BlogSpot - September 27th, 2013
An opportunity and a challenge in Merkel’s landslide victory
The outlook for the eurozone remains a central topic in the blogsphere, as Jeremie Cohen-Settong reminds us in a Bruegel blogspot. With recent data pointing at a recovery, a debate is opening up on what are the policies behind this. Wolfgang Schauble, in a FT op’ed, defends the European approach to the EMU crisis (with stark reactions, for example Ambrose Evans-Pritchard and to O’Rourke and Taylor’s sober assessment that a break-up is not unthinkable).
… domestically, Germany should be careful to avoid complacency. Dan Steinbock, in EconoMonitor, writes that after Chancellor Merkel’s expected victory in the federal elections, Germany will drive the regional economy, but not without challenges: slower growth and rising income polarization. Nor is Germany any longer immune to the decline of the Eurozone. The next coalition government will have to navigate skillfully a Europe whose economic role in the world economy is on relative decline. Similarly, Weidmann (see RealTime Brussels) issued a stark warning to Germany’s government: either reform or risk falling behind—challenged by globalization, energy policy shifts, and an aging society, and high debt. He called for targeted investments in infrastructure and education to boost growth, but without increasing national debt.
… regionally, the jury is out on whether the German model is the solution to the eurozone’s ills. First, the jury is out on the strength of the recovery, as pointed out by Paul Krugman and Andrew Watt. Second, the claim that “successful austerity and reform”, especially in the labor market, drove recent data is put to doubt (Francesco Saraceno). Antonio Fatas writes that empirical evidence is weak in support of either view (he notes that Spain or Italy or France or even Greece improved their (product markets) regulation much more than the USA or Canada but their (potential) growth performance was significantly weaker).
Angela Merkel’s remarkable election result confirms her position as the dominant politician in Germany and so also in Europe. Daniela Schwarzer and Guntram Wolff, in a Bruegel publication, look at Germany’s role in addressing the eurozone’s three central risks: the incompleteness of competitiveness adjustment; the fragmentation and fragility of the banking sector; and rising unemployment. They argue that Germany can act on all three fronts, by designing domestic policies in a way more supportive of growth and adjustment, supporting a meaningful banking union (involving some transfer of sovereignty), and backing a private investment initiative with support to employment and labor market reforms. Beyond this, they argue for a significant deepening of the euro area.
For Martin Wolf, in his FT column, the key priorities are getting out of the crisis and achieving reforms needed in the longer run (e.g., better insurance mechanisms). He argues that without a change in Germany’s philosophy, it cannot be done as targeting external surpluses is “beggar-thy-neighbor” policy and impaired in practice by currency appreciation.
Jacob Funk Kirkegaard, in a PIIE blog entry, writes that Germany’s election result illustrates Merkel’s effectiveness in showing solidarity with euro area reformers while neutralizing the most potent long-term political threat to the euro—the rise of a widespread euro-skepticism in Germany. For Kirkegaard, this political result is key to the long-term survival of the euro.
With key eurozone issues coming back to the fore
Crisis countries: Greece is back to test European policies, according to Ashoka Mody in a Bruegel article, with a vengeance—with the impending decision on the next round of Greek aid, with questions on the scale of official debt forgiveness, the IMF’s presumed insulation from default, and alterations to the eurozone’s legal framework. For Mody, continued reduction of interest rates and extension of repayment maturities have served only to prolong Greece’s struggles and Greece now needs a massive debt write-down, with the twist that it will put to the test the IMF’s implicit status as “senior” creditor. He expects European governments to lend new money—with domestic and regional frictions that will to the emergence of a different Europe. Charles Wyplosz, in VoxEU, also stresses the risks associated with the next Greek debt relief. He writes that (i) 'help' from Europe to Greece has been the most important contributor to the debt pile up since the beginning crisis; (ii) Greece cannot recover steady growth under the accumulated debt burden, and (iii) most of the Greek debt is now in official hands. Official lenders now need to face the need for official debt restructuring—through a Paris Club agreement.
Strengthening institution: Political Union—Silvia Merler, in a Bruegel publication, looks at prospects for a political union in Europe. While Sonia Alonso or Lluís Orriols pointed at the growing ideological and political divide between Northern and Southern Europe, Merler draws four conclusions. First, Europeans still on balance trust Europe and the European institutions more than the national ones, especially in the South. Second, trends towards distrust in Northern Europe could make a discussion about political integration more difficult. Third, neither France (with doubts about its own domestic political institutions) nor Germany (too confident in its own federal government) seem in a position to lead a real European debate on political union. Fourth, this debate could come from others—the UK (to secure the UK’s participation in a EU centred around the single market but outside of a deep political union) and Italy (promoting a clearly federalist agenda for the euro area).
Cleaning up balance sheets: Andre Sapir and Guntram Wolff (Bruegel, in reference to their policy contribution) focus on the future of the European financial system, and argue that, with the upcoming Asset Quality Review by the ECB, Europe has a chance to make its financial system both more stable and more efficient—requiring bold action to clean up bank balance sheets (involving shareholders and senior bank creditors in burden sharing and with credible cross-border resolutions) and set up a genuine single market for financial services. Thomas Huertas and Maria Nieto, in VoxEU, see the EU banking recovery and resolution directive as the real game changer—assuring through the introduction of a bail-in tool that investors, not taxpayers, will primarily bear the cost of bank failures and opening the door to orderly bank resolution. Indeed, the directive proposes to (i) introduce bail-in of investor capital for recapitalizartion, (ii) require banks to issue a minimum amount of liabilities subject to bail-in; (iii) establish resolution funds financed by the industry; and (iv) exempt ('carve-out' approach) from bail-in some customer obligations, such as insured deposits. For Guntram and Wolff, reform should go beyond banking—with a genuine cross-border equity and corporate bond market to absorb shocks.
