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

2. 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

3. Economic indicators Averages 2000-2008 Greece Euro 16 Germany GDP growth, % 4.0 2.0 1.5 Total consumption (private + public) % of GDP 89.177.377.2 Personal savings ratio 0.511.516.1

5. Twin deficits 2000 20082009 % of GDP Deficit - 3.7 - 7.7- 13.6 Current account - 7.7- 14.6- 11.2 EUR billion Deficit primary - 5.0 - 7.4- 20.3 interest expend. - 0.1- 10.9- 12.0 total - 5.1- 18.3- 32.3 Current account - 10.6- 34.8- 26.6

6. 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 2010 24.520.8* 45.3 50.3 2011 31.311.6 44.9 49.9 2012 31.7 1.6 33.3123.5 38.3 138.5 2013 24.8 - 8.4 16.4 21.4 2014 31.6 - 18.4 13.2153.1 18.2 178.1 * Plan of 1. April 2010

7. 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 ??

8. 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 ?

9. 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 ?

10. The rejected alternative solution: 1. Debt moratorium with partial cessation Losses (EUR billion) Suppose a hair cut of 20 % 33 % France 10.0 16.7 Germany 5.6 9.3 Italy 4.0 6.7 Belgium 3.4 5.7 Netherlands 3.0 5.0

11. 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

12. 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.

13. 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