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The Euro Debt Crisis and Germany's Euro Trilemma

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  • Jorg Bibow
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    Abstract

    This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it. It is argued that the crisis is not primarily a "sovereign debt crisis" but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all--perpetual export surpluses, a no transfer / no bailout monetary union, and a "clean," independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global "too big to fail" threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

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    File URL: http://www.levyinstitute.org/pubs/wp_721.pdf
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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_721.

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    Date of creation: May 2012
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    Handle: RePEc:lev:wrkpap:wp_721

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    Web page: http://www.levyinstitute.org

    Related research

    Keywords: Euro; Monetary Union; Banking Crisis; Balance-of-Payments Crisis; Sovereign Debt Crisis; Competitiveness Imbalances; Fiscal Transfers; Bailouts; Austerity;

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    1. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
    2. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
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    Cited by:
    1. Guonan Ma & Robert N McCauley, 2013. "Global and euro imbalances: China and Germany," BIS Working Papers 424, Bank for International Settlements.

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