State, money and rules: An EU policy for sovereign investments

State, money and rules: An EU policy for sovereign investments

State, money and rules: An EU policy for sovereign investments

Written by Simon Tilford, Katinka Barysch, Philip Whyte, 01 December 2008

The euro at ten: Is its future secure?

The euro at ten: Is its future secure?

The euro at ten: Is its future secure?

Written by Simon Tilford, 07 January 2009

The euro's success requires liberalisation

The euro's success requires liberalisation

The euro's success requires liberalisation

Written by , 26 August 2010
From The Wall Street Journal

Breakfast meeting on 'Is Europe going bust: the impact of demographic decline and the fiscal crisis?'

Breakfast meeting on 'Is Europe going bust: the impact of demographic decline an

Breakfast meeting on 'Is Europe going bust: the impact of demographic decline and the fiscal crisis?'

16 June 2009

With David Willetts MP, shadow secretary of state for innovation, universities & skills.

Location info

London

Launch of 'Narrowing the Atlantic'

Launch of 'Narrowing the Atlantic'

09 June 2009

With David O'Sullivan, director-general, DG Trade, European Commission. Panellists included: Dick Cunningham, Fredrik Erixon, Sean Mulvaney & Philip Whyte.

Location info

Brussels

Launch of 'Narrowing the Atlantic'

Launch of 'Narrowing the Atlantic'

08 June 2009

With Catherine Ashton, European commissioner for trade. Panellists included: Guy De Jonquieres, Iain MacVay, John Peet & Philip Whyte.

Location info

London

Has Germany become Europe's locomotive?

Has Germany become Europe's locomotive?

Written by Philip Whyte, 02 September 2010

By Philip Whyte

The German economy has been growing exceptionally strongly of late. In the second quarter of 2010, it expanded faster than any other economy in the G7 and faster than at any time since the country’s reunification in 1990. Industrial output is surging. The rate of unemployment has been declining for over a year and is now well below the eurozone average (let alone levels in the US). Consumer spending and business investment are picking up – and households and firms are generally less burdened with debt than their counterparts in highly leveraged economies like the UK and the US. Germany, in short, seems to have emerged strongly from the Great Recession. Indeed, some observers think it has entered a self-sustained recovery – and that it is starting to act as Europe’s ‘growth locomotive’.


If this were true, it would be welcome. Over the past decade, Germany has not been a great source of demand for the world or the European economy: in real terms, domestic demand is only about 3 per cent higher now than it was back in 2000. For most of the noughties, Germany was structurally reliant on exports for its economic growth: without debt-fuelled spending elsewhere in the world economy, it would barely have grown at all. So any sign of a sustained recovery in German domestic demand would be good news for the country itself and the rest of the world. Not only would it reduce Germany’s reliance on unsustainable (and hence destabilising) foreign profligacy. It would also allow the eurozone and the world economy to rebalance at a higher level of output and employment than otherwise.

Sadly, it may be premature to conclude that Germany has embarked on a durable, self-sustained recovery that will help to lift growth elsewhere. Much has been made of the scale of Germany’s rebound in the second quarter of 2010. But it needs to be placed in context. Germany resembles a bungee jumper in the spring-back phase. It is rebounding faster than neighbouring France. But this is partly because it fell much further on the way down. The size of Germany’s manufacturing sector has resulted in greater output volatility. Germany was hit disproportionately hard in 2008-09 when manufacturers scrambled to run down stocks, but it has since benefited as the stock cycle has reversed. Even after its recent rebound, however, German output is still lower relative to pre-crisis levels than in France.

Besides, the pattern of the recent upturn casts doubt on the view that Germany is acting as a ‘locomotive’ for other countries. The pick-up in domestic demand in the second quarter of 2010 came after three consecutive quarters in which household consumption fell. As for business investment, it is still a long way below pre-crisis levels. If Germany really had become a locomotive for the rest of the EU, net trade would be exerting a drag on its own economic growth. Yet the reverse is the case: net trade has boosted German GDP growth in three of the past five quarters. True, exports to Asia are making a greater contribution to growth. But Germany’s recovery is doing little to rebalance activity in the EU. Indeed, Germany’s trade surplus with the rest of the EU has risen compared with the first half of 2009.

There is a final reason to be sceptical about the prospect of Europe’s largest economy becoming a locomotive for the rest of the EU: it is not clear that German policy-makers want it to become one. As far as they are concerned, the global financial crisis has discredited profligacy and vindicated German prudence. The lesson of the crisis, they believe, is that countries must learn to live within their means. For them, the direction of change is clear: it is for the erstwhile dissolute to shape up, not for Germany to become more spend-thrift. Any suggestion that Germany needs to adjust tends to be met with bemusement, irritation and contempt. Germany has no lessons to take (least of all from irresponsible Anglo-Saxons). And any attempt to hobble German ‘competitiveness’ will be fiercely resisted.

The hopes currently being vested in Germany may consequently be misplaced. The strength of the country’s recovery is partly an optical illusion created by the depth of the downturn which preceded it. Much of the recovery is being driven by net trade. Domestic demand is still fragile and could weaken as the government’s fiscal stimulus is withdrawn and the stock cycle becomes less favourable. And German policy-makers have yet to be persuaded that it is in their country’s interest to reduce its reliance on export-led growth. In short, Germany is not yet acting as a ‘growth locomotive’ for the rest of Europe. And other EU countries, particularly in the highly indebted geographical periphery, may have to get used to the idea that the region’s largest economy may not be about to become one any time soon.

Philip Whyte is a senior research fellow at the Centre for European Reform

Comments

Added on 21 Sep 2010 at 17:10 by tenax_technologies

The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 %annually ) is dated and meaningless.
If a catchword is really needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant force for medium-term growth.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP ratio of 41 % (2008) is unmatched in the EU compared to countries of similar size like UK or France.Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

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Added on 03 Sep 2010 at 08:59 by StefaniWeiss

No locomotive, nowhere ...

I wish to share with you a slightly different view by a German economist which nevertheless might be taken into further consideration while judging German economic and political performances by CER.
At least that would be appriciated:



"A medium--sized mature economy with a potential (steady state) growth rate of 1.5 % will never be able to pull a large number of heavy wagons out of the mud. In trying it by the end of eighties , Japan, a similarly mature slowly growing economy, ended in the mud.
The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 %annually ) is dated and meaningless.
If a catchword is really needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant force for medium-term growth.
Second, Germany, by its priority to fiscal consolidation now anchored in the constitution, is a benchmark or yardstick for assessing the quality and credibility of fiscal consolidation in partner countries as measured by the deviation of government bond rates in these countries to German governance bond rates. Financial markets need such yardsticks.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP share of 41 % is unmatched in the EU compared to countries of similar size like UK or France. Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

Finally, Germany policy- makers must not be persuaded that it is in their country's interest to reduce its reliance on export-led grwoth. That has never been their job in the past and they wisely refrain from subscribing to it today.As a member of the Euro-zone, Germany neither pursues an exchange rate policy undervaluing its currency or provides export-stimulating instruments like export subsidies. Nor does it have a direct influence on wage negotiations except for the government sector which, however, has been decoupled from wage negotiations in the private sector. Germany's economic structure simply reflects a high degree of persistence in terms of the traditionally high importance of the manufacturing sector. In adjusting and fine-tuning that structure permanently to meet the demand of both European and non-European markets (together with its affiliates abroad) , it has been very succcessful in penetrating new markets. That success is basically owed to the companies themselves rather than to the government. This structure is not costless, especially when external demand falls in a synchronised way all other the world (as 2009). Vice versa, it spurs GDP growth,if world demand recovers synchronisedly due to the stimulus programs set up in each country.
To change that structure, requires a more courageous stance of the German government to liberalise (and privatise) service sectors like health and education than the governments has revealed until today. It is certainly the better way than to demand wage increases which would threaten job growth in the labour market. Finally, forget about the locomotive!"

Added on 02 Sep 2010 at 15:15 by rolf

A medium--sized mature economy with a potential (steady state) growth rate of 1.5 % will never be able to pull a large number of heavy wagons out of the mud. In trying it by the end of eighties , Japan, a similarly mature slowly growing economy, ended in the mud.
The picture of a mature economy growing close to its steady state acting as a "growth locomotive" in a dynamicly growing world economy (growing by 3-4 % annually) is dated and meaningless.
If a catchword is needed, Germany could be first described as a pacemaker whose efficient companies can spur structural change and productivity gains in partner countries by wiping their inefficient industries out of the market and enabling young fresh entrants to find access to resources formerly occupied by the old inefficient industries. That is an important contribution to growth in partner countries but not via the demand side but via the supply side which is the relevant side for medium-term growth.
Second, Germany, by its priority to fiscal consolidation now anchored in the constitution, could be described as a benchmark or yardstick for assessing the quality and credibility of fiscal consolidation in partner countries as measured by the deviation of government bond rates in these countries to German governance bond rates. Financial markets need such yardsticks.

Looking only at German exports diffuses the fact that Germany is also the most open economy in the EU in terms of import shares. An import/GDP ratio of 41 % (2008) is unmatched in the EU compared to countries of similar size like UK or France.Furthermore, exports are measured as gross output and thus hide the fact that they include a large number of imported inputs which are assembled in Germany("Bazaar "economy). Germany's end of pipe role in cross-border value added chains explains the high import share. That role is beneficial for the partners.

Finally, Germany policy- makers must not be persuaded that it is in their country's interest to reduce its reliance on export-led growth. That has never been their job in the past and they wisely refrain from subscribing to it today. As a member of the Euro-zone, Germany neither pursues an exchange rate policy undervaluing its currency or provides export-stimulating instruments like export subsidies. Nor does it have a direct influence on wage negotiations except for the government sector which however has been decoupled from wage negoations in the private sector. Germanys economic structure simply reflects a high degree of persistence in terms of the traditionally high importance of the manufacturing sector. In adjusting and fine-tuning that structure permanently to meet the demand of both European and non-European markets , it has been very succcessful to penetrate into new markets and to meet changing demand in emerging markets like China. That success is owed to the companies themselves rather than to the government. This structure, however, is not costless, especially when external demand falls in a synchronised way all other the world (as in 2009). And it means an impulse for recovery, respectively, if world demand recovers synchronisedly due to the stimulus programmes set up in each country (as in 2010).
Rolf J.Langhammer, The Kiel Institute for the World Economy, Kiel, Germany

Added on 02 Sep 2010 at 13:26 by Anonymous

I well remember the times when US/UK representatives literally laughed at the German way of running their economy. Too focused on producing industries, too export reliant and with a much too small services sector and little -debt financed - demand inside the country. Then the (and let's face the reality here) anglo-saxon debt/risk/leverage-dabbeling sent the western economies into oblivion. If the Germany way of acting would have resulted even slightly in a comparable mess, Berlin would have to stay in the corner and be silent for at least a decade. Not so the anglo-saxon economy-experts. Right after Europe is slowly recovering they start to sing the same old (lame) lamento about Germany. To say this clearly: Yes, Germany should slightly adapt, bolster interior demand and be a bit less export focused. BUT not and never in the way the anglo-saxon financial community wants it to. Over years Germany paid ten times the sum of the UK into the EU wallet (net!)... Germany played a major part in not letting Greece go down the speculative drain and yes, the German way of handling things didn't (and won't) generate as much profit as the anglo-saxon financial industry in good times... but it won't generate as much of a desaster either. Personally I believe a bit more of this German prudence indeed isn't such a bad idea at all.

Divisions remain over euro reform

Divisions remain over euro reform

Written by Katinka Barysch, 08 October 2010

by Katinka Barysch

Europeans agree that the management of the euro must be improved to prevent future crises, or deal with them better if and when they happen. The European Commission is hopeful that it can get all 27 EU countries to agree on a package of reforms it published at the end of September. However, recent conversations in various EU capitals left me with the impression that divisions still run deep on crucial aspects of eurozone reform. Not everyone shares the Germans’ sense of urgency, and there is a risk that complacency sets in before a sustainable new framework has been created.


On September 29th, the European Commission published six draft laws designed to improve the management of the euro. The package foresees earlier and tougher sanctions on countries that break agreed limits on budget deficits and debt levels, new procedures for macro-economic co-ordination to avoid harmful imbalances among EU countries, and a harmonisation of the way EU countries draw up their budgets. The conclusions of Herman Van Rompuy’s taskforce on eurozone governance are expected to go broadly in the same direction. The Commission hopes that the proposed reforms can become law by the summer of 2011 – an ambitious timetable even by the Commission’s own admission.

So far, discussions have mainly taken place among finance ministers, either among 16 of them in the Euro Group or all 27 in Van Rompuy’s taskforce (a slightly enlarged version of Ecofin). Finance ministries tend to welcome strict EU rules, which help them to fend off spending pleas from cabinet colleagues. But the same unity of purpose does not exist among the EU’s heads of state.

In rough terms, the EU countries fall into two camps: a German-led one which puts the emphasis on strict rules and automatic sanctions to enforce discipline; and a French-led group of mainly South European countries that – although aware of the need for fiscal discipline – want more political wiggle-room for economic policy co-ordination that could require an effort also from surplus countries, for example by trying to boost demand.

France’s club Med is weaker than the German stability camp: members such as Greece, Portugal and Spain are in the dock and their voices count for less in the current debate. Italy traditionally punches below its weight in European policy debates; and Rome’s opposition to attaching sanctions not only to excessive deficits but also stubbornly high debt levels is a little too predictable (its own debt being the second highest in the EU).

The German camp looks firmer and stronger. Austria and the Netherlands agree on the need for tough spending limits and sanctions. So do the Nordics, including non-euro countries such as Denmark and Sweden. Most of the Central and East European member-states, having imposed fierce austerity programmes at home, are not afraid of strict rules. “We are Germany’s natural allies in this”, insists one Polish official. “That’s why the Germans are stupid to try and keep the East Europeans out of the euro.”

However, the German-led group is not as cohesive as it appears at first sight. The non-euro countries do not only want stronger rules for the eurozone. They also want to forestall the emergence of a two-tier EU where euro countries closely co-ordinate their economic policies while non-euro ones wait outside the door. The price most non-euro countries are willing to pay for this is to be bound by the tough new rules and even accept financial penalties. However, the EU treaties allow eurozone countries to agree on new measures and sanctions among themselves but not to extend them to non-euro countries. Some in Central Europe now silently hope that the euro reform debate will drag on for so long that they can slip into the euro in the meantime. Poland has added a long-standing demand to the eurozone debate, namely that the costs of pension reform be excluded from budget deficit numbers. Other EU countries could complicate the reform effort with their own idiosyncratic issues. The UK is in the special position that it wants stronger rules for the euro – knowing that another eurozone crisis would harm its exports and finance industry – but under no circumstances does it want to be bound by them.

Although Germany has so far dominated the eurozone reform debate, it still faces an uphill struggle to get all 27 governments to back new rules and penalties. A restive European Parliament will also have a say on some of the proposed changes. The most important condition for creating a consensus on swift eurozone reform is still for France and Germany to reach an agreement. Christine Lagarde, France’s finance minister, and her German counterpart, Wolfgang Schäuble, have put on an admirable show of unity in the euro debates. But it is not always clear in how far they speak on behalf of their bosses at home. Divisions between Germany and France still run deep.

French policy-makers and economists think that the single currency suffers from a design flaw: a lack of economic governance. Closer economic policy co-ordination, including on such things as tax levels and industrial policy, is therefore what the French government is aiming for. Most Germans think that the reason for the current mess is that existing fiscal limits were not applied properly [for the reasons why they should re-think see How to save the euro, by Simon Tilford]. Germans demand stricter rules not only at the EU level but also at the national level. They want other EU countries to emulate Germany’s new constitutional clause, which mandates all future German governments to run balanced budgets from 2016 onwards. Germans do not mind that this clause will give the country’s already mighty constitutional court a direct say in economic management.

Policy-making by judicial decree would be anathema to most French. For them, discretion is the essence of politics, at home and in the eurozone. “Leaders need to be able to lead, especially in a crisis. They should not tie their own hands”, says one of Sarkozy’s economic advisors. The Commission proposals already embody a compromise between Germany and France: the fines proposed by the Commission will bite unless a qualified majority of EU countries votes against them. For many Germans, that still leaves too much room for political cop-outs. For most French, the thought of the Commission deciding something so eminently political as fines is still hard to accept.

Another profound disagreement concerns the idea of bolstering the euro through a permanent crisis resolution mechanism. The Commission omitted this from its September reform package, which is looking only at steps that can be implemented without changing the Lisbon treaty. The Commission, alongside the French, also argues that the EU should first see how its €440 billion safety net (the European Financial Stability Facility) works before it talks about new institutions.

But Berlin is in a hurry. It refuses to contemplate extending the EFSF beyond 2013. And it will accept a permanent rescue fund only if it comes with a bankruptcy procedure for countries that can no longer service their debt. “Without a resolution mechanism, we will have endless bail-outs and no incentives for countries to run a responsible fiscal policy”, warns one German finance ministry official. He speculates whether the EU could use the treaty adjustment that will be necessary for Croatia to join the EU over the next couple of years to set up this new mechanism.

French officials argue that talking about a bankruptcy procedure for countries now would only spook the markets. Generally, the French do not appear to feel the same sense of panic about the fate of the euro that has gripped many Germans. “The euro?” asks one Paris intellectual somewhat tongue in cheek. “France suffers from an identity crisis! It fears about its role in the world, its traditional dominance of Europe, its social model, even its way of life.” While France is concerned about losing its AAA credit rating and being ‘decoupled’ from the German economy, it has been less pro-active in the euro reform debate. Without a sense of urgency, France and Germany are unlikely to make the concerted effort that is still needed to get all EU countries to support a comprehensive reform package. The spectre of an EU lurching from crisis to crisis has not been banished.

Katinka Barysch is deputy director at the Centre for European Reform

What currency wars mean for the eurozone

What currency wars mean for the eurozone

What currency wars mean for the eurozone

Written by Simon Tilford, 15 October 2010

By Simon Tilford

The dollar has now fallen to $1.40 against the euro. This is still below the low of almost $1.60 that it reached in the middle in July 2008, but it represents a steep decline from under $1.20 in early June. Moreover, the US currency is likely to weaken further. The euro has also risen sharply against the British pound in recent weeks. Why is this happening? And what are the implications for the eurozone economy and, in particular, the member-states currently experiencing difficulties funding their government deficits?

The renewed strength of the euro is not down to optimism about the eurozone’s economic prospects. Most forecasters foresee only modest growth in the eurozone economy next year and in 2012. Nor does the appreciation in the value of the single currency reflect receding investor concerns over the solvency of various eurozone economies. The spreads between the German government’s borrowing costs and those of the struggling member-states of currency union remain very high. The reason for the strength of the euro reflects the differing policies of the US Federal Reserve (and the Bank of England) on the one side and the European Central Bank on the other.

The Federal Reserve will almost certainly embark on a further round of so-called quantitative easing before the end of 2010. The Bank of England may follow suit. Quantitative easing involves pumping money into the economy through the purchase of assets (usually government bonds), ostensibly with the aim of boosting credit growth and hence consumption and investment. Both central banks are considering such action because of the failure of their respective economic recoveries to gain traction and their consequent fears that inflation will fall too low. Weak economic growth and low inflation (or worse, deflation) is very dangerous for highly indebted economies, because it makes it much harder to reduce the real value of their debt.

The ECB has taken a different line. Some of its board members believe that they need to tighten monetary policy. The bank has already reined in its policy of providing unlimited liquidity to eurozone banks, with the result that market interest rates have risen sharply. Axel Weber, head of the influential German Bundesbank, has called for an increase in official interest rates and spoken out strongly against any quantitative easing comparable to that under consideration by the Federal Reserve or the Bank of England. The institutions’ contrasting approaches partly reflect philosophical differences – the ECB believes the potential inflationary risks of quantitative easing outweigh the threat of deflation. But the differing economic outlooks of the various eurozone economies are also a factor. For example, the German economy is expanding rapidly, explaining Weber’s call for tighter policy.

The problem for the eurozone is that unorthodox monetary policy such as quantitative easing tends to depress the currencies of the countries whose central banks are engaged in it. The reason is that some of the money issued flows abroad. The weakness of the dollar (and the pound) has led many to question whether the US and UK are engaging in competitive currency devaluations. In short, they stand accused of attempting to bolster their trade competitiveness at others’ expense. Because the ECB has elected to pursue a different monetary policy course and because – unlike East Asians countries such as China, South Korea and even Japan – the ECB does not intervene in the foreign currency markets to hold down the value of the euro, it is the single currency which is bearing the brunt of a weaker dollar.

There is no doubt that the Federal Reserve and the Bank of England are keen to keep their respective currencies weak. It is not hard to see why. For the best part of three decades, both economies have more or less continuously run current account deficits as their domestic savings have fallen short of their investment levels. They now need to close these external imbalances, which are a drag on their economies, and are one reason why both are running such large fiscal deficits. Savings rates in both countries have certainly picked up and investment remains weak, but a rebalancing of their economies remains elusive. Indeed, after narrowing in the immediate aftermath of the financial crisis, the US trade deficit is widening. A major reason for this is that many countries remain wedded to export-led growth and are unwilling or unable to rebalance their economies in favour of domestic demand.

Global imbalances were one of the key drivers of the financial crisis. They led to excessive capital flows into the US and other fast-growing developed economies. These pushed down the cost of capital and encouraged – together with poor management – excess leverage and risk-taking. US attempts to cajole the Chinese and others to pursue more balanced economic growth have largely fallen on deaf ears. By pumping out lots of dollars, the US central bank hopes to make it more costly for countries to hold down their currencies. China will have to buy more dollars if it is to maintain the renminbi’s peg to the US currency. This will be costly because the dollar will ultimately have to fall in value, reducing the value of China’s dollar holdings. Moreover, the inflows of dollars into China will prove destabilising, exacerbating bubbles and pushing up inflation. This, in turn, should make Chinese goods less competitive on the US market. However, it is impossible to say how long it will take before the Chinese and other East Asian governments blink.

In the meantime, the euro is set to remain very strong. This is bad news for the stability of the eurozone. If it persists, the adjustment facing struggling members of the currency union, such as Spain, will be even harder to bring off. Spain requires strong growth in exports to offset the weakness of its domestic economy, and a strong euro will make its goods and services less competitive in export markets outside the currency bloc. But is the eurozone an innocent bystander in all this? The eurozone’s trade with the rest of the world is broadly in balance, and no-one could accuse of the ECB of adopting policies aimed at weakening the euro. However, to an extent, the eurozone economies are reaping what they have sown.

First, Spain is so dependent on exports to the rest of the world to dig itself out if its current hole because the eurozone has failed to take action to address the trade imbalances between member-states of the currency union itself. Spain must close its external deficit without any corresponding obligation on countries such as Germany and the Netherlands to narrow their surpluses. In short, the eurozone is relying on demand generated elsewhere in the world to bail it out. In essence, its strategy to overcome the crisis involves running a trade surplus with the rest of the world. US action to weaken the dollar combined with the mercantilism of East Asian governments makes this all but impossible. Second, the Chinese were not the only ones who were deaf to US calls for action to rebalance the global economy. The German government was instrumental in preventing any discussion of imbalances within the G20, joining the Chinese in arguing that it is for the deficit countries alone to put their houses in order.

The G20’s failure to agree a global strategy to address imbalances leaves the eurozone in a tricky position. At the very least, the ECB should hold off tightening monetary policy, as this would further increase the attractiveness of the euro relative to the dollar. Secondly, it must get serious about removing barriers to stronger domestic demand across the eurozone. There will be no export-led exit from the eurozone crisis. Signs of a pick-up in German domestic demand are positive in this regard, but it remains to be seen how vulnerable this is to a weakening of external demand for German goods.

Simon Tilford is chief economist at the Centre for European Reform

Comments

Added on 10 Jan 2011 at 14:13 by Parag

Global finance and business is the new battlefield of the 21st century. Currency wars are an integral part of the strategy. Governments across the globe are trying to boost employment, and one of the best ways to do so is by increasing exports.
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Added on 30 Oct 2010 at 22:32 by Paul Brinkkemper

The above comment is rubbish.

1)It is absurd to disregard the reality that Euroland is a collection of nation states. Historically Europe has been a collection of different sovereign nation states. The recent unrest and the voted down referenda on the european constituntion prove that the public at large wants nothing of a centralised european governement.

2) The bad guys are the people printing money. If you and me print money, we get arrested and thrown in jail. If central banks print money, it is somehow perfectly okay. By some on TV it is even called 'saving the economy'.

The fact that the ECB prints less money than the FED (as the dollar/euro rate indicates) makes them less of a bad guy than the FED and the Bank of England. But they are still bad guys.

The good guys are the Austrian economics, Ludwig von Mises most notably, who predicted the fall of the central banking system as early as 1912. He called for a abandonement of fiat currencies (that are based on debt) and for a return to honest currency, based on valuable assets (like gold or silver).

It is the hybris of the central bankers, creating money out of debt, pretending they are god, taking society at large in whichever way they choose that is bringing the world to disaster.

Added on 15 Oct 2010 at 12:19 by Anonymous

This article is rubbish.

1 It is absurd to look at Euroland on a nation state basis. Euroland is one economy and should be looked at as such.. The German government, French government etc are the Euro equivalent of Scunthorpe Borough Council.

2 Who are the bad guys and the good guys? Clearly the USA and the Uk who are busy manipulating their currencies. It is called 'beggar my neighbour' and so we read in our economic text books. a major problem in the 1930's.

It is the selfish attitude of the politicians of the USA (and the British but who cares about them) that is bringing the world economy to disaster.

Europe dances to Germany's tune

Europe dances to Germany's tune

Europe dances to Germany's tune

Written by Charles Grant, 03 November 2010

by Charles Grant

For much of this year, the response of European leaders to the eurozone crisis has been hesitant and fractious. But when the European Council met in Brussels on October 28th and 29th, the EU appeared to be acting with greater purpose and sense of direction. One reason for this change is that most member-states – including France – are now willing to swallow large doses of German leadership. Chancellor Angela Merkel's influence was evident on the three key issues discussed by the summit: tightening rules on economic governance, setting up a new institution to deal with countries unable to borrow in the markets, and revising the EU treaties. However, Germany’s leadership has also brought problems. One is that Germany's determination to get its way has bruised several smaller states, as well as the Commission and the European Central Bank. Another is that its reluctance to discuss imbalances within the eurozone has prevented the EU from taking serious action to tackle them – though the imbalances have (in the view of many countries) contributed to the euro crisis.

On the first key issue, the summit adopted the report of the task force led by Herman Van Rompuy, the European Council president, on 'Strengthening economic governance in the EU'. The implementation of the report will mean stricter and more automatic punishments for countries that borrow too much, as the Germans – backed by the Austrians, Dutch, Finns and Swedes – have called for. Sensibly, the report says that the EU should focus not only on governments' budget deficits, but also the overall level of debt. The task force also considered the delicate subject of economic imbalances in the eurozone (the Germans do not like being told that their unwillingness to spend, and their current account surplus, contribute to inadequate demand and current account deficits in southern Europe). The report says it is more urgent to tackle imbalances in countries with big current account deficits than those in the surplus countries, but it does propose monitoring of imbalances and disciplinary procedures for all those who fail to act on recommendations to tackle imbalances.

On the second issue, the new institution, EU leaders agreed to establish a 'crisis resolution framework' to replace or supplement the European Financial Stability Facility (EFSF) that they designed last May to support governments unable to borrow in the markets. Merkel has been unwilling to prolong the three-year life of the EFSF, fearing that Germany's constitutional court could declare it in breach of the Maastricht treaty's no-bail out rule (she also knew that giving the EFSF a finite life would increase her leverage in the arguments on eurozone governance). EU leaders have not yet agreed on how the new body will work, but it will probably be a kind of European Monetary Fund that both lends money (with strict conditions attached) and facilitates an orderly restructuring of the debt of countries that cannot repay what they have borrowed.

The Germans say this restructuring should lead to private sector creditors taking a loss, and many governments go along with that. But at the summit Jean-Claude Trichet, the president of the European Central Bank, and the leaders of some southern states – who worry about their ability to borrow – argued against establishing that kind of restructuring mechanism at this stage. It could deter investors from lending to eurozone governments, Trichet argued, and make it even harder for them to service their debts. The Germans responded that tax-payers should not bear all the cost of bail-outs, and that markets should fret about potential losses in order to discipline borrowers. The markets now seem to be doing that job – perhaps too well. Since the summit the cost of borrowing for the southern Europeans has risen to as high as it was before the EFSF was hatched in May (though the governments concerned started to tighten their belts several months ago). The Germans will face stiff opposition on the issue of creditors taking losses. But since they will be responsible for providing the biggest share of any rescue package, they are likely to win the argument.

On the third issue, treaty change, the summit asked Van Rompuy to report back in December on whether the current treaties need to be amended to establish the crisis resolution mechanism. The answer to that question is already clear. For many months the Germans have argued that treaty change was needed to ensure that a new mechanism did not fall foul of their constitutional court. However, most governments – having spent the best part of a decade sorting out the Lisbon treaty – did not want another round of treaty change. Then at the Franco-German summit in Deauville on October 19th, Merkel persuaded France's president, Nicolas Sarkozy, to back treaty change (in return for a modest weakening of some sanction mechanisms). At the European Council most other leaders followed them, if only grudgingly – though Luxembourg's Jean-Claude Juncker and the Commission's José Manuel Barroso argued against treaty change.

The heads of government now seem confident that a small treaty change can be achieved without too much pain. They have reached a tacit understanding to limit the change to the establishment of the new institution, and to rule out any other amendments. The Lisbon treaty contains a 'fast track' procedure that allows the heads of government to agree a change, by unanimity, without the need for a convention (the mix of MPs, MEPs and government representatives that drew up the constitutional treaty that later became the Lisbon treaty) or an inter-governmental conference. But two conditions must be satisfied: the change must not transfer powers to the EU, and it must concern the implementation of EU policies, rather than the fundamentals of the Union. The clause the Germans want should meet those conditions.

The fast-track procedure still requires each member-state to ratify the amendment. The Irish and the Danes seem to think they can avoid referendums. In the Netherlands, the populist Dutch Freedom Party and the left-wing Socialist Party are both threatening to demand a referendum, but they lack a parliamentary majority. In the Czech Republic, President Vaclav Klaus could create problems, as he did by delaying the ratification of the Lisbon treaty. In any case Czech eurosceptics are likely to challenge the amendment in the constitutional court, on the grounds that it gives the EU more power and therefore merits a referendum. Britain will not be affected by the new rules on eurozone governance, since it has an opt-out from treaty provisions on the euro. Nevertheless Conservative eurosceptics want Prime Minister David Cameron to block treaty change until the other member-states grant Britain new opt-outs from the treaties in areas such as social policy. Cameron seems determined to face down the eurosceptics. He will accept the amendment so long as other governments help him constrain the growth of the EU budget. At the moment France, Germany and about half the member-states are backing Britain's efforts to hold the rise in next year’s budget to 2.9 per cent.

The Germans did not get everything they wanted at the summit. There was little support for their scheme to deprive governments that borrow too much of voting rights. They have had to accept the Van Rompuy report's argument that imbalances should be monitored. But the Germans achieved most of their key objectives. France had opposed stricter rules and quasi-automatic penalties for over-borrowed countries, a formal debt restructuring mechanism, and treaty change. But now it has accepted those German priorities – without appearing to get a great deal in return.

Visiting Paris just after the summit, I was struck by the deferential tone of some French officials when they talked of Germany. They noted that Germany is in a supremely self-confident mood because of its export surge to emerging markets. They thought this was not the right time to tell the Germans that their economic model was marred by a low level of domestic demand, and that that was aggravating the eurozone crisis. Much better to suggest gingerly that Germany would benefit from taking specific steps such as increasing investment and spending on R&D, lengthening shopping hours and getting more women into the workforce. Such steps would in the long term help to rebalance the eurozone. These French officials may be right on the tactics of how best to deal with the Germans.

In Paris, some senior figures fret about Germany's seemingly superior economic performance, compared to France and other EU countries, and about its economic structure – very focused on emerging markets – which seems to be diverging from that of its partners. "Will Germany lose interest in the EU?" they ask. For several years the French – and many others – have worried about Germany becoming less 'European' and more focused on the east, for example through its special relationship with Russia.

One French response is to stay close to the Germans in order to retain influence with them. That has been evident in Russia policy: in recent years France has emulated Germany's soft approach towards Moscow (which is not to say that that policy is necessarily wrong). And that response has also been evident on the euro. At the Brussels summit several smaller member-states complained about having to fall in behind deals stitched together by Paris and Berlin. But so long as the French continue to back the Germans on eurozone governance, their partners – and the EU institutions – have little choice but to follow.


Charles Grant is director of the Centre for European Reform

Comments

Added on 04 Nov 2010 at 11:45 by Ben Tonra

Irish Government views on whether or not a referendum to establish the new institution is required are not determinative. The Attorney General will provide advices on any treaty text that is proposed. The cabinet will then make its decision as to whether or not a referendum is to be presented to parliament, etc.

The political dynamic will favour a referendum. Since the SEA, no substantive treaty amendment (apart from enlargements) has been ratified by Ireland without one.

Legally, it is open to any citizen to challange parliamentary ratification. The Courts' judgement will hinge on whether or not the measure proposed alienates Irish sovereignty and/or alters the essential scope or objectives of the Union. As a non Lawyer, that strikes me as a crap-shoot.

Added on 03 Nov 2010 at 20:04 by MARIA LIANOU, MA, ATHENS UNIVERSITY

The procedures appeared in the EU Summit are the first measures of the European Union against the economic crisis that tested the viability of the euro and the Union itself. However, these proposals are based on the logic of member states’ discipline and associated sanctions. Fiscal discipline by itself cannot manage the deficits and reduce the Eurozone imbalances. In other words, the present proposals do not correct the deeper or hidden causes of the crisis, as they do not lead to a proper economic union. The solution is the convergence of economies. Moreover, the process of European integration has historically shown that EU takes initiatives towards deeper integration when it faces crises. This tendency seems to be confirmed by the current crisis as well. This economic crisis ought to become the opportunity for a further deepening of integration, in other words for “more Europe”. This is what we need today. Any other choice is a return to the past and a dead end possibly having disastrous consequences. The European Federation should be, without any doubt, the final destination of the European integration.

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