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Germany’s Role in The Euro Crisis Management Ágnes Orosz

Institute of World Economics Research Centre for Economics and Regional Studies  of the Hungarian Academy of Sciences . Germany’s Role in The Euro Crisis Management Ágnes Orosz. “Post-Crisis Economic Development of EU and Bulgaria” 18 th – 19 th October 2012, Sofia.

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Germany’s Role in The Euro Crisis Management Ágnes Orosz

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  1. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Germany’s Role inThe Euro Crisis Management Ágnes Orosz “Post-Crisis Economic Development of EU and Bulgaria” 18th – 19th October 2012, Sofia

  2. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Outline Outline • Importance, relevance of the topic • The nature of sovereign debt crisis • Competitiveness imbalances • Current account imbalances • Germany’s euro trilemma • Final remarks

  3. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Why is Germany important? • Strong commitment to stabilise the euro area • Ruling of the German Constitutional Court on September 12  „green light” for ESM (with a few recommendation) • Engagement to rule-based fiscal policy (pioneer, role model) • Biggest contributor to crisis management • Historical reasons • Trade, economic performance, etc.

  4. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  On the issue of „sovereign debt crisis” • Not primarily a “sovereign debt crisis”  banking and balance of payments crisis • Competitiveness imbalances • Current account imbalances • Increasing corresponding debt flows

  5. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Competitiveness problem of the periphery • Particularly important for: Greece, Ireland, Italy, Portugal, and Spain • Devaluation is not possible because of the euro  ULC (increased the most in the „problematic area, while the least for Germany)  competitiveness gap with Germany (solution = downward adjustment of wages???) • Differences is export basket  decreasing wages no solution • Export structure issues

  6. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  About current account imbalances About current account imbalances • Trade surpluses of Germany more regionally concentrated to Europe • Loss: decreasing export demand within Europe • Benefits: (1) depressing the euro stimulating non-euro net exports, (2) depressing German interest rates  Germany as a safe haven for investments • Early warning mechanism of EC (CA above 6% of GDP = danger for overall stability in Europe) = rather consequence than cause

  7. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Germany’s euro trilemma Germany’s euro trilemma • Perpetual export surpluses • No transfer/no bailout monetary union • A “clean” independent central bank • Maastricht regime designed by Germany: no bail-out and no transfers (result: bankrupting its trade partners) • Trilemma must be solved  steps towards more bail-out (contradict to the German voters)

  8. Institute of World EconomicsResearch Centre for Economics and Regional Studies of the Hungarian Academy of Sciences  Final remarks Final remarks • Importance of the presidential elections in September 2013  European policy would be a part of the election campaign • Need for additional crisis management measures  financial relief and political support from Germany (incremental steps) • Political union debate has started (potential constitutional changes) • Changes in Merkel’s communication (Greece’s visit)

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