Challenges of Eurozone Integration on Europe's Competitiveness
The integration of Eurozone has brought about various crises, including financial, debt, political, and competitiveness crises. The use of a single currency with uniform interest rates has led to imbalances and political stalemates within the Eurozone. High debt levels among Eurozone countries, particularly the PIIGS nations (Portugal, Italy, Ireland, Greece, and Spain), have raised concerns about financing needs. The reliance on ECB cash during the banking crisis has further highlighted the challenges. Additionally, the real unit labor cost trends show disparities among Eurozone countries, affecting their competitiveness.
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Why further eurozone integration could hurt Europe s competitiveness 1
Europes four crises Financial crisis Debt crisis Political crisis Competitiveness crisis Bank crisis 2
The role of the euro The crisis started in the US but... ...the euro locked it in: One-size-fits-all interest rates Perverse incentives Exposed tremendous imbalances Political stalemate 3
Debt crisis: Financing needs PIIGS 2013 - 2015 ( bn) 0 50 100 150 200 250 300 350 400 450 500 2013 Greece Ireland Italy 2014 Portugal Spain 2015 5
Bank crisis: Size of banks relative to GDP 6
Banking crisis: The reliability on ECB cash 1,400,000 1,200,000 1,000,000 800,000 millions 600,000 400,000 200,000 0 May-08 May-09 May-10 May-11 May-12 Jan-08 Mar-08 Jan-09 Mar-09 Jan-10 Mar-10 Jan-11 Mar-11 Jan-12 Mar-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jul-08 Nov-08 Jul-09 Nov-09 Jul-10 Nov-10 Jul-11 Nov-11 Jul-12 7 Greece Ireland Italy Portugal Spain SMP Total
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 -750 GIIPS -1,250 Euro Crisis Monitor Institute of Empirical Economic Research Osnabr ck University 8
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 90 9 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Competitiveness: Internal devaluation 50 45 40 Difference to German labour costs (%) 35 30 Peak 25 2011 2012 20 15 10 5 0 10 Greece Ireland Italy Portugal Spain
Competitiveness: Unemployment levels (%) 45 40 35 30 25 20 15 10 5 0 11 EU (Total) PIIGS (Total) EU (Youth) PIIGS (Youth)
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 Total OECD 13
Is fiscal / banking union the answer? Inexorable logic of the euro? Joint back stop for banks (deposit guarantee scheme / resolution fund) Fiscal distribution (eurobonds / transfers) 14
1. Can Germany afford it? Superman: "Easy, Miss, I've got you." Lois Lane: "You...you've got me, who's got you?" 15
Germanys 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 ES 30.00 20.00 10.00 0.00 2010 2020 2030 2050 2060 16
2. How to avoid moral hazard in a fiscal / banking union? Will it be possible to incentivise reforms in a fully fledged fiscal / banking union? How to avoid d j vu? Berlin s answer: strict central controls 17
Political crisis: 17 national democracies 17 national parliaments Electoral cycles Constitutional limitations Public opinion No demos = Massive risk of political backlash 18
Support for a transferunion? Support for greater eurozone integration vs debt pooling (Germany) 83% 79% In favour Against 14% 12% Stronger coordination of economic policies in the eurozone Eurobonds 19 Sources: Eurobarometer/ZDF
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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 Trust Do not Trust
What alternatives? 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? 21
