The new Europe
The financial crisis is largely over, yet confidence in the ECB and EU remains low. Thanks to Brexit and populism, there is currently no shortage of challenges – nor of a visionary upswing in some parts of Europe.
In a nutshell
Billions in taxpayers' money has been spent rescuing banks since the financial crisis erupted in 2008. From the debt crisis to the euro crisis, the EU stumbled from one low point to the next. Greece in particular had to contend with a loss of confidence on the international financial markets – from which Germany gained considerable benefit, by the way. The refugee crisis followed in 2015, with the Brexit referendum in the UK and the election of Donald Trump in 2016. But new visionaries also took to the international stage, including the new French President, Emmanuel Macron.
In order to reboost the economy, the European Central Bank (ECB) has been pursuing a much criticised excessively low interest rate policy for years, which we can assume is benefitting German households, however. Since 2015, the ECB has been buying bonds from European institutions and states – a measure for which there are justifiable grounds. Since June 2016, it has also been buying corporate bonds, and published the results of the second stress test round in July 2016.
"ECB is one of the few institutions contributing to the solution."
It turns out that the ECB is taking specific action to continue providing momentum and 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 to achieve a sustainable solution, politicians need to act much more decisively." However, countries are different as to how quickly they implement reforms and hand oversight over to EU-institutions.
The refugee crisis was and still is one of the EU's main stumbling blocks. A lack of cooperation between member states has allowed the humanitarian crisis to continue to spread, with immigration and the distribution of refugees remaining a critical issue, despite the EU-Turkey Agreement. Immigrants' integration into the labour market, especially in Germany, will remain a political challenge for decades. But science must also provide analyses and potential solutions. For example, the Leibniz Association's "Crises of a globalised world" research network has addressed the issue of the refugee crisis.
Migration was and is a constant issue when it comes to Brexit. But the UK's decision to leave the EU also touched on other economic dimensions: Even before the referendum, an IWH study had already suggested that the pound would react strongly to the UK's departure. With the increasing likelihood of Brexit, more than 50% of researchers asked by Thomas Krause predicted a significant devaluation of the pound against other currencies, including the euro. Stock market price volatility therefore reached record levels ahead of the referendum. "This turbulence reflected the uncertainty that was and is associated with the Brexit decision", states Gropp. The President takes a calm view the fate of London's financial centre, however: "London's financial centre will retain its dominant position within Europe despite Brexit. This is based on both the experience gained from the introduction of the euro and is also due to London's considerable location factors: the size of the city, the regulatory environment and its human assets." Should the United Kingdom withdraw from the EU in a „hard Brexit“ in March 2019, exports to Great Britain are likely to decline. Export-oriented EU countries such as France and Germany, as well as important suppliers like China would suffer job losses. In Germany, the car industry would be most affected.
On a third front, the EU is fighting for the confidence of its citizens. But while on the one hand, the popularity levels of eurosceptic parties rose or national conservative parties even governed some Member States in the past, the EU also appears to be reinventing itself: Neither Brexit nor the election of Donald Trump in the US have fractured the EU. On the contrary. Despite meeting with domestic resistance, French president Emmanuel Macron is a committed European. The EU also now aims to close ranks when it comes to defense.
Crises are always an opportunity for change. It is no secret that the EU has potential for improvement in many respects. Perhaps this new momentum will finally trigger other important change processes: improvements to the democratic legitimacy of the EU institutions, less regulation of the labour and product markets, a reduction in bureaucracy both in the EU and its member states, the implementation of the capital markets union and a new weighting for EU spending. This is the only way for the EU to remain sustainable – prepared for future financial crises and strengthened by new cohesion.
Publications on "The New Europe"
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, 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.
“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.
Germany’s Benefit from the Greek Crisis
in: IWH Online, No. 7, 2015
This note shows that the German public sector balance benefited significantly from the European/Greek debt crisis, because of lower interest payments on public sector debt. This is due to two effects: One, in crisis times investors disproportionately seek out safe investments (“flight to safety“), bidding down the returns on safe-haven assets. We show that German bunds strongly benefited from this effect during the Greek debt crisis. Second, while the European Central Bank (ECB) monetary policy stance was quite close to an “optimal“ monetary policy stance for Germany from 1999 to 2007, during the crisis monetary policy was too accommodating from a German perspective, due to the emerging disparities across the Euro area. As a result of these two effects, our calculations suggest that the German sovereign saved more than 100 billion Euros in interest expenses between 2010 and mid-2015. That is, Germany benefited from the Greek crisis even in case that Greece defaults on all its debt (a total of 90 billions) owed to the German government via diverse channels (European Stability Mechanism [ESM], International Monetary Fund [IMF], or directly).