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Berlin

The Eurocrisis:

new challenges for the EU’s

economic policy

Thomas Westphal

Director General European Policy

German Federal Ministry of Finance

23th of February 2015

College of Europe, Bruges


Berlin

Five points:

1. Talking about EMU

2. The crisis

3. Analysing the current situation

4. What needs to be done to come to a stable

EMU

5. Next steps


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MEETING OF THE HEADS OF STATE OR

GOVERNMENT

THE HAGUE, 1-2 DECEMBER 1969

“They have reaffirmed their readiness to expedite the

further action needed to strengthen the Community and

promote its development into an economic union. …

To this end they agreed … a plan in stages will be

worked out during 1970 with a view to the creation of

an economic and monetary union.”


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Benefits of a Monetary Union

• No exchange rate risk

• Lower transaction cost

• Lower interest rates

• Lower public deficits

• Improvements for the international

monetary system

4


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Cost of a Monetary Union

Limits the number of policy instruments to

deal with shocks:

• exchange rate policy

• Monetary policy

• commit to coordinate economic/fiscal

policy

5


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Optimal Currency Area

Ex-ante criteria:

• Flexible prices and wages

• Factor mobility

• Financial market integration

• Open economy

6


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Optimal Currency Area

Ex-post criteria:

• Trade integration

• Commitment = stability FDI

• Institutional effects

7


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Five points:


2. The crisis


4. What needs to be done to come to a

stable EMU

5. Next steps


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A crisis in different shapes

• US-subprime crisis (2007)

• Banking crisis (2008)

• Economic crisis (2009)

• Eurozone debt crisis (2010)

• Social and political crisis (current).

9


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The crisis: loss of confidence

10

0

5

10

15

20

25

30

Long term interest rates

BEL DEU IRL GRC ESP FRA ITA NLD AUT PRT FINQuelle: Eurostat


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-2

-1

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Euro area inflation rates

Euro area Germany Ireland Greece Spain France Italy ECB reference value


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-5

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Real long-term interest rates

Germany

Ireland

Greece

Spain

France

Italy

Portugal


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Building-up of imbalances

13

90

100

110

120

130

140

150

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Unit labour costs before the crisis Index: 1999=100

Euro area Germany Ireland Greece Spain France Italy Portugal


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Public and private sector debt in % of GDP

0

20

40

60

80

100

120

140

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

German

Private Debt

Public Debt

0

50

100

150

200

250

300

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Ireland

0

40

80

120

160

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Greece

0

50

100

150

200

250

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Spain

0

40

80

120

160

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

France

0

40

80

120

160

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Italy

0

50

100

150

200

250

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Portugal

0

40

80

120

160

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Finland


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What to do?

15

growth

debt

reforms banks

competiti-

veness

exchange

rates

bazooka

ECB solidarity

Eurobonds


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Crisis response

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Policy coordination

“boldly go where no man has gone before”

17


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A dynamic system

18


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Five points:


2. The crisis



stable EMU

5. Next steps


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Achievements • Market confidence has

returned

• 3 programmes completed

(IRL, PRT, ESP)

• Ex-programme countries

growing again

• Recession behind us

20


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90

95

100

105

110

115

120

125

200

5Q

1

200

5Q

2

200

5Q

3

200

5Q

4

200

6Q

1

200

6Q

2

200

6Q

3

200

6Q

4

200

7Q

1

200

7Q

2

200

7Q

3

200

7Q

4

200

8Q

1

200

8Q

2

200

8Q

3

200

8Q

4

200

9Q

1

200

9Q

2

200

9Q

3

200

9Q

4

201

0Q

1

201

0Q

2

201

0Q

3

201

0Q

4

201

1Q

1

201

1Q

2

201

1Q

3

201

1Q

4

201

2Q

1

201

2Q

2

201

2Q

3

201

2Q

4

201

3Q

1

201

3Q

2

201

3Q

3

201

3Q

4

201

4Q

1

201

4Q

2

201

4Q

3

201

4Q

4

201

5Q

1

201

5Q

2

201

5Q

3

201

5Q

4

201

6Q

1

201

6Q

2

201

6Q

3

201

6Q

4

Real GDP in the euro area (Index: 2005Q1=100, Commission forecast as of Q1 2015)

Euro area Germany Spain France Italy


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weak growth recovery

upswing

average Euro zone: +1,3


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Effects of low inflation

24


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0

20

40

60

80

100

120

193

6

193

8

194

0

194

2

194

4

194

6

194

8

195

0

195

2

195

4

195

6

195

8

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

Eurozone aggregated historic debt/GDP for selected countries: Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain.

Sources: IMF historical public debt database, Angus Maddison Project, BMF staff calculations

Debt ratio in the Eurozone (% BIP)


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0

20

40

60

80

100

120

140

160

180

GRC ITA PRT IRL CYP BEL ESP FRA AUT SVN DEU NLD MLT FIN SVK LTU LVA LUX EST

Public debt in the euro area in % of GDP

2013 2014 2015p 2016p 60% Threshold


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-2

0

2

4

6

8

10

12

14

16

ESP SVN PRT FRA IRL BEL ITA CYP SVK AUT NLD FIN GRC MLT LVA LTU EST DEU LUX

General government deficit in the euro area in % of GDP

2013 2014 2015p 2016p 3% threshold


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Five points:


2. The crisis



stable EMU

5. Next steps


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A stable EMU: substance

• In absence of political and fiscal union:

CONFIDENCE

• Community vs. Intergouvernemental rules

• Set of (simple) rules (common sence, ownership)

• Fiscal policy: lowering debt ratios, MTO allows

stabilisation via automatic stabilisers

• Policy coordination (forward looking)

• Agreement on debt reduction, structural reforms, how to

support growth

• Internal market, incl complete banking union, budget (put

the money where your mouth is) tax rules?

29


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A stable EMU: institutional

• Commission: Guardian of the Treaty or political

institution?

• EP: grand coalition? Eurozone chamber?

• Council: ability to shape policy?

• National parliaments: how to ensure national

support for European ideas and policies?

30


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• Geopolitical

• Political: support for European idea

• Social: unacceptably high unemployment in some countries

• Fiscal: legacy of high public debt limits policy space

• Economic: growth fragile; still need for structural reform

• Institutional: new Commission, new Parliament

• Confidence: need to implement our rules

31

Challenges remain


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Five points:


2. The crisis


4. What needs to be done to come to a stable

EMU

5. Next steps


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Juncker Plan

33


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Connect policies

34

Policy coordination identifies challenges

Policy recommendation address challenges

Member States act accordingly

EU-budget finances


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Create space for shock absorbtion

35

Member States reach MTO

Lower debt ratios = room for lower taxes

automatic stabilisers can work

debt ratios reduced = room for lower taxes


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Thank you for your attention

Thomas Westphal

Director General European Policy

German Federal Ministry of Finance

23th of February 2015

College of Europe, Bruges

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