March « 2013 « Euro

Archiv: March 2013

Halftime in Cyprus

27. March 2013, von Alexandre Abreu, Comments (0)

Analysing the latest acute episode of the euro crisis, Cyprus, on March 26th is a bit like writing a match report at halftime: you’re bound to get much of the story right, but if you try to predict the final outcome, you may very well miss – by an inch or by a mile. And as it happens, this particular crisis episode is very much at halftime: after intense negotiations and some extraordinarily clumsy backing and forthing by the Eurogroup and the Cypriot authorities, a deal has finally been brokered that involves a 10€ billion emergency loan, differential treatment of the various banks, austerity (as always), a bail-in of the holders of bonds and deposits over 100,000€ (the big novelty) and no penalty on holders of deposits under that amount (albeit after an announcement to the contrary with indelible consequences, more on which below). However, the banks in Cyprus remain closed to the public as I write, with strict restrictions on movements and withdrawals in place, and no one really knows what will happen once depositors are once again allowed to access their money. My own guess, taking into account the rationality of bank runs and the stage that has been set by the political handling of this crisis, is that the Cypriot banking system may well come crumbling down in a matter of days – and it’s anyone’s guess what that could unleash. We shall soon find out, however, so rather than play the role of Cassandra here, I shall instead dwell on some of the lessons that, even at halftime, we can already draw from the Cypriot crisis – and there are some interesting ones to be drawn.

1. It ain’t over till it’s over. By now, there have probably been a hundred different speeches claiming that the worst of the euro crisis is behind us. In some instances, this has been based on wishful thinking regarding the imaginary virtuous properties of the fiscal compact and structural reform (read: permanent austerity, labour market deregulation and privatisation). In other cases, it has been supported by the peripheral countries’ ‘return’ to the bond markets (really due to the OMT) or the reduction in their current account deficits (mostly a consequence of recession). For all this magical thinking, however, the fact of the matter remains that the eurozone as a whole is in recession and looks set to plunge even deeper; the number of countries that have had to resort to emergency loans has by now reached a handful (Greece, Portugal, Ireland, Spain and Cyprus); the social and economic situation is dire across the eurozone periphery and catastrophic in the hardest-hit countries; and the question in many people’s minds is which country will be next, with several candidates in line. So really, it’s far from over.

2. Every unhappy eurozone member is unhappy in its own way. Each troubled eurozone country has its own set of specific troubles, including the unraveling of massively bloated financial systems, busted housing bubbles, distorted specialisation patterns, loss of international competitiveness, or various combinations of the above. Make no mistake about it, however: there is one common cause underlying all of these epiphenomena, and that cause is an ultimately flawed monetary union without a sovereign to back it.

3. All creditors are equal, but some creditors are more equal than others. Throughout the Eurozone crisis, creditors (typically bondholders) have by and large been treated as sacrosanct. The argument has always been that default or suspension of debt/interest repayment is really not an option, because once you scare investors away, it’s well-nigh impossible to regain their trust. In the Portuguese case, for example, this is used to justify paying out 10 billion euros in interest on public debt in 2013 (more or less equivalent to total public spending on health), even as the economy collapses for lack of domestic demand and even as it is increasingly obvious that a default, or at least major haircut, isinevitable further down the road (public debt amounting to 120% of GDP, with an implicit average interest rate of 5%-6% and absent inflation, can never be repaid by the government of a shrinking economy). Now, what the Cyprus banking crisis has shown is that creditors are not so sacrosanct after all, and it’s alright to scare them away if most of those creditors are not financial institutions from the European core – particularly if there’s a fair chance that these creditors might be scared away from Cyprus and onto Luxembourg or the Netherlands. Indeed, taking into account how all the Cyprus-bashing as an offshore haven for Russian mobsters and oligarchs fails to recall the amount of money laundering that takes place in Luxembourg, the Isle of Man, the Netherlands – and even Germany, for that matter –, one might add that all offshore havens are equal, but some are more equal than others.

4. Once the cat is out of the bag, you probably won’t be able to catch it. The Cypriot banking crisis has been quite extraordinary not only because this is the first time that creditors are called upon to suffer losses as a pre-condition for a bail-out, but also, and especially, because the initial plan involved overriding the EU-wide insurance on deposits under 100,000€ by levying a 6,7% penalty on those deposits. This figure was subsequently reduced to 3%, and then dropped altogether, but by then the cat had already been let out of the bag: depositors in Cyprus, across the Eurozone periphery and in fact across the Eurozone as a whole now know that, under certain circumstances, the European authorities are willing to sacrifice small depositors. Now that’s what I call a sure way of triggering some major bank runs across the Eurozone. But then again, let me not play Cassandra here.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Getting Cyprus Wrong – and Germany Too?

27. March 2013, von Almut Möller, Comments (1)

The agreement on Cyprus concluded this week will turn out as a burden to policy-makers in Europe for both next steps related to Cyprus and the Eurozone rescue as a whole. The best take I have read so far is by Bruegel’s Nicolas Véron, who in his latest commentary addresses the manifold arenas in which the case of Cyprus will play out in the months to come.

Véron also discusses the role of Germany, making the point that the Cyprus agreement was held hostage by Germany’s federal electoral campaign, and Berlin as the “unquestioned central actor” in the Eurozone contributed to undermining trust won back in 2012. I agree that domestic politics played a major role for the governing coalition of Chancellor Merkel. The last thing Merkel wants is a euro controversy tainting the so far bright prospects of her re-election, and headlines in German local newspapers this week did her a favour by stating “Citizens’ deposits safe in German banks”.

The question is, despite the opposition trying to capitalise on the government’s potentially damaging slip and on the anti-Merkel mood in Cyprus and other parts of Europe: with a different government in power in Berlin, would the stance on Cyprus have looked significantly different? I doubt it.

German sociologist Ulrich Beck provided what I consider the key to understand German thinking in an interview published by the London School of Economics’ EUROPP blog this week. It is a crucial hint to understand the German soul throughout the past, present and future of the crisis, which is why I quote it in full length:

“(…) Germany’s austerity policies are not based simply on pragmatism, but also underlying values. The German objection to countries spending more money than they have is a moral issue which, from a sociological point of view, ties in with the ‘Protestant Ethic’. It’s a perspective which has Martin Luther and Max Weber in the background. But this is not seen as a moral issue in Germany, instead it’s viewed as economic rationality. They don’t see it as a German way of resolving the crisis; they see it as if they are the teachers instructing southern European countries on how to manage their economies.”

From the crumbling of the City of London during the first wave of the crises through the debt and governance failure in Greece to what is now being described as a ‘fatal business model’ in Cyprus in German papers, there has always been a moral, even moralistic undertone in the German debate, which people outside Germany are struggling with. For Germans themselves, however, it makes a lot of sense. There is a sense of unfairness felt in Germany when witnessing a growing anti-Germany mood in the streets of Cyprus, Italy, Greece and elsewhere: after all we are the good Europeans, not the bad ones, in helping others to find their way back to what we believe is a ‘good’ way of running an economy, and a government responsive to citizens’ needs. And we are even helping with our taxpayers’ money.

In government circles in Berlin this is framed positively and, with what I believe is a genuine sense of responsibility, as help in ‘forging a new social contract’ in countries affected by the crisis. In other parts of Europe, however, Germans cause increasing outrage for allegedly not tolerating any other system than their own, and for playing a moralistic blame game against “hubris, greediness and wilful negligence” (this is how a leading German conservative daily put it today, suggesting to turn the headquarters of the soon to be closed Laiki Bank into a “museum of greed”).

I understand that it is getting harder to believe in the rest of Europe when reading such commentary (and the list of similar quotes has become long in the course of the crisis) that Berlin has good intentions, and that it genuinely does not want to dominate or destroy other countries’ economic and social models. Keeping in mind the hugely formative driving force to German thinking as described by Ulrich Beck might deliver a key to understanding Germany better.

But Germans have to do their part too. In my observation there is still a lack of real understanding of how and why Germany is perceived by others as lacking empathy among policy makers in Berlin. And those who indeed are aware of these perceptions are playing an increasingly dangerous game by ignoring them or playing them down as a natural sight effect that comes with strong leadership.

If I was to revisit the findings of a set of papers that we published in mid-2012 on how Germany is viewed by other EU Member States, by now the results will certainly give much more reason for concern regarding Germany’s role in Europe. Perceptions matter in European politics, and they might turn against German leadership and narrow Berlin’s room for manoeuvre – to the detriment of Germany and Europe.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

What a Tomato Can Tell us about the Euro

22. March 2013, von Adriaan Schout, Comments (0)

In order to form an opinion on the effects of the euro, we could start out from a simple question: what sort of impact had the introduction of the euro on a specific product, let us say a tomato, that a country (e.g. the Netherlands) cultivates and exports? The Netherlands has a strong horticultural sector. At first sight, it seems as if the Dutch exports in horticultural products have benefitted greatly from the euro. In 2010, almost 10% of the workforce worked in the production, knowledge development and trade of vegetables and fruits. 75% of the exports of tomatoes, cucumbers, paprika, etc. were within the EU. Exports within the EU have benefitted from European integration since 1992 with the removal of trade barriers, the definition of common food laws, the protection of patent rights and the introduction of the euro. Since the introduction of the euro in 2002 the exports of vegetables and of fruits have increased massively with 90% and more depending on products and regions. Exports to southern European Member States have proven to be particularly impressive with a growth of 241% between the introduction of the euro and 2010. Does this mean that the euro was a big success?

There are many reasons for this sharp increase in exports from the Netherlands and for the increasing imports by the southern Member States. One explanation for the favourable exports between 2002 and 2010 was the introduction of the euro. Tomatoes and related products are bulk products with low margins. Hence, the export success depends on enormous volumes combined with low profits margins. As a result, small changes in costs result in major changes in trade. The introduction of the euro contributed in two ways to the export success. The euro implied lower transaction costs, and lower costs with bulk products imply more exports. In addition, the economic conditions in the southern countries was inflated due to investments in housing, the inflow of cheap capital and high consumption. There were few incentives within the eurozone to lower wages and prices. As a result, Dutch horticultural exports to southern Member States flourished and investments in production went up, meaning that the success of the Dutch production and exports was partly a sign of failing market adjustments in the south.

Evidently, this upswing in Dutch exports has had its flip sides. Production in the south was pushed back before 2010. At the same time, investments in the Netherlands had gone up leading to the current overcapacities. These days, Dutch export of tomatoes within the EU is dropping. At first sight, this might appear to be a logical consequence of the general economic crisis given that consumption is falling in many eurozone countries. What is much less realised is that it is also the introduction of the euro that can partly be blamed for the present economic setback in horticulture. Currently we see wages in southern eurozone countries dropping, production and export of horticultural articles from the south are increasing, and, as a result, imports from the Netherlands drop and exports to the northern countries increase. Dutch export is not only dropping towards southern countries but also towards countries like the UK due to stronger competition from southern tomatoes.

Looking back, it would have been better had the market for horticultural products remained more in balance. The success of the exports was in part the result of failing markets within the eurozone. Would markets have adapted more smoothly, exports from the Netherlands would not have grown so fast and this would have prevented overinvestments and less adjustments once the crisis set in. Similarly, production in the south would have increased earlier had markets been more flexible.

This shows that the introduction of the euro – a macroeconomic development – resulted in microeconomic imbalances in the market for horticultural products. Looking back, the increase in Dutch exports following 2002 was too high and is now followed by a reversal of trade flows. The story of the tomato tells us that the increase in exports due to the euro was also a sign of insufficient adaptations in the south and has resulted in a hard landing that could have been prevented had the euro not functioned as a ‘sleeping pill’ to postpone market adaptations. At the same time, export surpluses were not matched by adaptations in exchange rates so that adaptions in the end have been more abrupt. What goes up must come down. Paradoxically, the euro has aggravated the ups and the downs. Like it or not, the well-functioning of markets is even more important with the euro.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Is there an Alternative for Europe in Germany?

15. March 2013, von Almut Möller, Comments (1)

In my last blog I made the point that despite Germany being a major player in the reform of the eurozone and despite federal elections taking place in the fall of 2013, Germans at the moment seem rather indifferent about the eurozone’s future direction.

I found this to be rather baffling, since the decisions taken by eurozone leaders these days are not mere technical or legal adjustments, but will determine the substance of policies in the currency union and have already done so.

But is it really true that Europe is absent in the minds of German citizens? Perhaps it is a question of weeks now.

The election campaigns haven’t got into full swing yet, as the political parties are still in the process of putting together and adopting their platforms. And it was only this week that a new party with a distinctly anti-euro profile has entered the stage (to which I will come back).

Over these past two weeks, both the leaders of the Green Party (BÜNDNIS 90/DIE GRÜNEN) and the Social Democrats (SPD) have presented their draft platforms to the public. The Greens will put the draft to their party congress in Berlin in late April. In June, every party member gets the chance to cast a vote on the top ten priorities for the Green campaign. As to the Social Democrats, their party congress will convene in mid-April in the southern German city of Augsburg to adopt the 2013 platform. Those seeking for “Europe controversy” in the country notorious for its “Europe consensus” are likely to eventually find some food for commentary at these gatherings.

Leafing through the 100-pages platform of the SPD and searching for “Europe”, there was a particular thing that struck me. EU matters have usually been framed as a grand thought and duty for Germany, more of a political ritual found in intros or conclusions, or in the obligatory chapter at the end in pamphlets of this kind (sometimes together with foreign policy). For voters that made the effort to read through those pamphlets, things must have quite naturally looked as something of a separate matter (“We will work for a better Germany for you, and then there is also the EU which we, good Germans as we are, want to build.”).

Today, European affairs have become much more a matter of policy substance – and with issues such as budget and banking supervision or the tax on financial transactions, quite naturally, intertwined with the domestic context. The new message, accelerated by the past years of crisis, is “We will work for a better Germany for you, and our playing field to achieve this is also Europe”. In other words, we can only preserve our freedom, prosperity and social justice in this world when taking much more responsibility for each other. My guess is that this is a line that still won’t go down naturally with traditional SPD voters.

Needless to say that for the Greens, advocating Europe in such a way is an easier argument to make. The party’s environmental agenda, one of its main pillars since entering the formal political arena in Germany thirty years ago, is by its very nature a field in which the borders of nation-states do not matter all that much.
It is too early to tell though whether the parties challenging Angela Merkel’s return to the chancellery manage to frame their agendas to really make a difference – and to portray European affairs no longer as a matter of statecraft at EU summits, but of political choices, of political drama and of majorities.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

The French Squeeze

14. March 2013, von Adriaan Schout, Comments (0)

There are signs that the economies in the eurozone are picking up in various ways. Recent figures of the ECB on Target2 (the capital account of the eurozone countries within the ECB) show remarkable signs of improvement. The claims of the triple-A countries Germany, Finland and the Netherlands on the problem countries are going down. The Dutch and the German claims at the peak of Target2 lending in 2012 amounted to € 173 billion and € 750 billion, but these have dropped by almost 20% since. There are many explanations for this development. Draghi’s promise to do ”whatever it takes” to keep the eurozone intact, has created the trust needed to restart trade in sovereign debt of Spain, Ireland, Portugal and Italy. In addition, (wage) reforms and austerity measures have reduced the imports; investors are returning and exports of for example horticultural products are increasing.

These developments in the south imply enormous reductions in risks for the budgets of northern countries. If the situation in the problem countries had deteriorated, the Target2 claims could have end up as losses – and downgrades – for the triple-A countries. These claims are not just important in terms of abstract risks on the ECB books, but they also have practical implications for the national debt positions. The Dutch government used the profits from the Central Bank on the sovereign debts from Southern countries to lower its public debt figures, so that the deficit is at least cosmetically closer to the 3% monitored by Olli Rehn. However, including the Target2 risks of the ECB in the national budgets would show that national debts are potentially much higher. Also in this respect the drop in the ECB’s Target2 exposure is good news.

However, the difficulties in the eurozone and the Target2 risks are far from over. The Global Competitiveness report for 2012-2013 displays the many remaining economic hurdles in the eurozone including repeated warnings over inflexible labour markets in Spain. Moreover, the outcome of the recent elections in Italy obviously creates additional challenges.

The real worry however is France. Its Target2 deficit has not gone up due to the deterioration of its current account. Moreover, its public debt is rising above 95% – which means that its debt becomes unsustainable. The global competitiveness index of France has fallen last year from 18 to 22. It is doubtful whether the French social economic institutions – including its labour relations – are up to the economic challenges France is facing. Despite the efforts of Olli Rehn with the reinforced EU semester, France has shown few signs of improvement over the past year. Worryingly, with the economic reforms in its neighbouring countries including Spain and the Netherlands, its competitiveness and current account balance is being threatened from all sides.
We saw in August 2011 that financial markets woke up to the worries over Italy’s economic situation. Typically, this awakening did not happen with a whisper but with a bang. The crisis in the eurozone was then probably at its worst because of the size of the Italian economy. An immediate crisis over France may not be around the corner, but all ingredients for the next major euro problem are present. Symbolically as well as economically, a eurocrisis over France would be extremely damaging to the European integration project as a whole.

It is surprising that the French interest rates are currently still comparable to those of Germany. Either financial markets are irrational or they are counting on Draghi’s unconditional support for France. Both explanations would be very dangerous economically and politically. Irrational financial markets could prove to be extremely volatile and a repetition of August 2012 is possible. Alternatively, German – and Dutch – patience with Draghi and the ECB could reach its limits. FDP chairman Brüderle already warned France that reforms are needed. The EU cannot afford an existential crisis because of French economic negligence.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

The European crisis explained in two graphs

13. March 2013, von Aldo Caruso, Comments (1)

Guest contribution by Ricardo Paes Mamede (Assistant professor at the Department of Political Economy of ISCTE – University Institute of Lisbon)

A long book is probably too short to explain the European crisis in full length and depth. However, the essential causes of this crisis can be grasped with two simple ideas.

1) The sovereign debt crisis stems from the accumulation of external debt (both public and private) in some EU economies since the early 1990s

Since 2010, the interest rates on the sovereign bonds of some EU countries has increased sharply. According to the official view, the causes of this sovereign debt crisis are to be found in unsustainable national fiscal policies and the postponement of ‘structural reforms’– mainly labour market liberalisation and pension systems’ reforms – in the countries most affected by the crisis. But this is not what the data show. Fiscal developments and changes in labour market laws and pension systems vary widely across countries, both among those most affected by the crisis and among the remaining EU member states. On the contrary, as the first graph shows, the relation between the sovereign debt crisis and external indebtedness (public and private) is rather clear: countries whose sovereign debt interest grew the most in 2010-2012 were those which accumulated more external debt since the mid-1990s (Figure 1).

Figure 1 – Correlation between the accumulation of external debt (% of GDP) and sovereign debt crisis

Change in % of GDP between 1996 and 2008

Change in % of GDP between 1996 and 2008

Source: AMECO
Notes: External indebtedness is measured by the International Investment Position, a commonly used indicator of external debt. Data on some EU countries is unavailable for the period under analysis, namely: Bulgaria, Cyprus, Estonia, Slovenia, Ireland, Malta and Romania.

Therefore, in order to understand the causes of the European crisis first we have to explain why some countries accumulated more external debt (public and private) than others over the years. This brings us to the second idea.

2) The determining factor behind the growing indebtedness of some countries (and improved external position of others) is the specialization profile of each national economy

In the 20 years preceding the global crisis of 2008/9, EU economies have undergone significant transformations, most of which were politically induced. These include: the abolition of customs barriers within the EU, the creation of the internal capital market, the liberalization of financial flows and activities, the increasing EU level control over monetary and fiscal policies, the trade agreements between the EU and China (and other emerging economies), the Eastern EU enlargement, the appreciation of the euro against the dollar (from 2003), or the sharp increase in oil prices (between 2002 and 2008). These changes encompassed all Member States, but had very different impacts across countries. Lacking the appropriate policy instruments to manage such impacts, countries with less advanced productive structures accumulated more debt (public and private) than the others. This is shown in Figure 2.

Figure 2 – Relationship between the accumulation of external debt and the specialization profile of each national economy

% of business employment, 1998

% of business employment, 1998

Sources: Eurostat and AMECO
In other words, the rules and institutions of the EU have proved very suitable for certain economies with more advanced productive structures, but detrimental for others. It is worth noting that productive structures take a long time to change, regardless of the policies pursued at the national level.



It makes little sense to sustain that the sovereign debt crisis is fundamentally caused by government misconduct in specific countries. To be sure, citizens from different parts of Europe have many reasons to complaint about the quality of their democracies and the about decisions taken both at the national and the EU levels. Still, the main mistake of the national leaders of those countries most affected by the crisis was probably the decision to participate in the European integration process according to the rules that were adopted in the past decades, without anticipating the difficulties this would create for their economies. Their greatest mistake will be to persist in the same path.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

Supported by