: Europe and the euro area
The IMK has been covering macroeconomic developments in the euro area since the Institute’s foundation. Particular emphasis has been put on the euro area crisis and needed economic governance reforms. The IMK has contributed to the public debate on these crucial issues, producing scientific publications on the causes and consequences of the crisis and providing economic policy guidance. The Institute has been critical of overly tight austerity measures and instead favours a greater stabilisation role for national fiscal policy, promoting public infrastructure and a well-functioning welfare state. Improved coordination between social partners (collective wage setting) and national fiscal and monetary authorities can also help ensure balanced economic developments across the member states using the common currency. Achieving better policy requires changes to Europe’s economic governance rules and institutions. More recently the IMK has analysed EU efforts to recover from the Corona-induced economic crisis and restructure Europe’s economies with a view to meeting climate goals.
Study finds public capital stocks throughout the EU to increase markedly due to RRF. In some hard-hit European countries, the RRF would offset a significant share of GDP lost during the pandemic. As gains in GDP much stronger in (poorer) southern and eastern European countries, RRF to potentially reduce economic divergence. All countries to experience lower public debt ratios over the next years.
On the 1st of July, Germany will take over the rotating EU-presidency. Besides the task of exiting the crisis caused by the pandemic as swiftly as possible, a number of important dossiers need to be pushed forward. They include the European Pillar of Social Rights, action on minimum wages and incomes, backing for national short-time working and unemployment schemes, and a larger EU budget with a stronger social component.
A reformed European fiscal framework should allow for permanently higher government debt ratios in a post-Corona world. We advocate an expenditure rule for non-investment public expenditures. Public investment should again be governed by a Golden Rule, i.e. net investment should be allowed to be financed through debt. An essential ingredient of a reformed MIP should be a Macroeconomic Dialogue.
Europe's economic policy response to the crisis marks a step forward. Measures adopted are limited to loans, but if the Recovery Plan is implemented it will fundamentally change the EU. Even then, much remains to be done: a programme of investment in European public goods such as infrastructure and health is needed.
The Recovery Fund recently proposed by the EU Commission marks a sea-change in European integration. Yet it will not be enough to meet the challenges Europe faces. We propose a 10-year, €2 trillion investment programme focusing on public health, transport infrastructure and energy/decarbonisation. It would finance genuinely European projects so that the EU emerges stronger from the covid-19 crisis.
The 3 and 60 percent deficit and debt caps came into the Maastricht Treaty 1992 by coincidence. Reconsidering them would allow discussing new proposals for fiscal policy reforms in the Euro area.
This study derives the macroeconomic conditions for stability, convergence and growth in the Euro Area as a whole and its member states and shows the need for effective coordination between the monetary and fiscal authorities, but also the social partners responsible for nominal wage developments. On this basis a proposal for politically feasible institutional reforms is proposed to promote balanced, crisis-free growth.
This study analyses the profits earned from seignorage by leading world central banks in the course of the experimental monetary policies pursued since the global financial crisis of 2008/9. The analysis brings out the linkages between currency emission and public finances and thus between monetary and fiscal policy. There have been major changes over time, but with substantial differences between countries.
Some important progress has been made since the crisis, belatedly and often imperfectly, in reforming the institutional framework of the Euro Area. However, the existential weaknesses - redenomination risk given doubts about the effectiveness of the Lender-of-Last-Resort function and the inadequacy of measures to address inherent divergence trends between member countries - have not been resolved. For as long as that is so, the euro area will remain on shaky ground. This report reviews proposals to strengthen the institutional setup of the euro area.
Germany’s export-led growth led also to an ever increasing current account surplus since 1999. As a trend, exports grow systematically faster than imports. There is no rebalancing mechanism. A time bomb?
We use a multi-regional input-output model to estimate the spillover effects of Germany's final demand on Southern European countries. The spillover effects are rather small. A moderate demand boom in Germany will only marginally alleviate the external adjustment process in the South.
We investigate the size of spillover effects of an upswing in Northern Europe on growth and employment in the European South. A Northern expansion does generate sizeable positive growth impulses as long as consumption and investment multipliers are high and not impeded by the economic crisis. In order to achieve a sustainable upswing in the short term, however, the South cannot rely on spillover effects alone but requires less restrictive fiscal policy or larger European transfers spent locally.
The EU-budget goes some way to redistributing resources between countries and helping with macroeconomic stabilisation. The effects are very limited in size however, and work mainly on the revenue side, i.e. through the member state contribution.
Inflation in the euro area is much too low and economic growth too weak. Expansionary fiscal policy is needed to supplement monetary policy. More fundamentally, the euro area lacks an important stability anchor because politicians failed to safeguard the safe-asset quality of all euro area government bonds.