eurozone cannot be considered impossible The ECB’s main task: to guarantee the currency union as a stability union not to guarantee the composition of the Eurozone Bank of Russia

  25. Diverging interest rates on loans to companies – should the ECB react? Higher refinancing costs for the private sector reflect higher national fiscal risks and the deterioration in the banks’ situation in peripheral countries. That is not a development for monetary policy to address, but rather a direct consequence of national fiscal policy. Bank of Russia

  26. Financial Stability:a) European Banking Union Three pillars Single Supervisory Mechanism (SSM) Single Resolution Mechanism (SRM) Single Depositor Guarantee Scheme (SDGS) SSM will be composed of the ECB and the supervisory authorities in the member states German cabinet approved draft law on SSM; paving the way for SSM regulation by Summer 2013 (operational not before 2014) When an effective SSM is established, the ESM could have the possibility to recapitalise banks directly (currently only via member state treasuries) Legal foundation of SRM still under discussion SSM without the SRM means liability and control are temporarily out of balance. SDGS only with fully integrated financial systems (fiscal union) Bank of Russia

  27. Financial Stability:b) Financial Market Regulation Plan to introduce Financial Transaction Tax (FTT) As yet: no exemptions for money market transactions Colateralised money market transactions unprofitable Risk: shifting from colateralised to uncolateralised market segment impediment for the implementation of monetary policy of the eurosystem restricted negative regulatory side effects (liquidity coverage ratio) Lawsuit by UK government against FTT Bank of Russia

  28. Financial Stability:c) Financial Market Infrastructure Since April 2012 Principles for Financial Market Infrastructures (PFMI) as a framework for responsibilities of systemically relevant FMIs regarding security, efficiency and resilience FMIs obliged to apply PFMI: payment systems central counterparties central depositories In Germany: Review process of national implementation of PFMI payment systems (by ECB regulation) central counterparties (by Europ. Market Infrastructure Regulation) central depositories (by EU regulation) Bank of Russia

  29. How to overcome the crisis? Bank of Russia

  30. How to overcome the crisis? Es ist niemals zu spät, vernünftig und weise zu werden; es ist aber jederzeit schwerer, wenn die Einsicht spät kommt, sie in Gang zu bringen. Никогда не поздно взяться за ум; но если понимание приходит поздно, то труднее бывает его использовать. Immanuel Kant (Prolegomena) Bank of Russia

  31. bertram.wieland@diplo.de

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