1 A German Economist’s View on the Crisis. Prerequisites for Returning to Stability Rolf J. Langhammer Kiel Institute for the World Economy, Kiel Germany September, 20, 2010 Centre d’Analyse Stratégique, Paris

2 I.Four elements of the crisis: state of coping with them II.Real adjustment III.Fiscal adjustment IV.Measures for returning to stability A German Economist’s View on the Crisis Prerequisites for Returning to Stability

3 I.Four elements of the crisis : state of coping with them  Recession (cyclical): behind us  Financial market crisis: not yet solved, fragility and vulnerability of financial institutions and markets still exist  Real adjustment: intra-sectoral excess capacities not yet reduced, inter-sectoral adjustment unfinished  Fiscal and monetary exit strategies : not yet done, monetary easing continues, fiscal adjustment postponed

4 II.Real adjustment Assumptions  medium term global economic growth (including China) lower than  new relevant prices like after 1973 plus other factors (demographics, technological improvements) will spur sectoral structural change and change in factor mix (more labour intensity?)  global imbalances will slowly decline, big concerns about real adjustment in the US A German Economist’s View on the Crisis Prerequisites for Returning to Stability

5 III.Fiscal adjustment : Challenges  “Deterministic” governance in a “stochastic” world with tail risks (Pisani-Ferry)  Return to pre-crisis debt level is time-asymmetric: In Germany, it takes three years for the debt level to rise from 65% to 80% compared to expectedly twelve years to return to 65% (see German Council of Experts’ scenario and EU Sustainability Report 2009)

6 A German Economist’s View on the Crisis Prerequisites for Returning to Stability Long-term development of the German debt level following Maastricht criteria under different assumptions on nominal growth rates Source: German Council of Economic Experts, 2009 Debt level

7 A German Economist’s View on the Crisis Prerequisites for Returning to Stability EU Sustainability Report 2009

8 A German Economist’s View on the Crisis Prerequisites for Returning to Stability  Implicit debt levels (unfunded entitlements) increasingly receive public attention and cause concerns.

9 A German Economist’s View on the Crisis Prerequisites for Returning to Stability r = Discount rate g = Growth rate Source: Hagist, Moog, Raffelhüschen, Vatter (2009)

10 A German Economist’s View on the Crisis Prerequisites for Returning to Stability IV.Measures for returning to stability  Real adjustment -Enhancing EU cross-border labour market flexibility -Germany : structural reforms, liberalising service markets, shifting parts of public services expenditures to the private sector -Deficit countries : strengthening the export base  Fiscal adjustment -Establishing national debt commissions for setting binding medium-term upper limits for explicit debt levels -Expenditure side: Cutting subsidies and consumptive expenditures -Revenue side : Broadening the tax base, reform the tax base from direct to indirect taxation -Coordination at EU level : stricter surveillance of Maastricht debt and deficit levels including sanctions (denying voting rights or access to EU funds)

11 A German Economist’s View on the Crisis Prerequisites for Returning to Stability Je vous remercie de votre attention!