Why further eurozone integration could hurt Europes competitiveness

Europe’s four crises Financial crisis Debt crisis 2 Political crisis Bank crisis Competitiveness crisis

The role of the euro l The crisis started in the US l but.

Debt crisis: Financing needs PIIGS 2013 - 2015 (€bn) 0 50 100 150 200

Bank crisis: Size of banks relative to GDP 6

7 Greece Ireland Italy Portugal Spain SMP Total Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11

Bank crisis / debt crisis: Net Balance within Eurosystem / Target [€bn] DNLF =

Competitiveness: Real unit labour cost trends selected euro members (1999=100) 150 140 Germany 130

Competitiveness: Internal devaluation 50 45 Difference to German labour costs (%) 40 35 30

2000 Q 1 2000 Q 2 2000 Q 3 2000 Q 4 2001 Q

Global competitiveness Labour productivity growth (%) 4. 0 3. 0 2. 0 1. 0

Is fiscal / banking union the answer? l l l 14 “Inexorable logic” of

1. Can Germany afford it? Superman: "Easy, Miss, I've got you. " Lois Lane:

Germany’s demographic trends Figure: Eurozone population projections selected member states 2010 - 2060 (millions)

2. How to avoid moral hazard in a fiscal / banking union? l l

Political crisis: 17 national democracies 17 national parliaments l Electoral cycles l Constitutional limitations

Support for a transferunion? Support for greater eurozone integration vs debt pooling (Germany) 83%

Support for central fiscal controls? Do you trust the EU (Portugal, Ireland, Italy, Greece,

What alternatives? l l l 21 Muddle through: Cash for austerity Transfer-union / bank-union:

Slides: 21

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Why further eurozone integration could hurt Europe’s competitiveness 1

Europe’s four crises Financial crisis Debt crisis 2 Political crisis Bank crisis Competitiveness crisis

The role of the euro l The crisis started in the US l but. . . the euro locked it in: – – 3 One-size-fits-all interest rates Perverse incentives Exposed tremendous imbalances Political stalemate

Debt levels in the eurozone (% GDP) 4

Debt crisis: Financing needs PIIGS 2013 - 2015 (€bn) 0 50 100 150 200 250 300 350 400 450 500 2013 Greece Ireland 2014 Italy Portugal Spain 2015 5

Bank crisis: Size of banks relative to GDP 6

7 Greece Ireland Italy Portugal Spain SMP Total Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 € millions Banking crisis: The reliability on ECB cash 1, 400, 000 1, 200, 000 1, 000 800, 000 600, 000 400, 000 200, 000 0

Bank crisis / debt crisis: Net Balance within Eurosystem / Target [€bn] DNLF = Germany, Netherlands, Luxembourg, Finland GIIPS = Greece, Italy, Ireland, Portugal, Spain 1, 250 DNLF 750 250 -250 Jan- May- Sep- Jan- May- Sep- Jan- May 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 -750 GIIPS -1, 250 8 Euro Crisis Monitor Institute of Empirical Economic Research Osnabrück University

Competitiveness: Real unit labour cost trends selected euro members (1999=100) 150 140 Germany 130 Ireland Greece Spain 120 France Italy 110 Cyprus Portugal 100 9 90 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Competitiveness: Internal devaluation 50 45 Difference to German labour costs (%) 40 35 30 Peak 25 2011 2012 20 15 10 0 Greece Ireland Italy Portugal Spain

2000 Q 1 2000 Q 2 2000 Q 3 2000 Q 4 2001 Q 1 2001 Q 2 2001 Q 3 2001 Q 4 2002 Q 1 2002 Q 2 2002 Q 3 2002 Q 4 2003 Q 1 2003 Q 2 2003 Q 3 2003 Q 4 2004 Q 1 2004 Q 2 2004 Q 3 2004 Q 4 2005 Q 1 2005 Q 2 2005 Q 3 2005 Q 4 2006 Q 1 2006 Q 2 2006 Q 3 2006 Q 4 2007 Q 1 2007 Q 2 2007 Q 3 2007 Q 4 2008 Q 1 2008 Q 2 2008 Q 3 2008 Q 4 2009 Q 1 2009 Q 2 2009 Q 3 2009 Q 4 2010 Q 1 2010 Q 2 2010 Q 3 2010 Q 4 2011 Q 1 2011 Q 2 2011 Q 3 2011 Q 4 2012 Q 1 2012 Q 2 Competitiveness: Unemployment levels (%) 45 40 35 30 25 20 15 10 5 0 11 EU (Total) PIIGS (Total) EU (Youth) PIIGS (Youth)

Global competitiveness 12

Global competitiveness Labour productivity growth (%) 4. 0 3. 0 2. 0 1. 0 0. 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -1. 0 -2. 0 -3. 0 Euro area 13 Total OECD

Is fiscal / banking union the answer? l l l 14 “Inexorable logic” of the euro? Joint back stop for banks (deposit guarantee scheme / resolution fund) Fiscal distribution (eurobonds / transfers)

1. Can Germany afford it? Superman: "Easy, Miss, I've got you. " Lois Lane: "You. . . you've got me, who's got you? " 15

Germany’s demographic trends Figure: Eurozone population projections selected member states 2010 - 2060 (millions) 90. 00 80. 00 70. 00 60. 00 DE 50. 00 FR 40. 00 IT 30. 00 ES 20. 00 10. 00 2010 16 2020 2030 2050 2060

2. How to avoid moral hazard in a fiscal / banking union? l l l 17 Will it be possible to incentivise reforms in a fully fledged fiscal / banking union? How to avoid déjà vu? Berlin’s answer: strict central controls

Political crisis: 17 national democracies 17 national parliaments l Electoral cycles l Constitutional limitations l Public opinion l No demos = Massive risk of political backlash l 18

Support for a transferunion? Support for greater eurozone integration vs debt pooling (Germany) 83% 79% In favour Against 12% 19 Stronger coordination of economic policies in the eurozone Sources: Eurobarometer/ZDF 14% Eurobonds

Support for central fiscal controls? Do you trust the EU (Portugal, Ireland, Italy, Greece, Spain)? 80 70 60 50 40 30 20 10 0 2001 20 2002 2003 2004 2005 2006 Trust 2007 Do not Trust 2008 2009 2010 2011 2012

What alternatives? l l l 21 Muddle through: Cash for austerity Transfer-union / bank-union: Who’ll be lender of last resort? Political and economic price? Euro break-up: Greece or more countries?