Managing the Crisis Manfred J.M. Neumann University of Bonn Munich, 30. April 2010

2 Remarks on Bank Regulation and Supervision 1.Core capital relative to non-weighted assets:10 % 2. European Systemic Risk Board (ESRB) for monitoring macro-prudential risk: ECB/ESCB-council can take care of that

Economic indicators Averages Greece Euro 16 Germany GDP growth, % Total consumption (private + public) % of GDP Personal savings ratio

Twin deficits % of GDP Deficit Current account EUR billion Deficit primary interest expend total Current account

Back on the envelope (EUR billion): Suppose the Greek deficit will be cut by EUR 10 billion (4 % of GDP) each year: If half Debt redempt. + fresh deficit = demand for support comes true * * Plan of 1. April 2010

The support-package for Greece builds on deficit cuts of 4 % of GDP each year plus devaluation by command “your wages will be cut by 25 %” John Maynard Keynes Credible? How long will the Greek government be able to deliver ??

If the Greek government cannot deliver - the Euro-EU will transform into a transfer union having to push up transfers year after year - danger of moral hazard why not imitate ? How long would the game be tolerated in the rest of euro 16 ?

Note: Each aid package is a combination of a bail-out of investors plus a bail-out of Greek government Question: Why not have investors take their share in the bail-out ?

The rejected alternative solution: 1. Debt moratorium with partial cessation Losses (EUR billion) Suppose a hair cut of 20 % 33 % France Germany Italy Belgium Netherlands

2. Deliberate exit from the euro to effect real devaluation 5 years well-defined re-entry (criteria) The choices for Greece are a few years of costly restructuring with a new currency plus devaluation or long-run stagnation with overvaluation under the euro regime

Domino ? - unlikely but cannot be ruled out given other overindebted countries - if the fundamental conditions for a domino exist, it will happen, anyway, as the EuroEU will hardly be ready to put up rescue packages for more countries.

Stability and Growth Pact needs rewriting Problem: how to achieve incentive compatibility? More biting sanctions - loss of financial aid - temporary loss of voting rights - temporary loss of euro-membership ? Automatic start of sanctions ? rules with trigger points