Europe in crisis
Economic, refugee and confidence crises. The EU is currently having to fight on many fronts at the same time.
It was back in 2007 that the US property bubble burst, sparking the global economic crisis. The collapse of the Lehman Brothers investment bank in 2008 marked the first low-point of the financial crisis. For the European Union, however, the danger was by no means over: the billions of euros of tax revenue that had to be used to protect banks from insolvency soon plunged European countries into a debt crisis, and shortly thereafter into the Euro crisis. Greece in particular faced a huge loss of confidence on the international financial markets - from which Germany gained significant benefit, by the way.
European decision-makers were confronted with huge challenges, most notably the European Central Bank (ECB). In order to revive the economy, it has been pursuing a much-criticised excessively low interest rate policy for years, even though this is expected to benefit German households. Since 2015, the ECB has been buying bonds from European institutions and States - an extremely well-founded measure. Since June 2016, it has also been buying corporate bonds and published the results of its second stress test round in July 2016.
"ECB is one of the few institutions contributing to the solution."
It is clear that the ECB is implementing specific measures to provide new impetus and increased security to the European economy. “It is one of the few institutions contributing to the solution,” according to Reint E. Gropp, President of the IWH. “But a sustainable solution requires far more decisive political action”. Because new calculations by the IWH also show that the reserves of the European banks are increasing at the ECB - a highly unusual situation.
The refugee crisis is the EU's second major front. A lack of cooperation between Member States has allowed the humanitarian crisis to spread and intensify. And the agreement with Turkey also appears to be precarious. Leading European politicians must now quickly find solutions to the many challenges that have arisen as a result of refugee migration: humanitarian aid, distribution and immigrants' integration into the employment market. And science must also provide analyses and potential solutions. The Leibniz Research Alliance, “Crisis in a Globalised World”, has also investigated the refugee crisis, for example.
On a third front, the EU is battling the dwindling confidence of its citizens. In addition to the growing popularity of Euro-sceptic parties in Member States, the crisis of confidence has further manifested itself in the form of Brexit. A further break-up of the EU can only be prevented, however, if Europe's leading politicians, most notably the new French President, Emmanuel Macron, and Angela Merkel, take a clear stance. The election of Donald Trump in the US has also resulted in further uncertainty for Europe.
Crises are always an opportunity for change. It's no secret that there is improvement potential in many areas of the EU. Perhaps Europe's crises will finally initiate major change processes: improvements in the democratic legitimacy of the EU institutions, less regulation in employment and product markets, a reduction in bureaucracy in both the EU and its Member States, the broad implementation of the capital market union and a new emphasis on EU spending. Only then will the EU be sustainable, prepared for future financial crises, with or without Great Britain, and strengthened by a new cohesion.
Current IWH Publications
Von der Transformation zur europäischen Integration: Auf dem Weg zu mehr Wachstumsdynamik – ein Tagungsbericht
in: Wirtschaft im Wandel , No. 2, 2016
Unter dem Titel „Von der Transformation zur europäischen Integration: Auf dem Weg zu mehr Wachstumsdynamik“ hat das Leibniz-Institut für Wirtschaftsforschung Halle (IWH) gemeinsam mit Partnern aus Universitäten in Mitteldeutschland am 22. Februar 2016 Forschungsergebnisse zu den Folgen des Strukturwandels, zur Erzielung von mehr Wachstumsdynamik und den wirtschaftspolitischen Rahmenbedingungen hierfür präsentiert.
EFN Report Spring 2016: Economic Outlook for the Euro Area in 2016 and 2017
No. 2, 2016
Global growth will stay rather moderate this year. The peak of the upswing in the US appears to be over. For Japan, after three years of “Abenomics”, a prolonged upswing is still elusive. In China low profitability and high debt levels of many government-owned industrial firms continue to drag growth down. The low prices for commodities heighten uncertainty and volatility on financial markets since they increase the risks of financial crises in economies that are dependent on commodity exports. In the euro area, chances for the recovery to continue are good, as this year, like in 2015, oil prices will probably be markedly lower than they were a year ago, supporting real income of private households and lowering production costs of firms. In this context, our forecast is that euro area GDP will expand by 1.6% in 2016 and by 1.7% in 2017. These rates are higher than the rate of potential growth, but they are arguably low given the expansive monetary policy and the strong stimulus from decreased commodity prices. We do not expect an increase in euro area inflation during 2016, but prices will grow by around 1% in 2017, because the dampening effects of decreasing energy prices slowly fade off and the euro remains rather weak. However, risks for this cautiously optimistic forecast are substantial. New shadows on the financial sector, the uncertainty about whether or not the British will vote in favour of membership in the European Union and the lack of a viable political solution for the refugee crisis are some of the main uncertainties behind these forecasts.
Mere Criticism of the ECB is no Solution
in: One-off Publications , No. 1, 2016
Criticism in Germany of the ECB is counter-productive. Monetary policy must remain expansive so that it can at least begin to fulfil the ECB mandate. The preservation of its credibility also demands that. Instead of the ECB doing less, European policymakers must do more. They need to act more decisively to set Europe back upon a growth path. [A shorter version was published under the title “Kritik an Draghi ist noch keine Lösung“ in the Frankfurter Allgemeine Sonntagszeitung of April 10, 2016]. Policymakers, including in Germany, can no longer shirk their responsibility for the current economic situation in large parts of Europe. That calls for growth-friendly fiscal policy, structural reforms to open up new markets and consolidation and restructuring of the financial sector. We in Germany, above all, must look in the mirror, because we need the majority of these reforms just as urgently as our European neighbours do.
Multidimensional Well-being and Regional Disparities in Europe
in: IWH Discussion Papers , No. 13, 2016
Using data from the OECD Regional Well-Being Index – a set of quality-of-life indicators measured at the sub-national level, we construct a set of composite well-being indices. We analyse the extent to which the choice of five alternative aggregation methods affects the well-being ranking of regions. We find that regional inequality in these composite measures is lower than regional inequality in gross-domestic product (GDP) per capita.
“The German Saver” and the Low Policy Rate Environment
in: IWH Online , No. 9, 2015
It is widely claimed that “the German saver” suffers (i.e. generates significantly lower returns on her savings) in the low interest environment that Germany currently experiences relative to a high interest rate environment. With “low interest rate environment”, the observers tend to mean “low policy rates”, i.e. the European Central Bank’s (ECB) main refinancing rate.