The Crisis-Oriented Monetary Policy of the ECB. Consequences for the EMU-States

Master's Thesis, 2015

79 Pages, Grade: 1


Table of Contents

List of Abbreviations

List of Figures

1 Introduction

2 Problem Definition

3 Objectives

4 Methodology

5 The European System of Central Banks
5.1 History and Development
5.2 Organizational Structure, and Objectives of the E(S)CB
5.3 Strategy and Instruments of Monetary Control

6 Genesis and Causes of the European Debt Crisis
6.1 Massive Consume and Increase of Public Debts after the
Euro Implementation
6.2 Productivity Deadlock and Increase in Labor Cost
6.3 Misgovernment
6.4 Global Financial Crisis 2007 et seqq
6.5 Conclusion

7 Unconventional Monetary Operations of the ECB
7.1 General Monetary Operations
7.2 Securities Markets Program
7.3 Outright Monetary Transactions
7.4 Extended Asset Purchase Program
7.5 Conclusion

8 Impact of the Unconventional Monetary Operations of the ECB
8.1 Inflation Rate (Price Stability)
8.2 Confidence in Financial Markets
8.3 Risk Premiums and Yields of Government Bonds
8.4 Fiscal Situation of the PIIGS States
8.5 Conclusion

9 Consequences of the Crisis-Oriented Monetary Policy
9.1 Transfer of Capital Liabilities to other EMU Members
9.2 Moral Hazard
9.3 Loss of Market Economy and Democracy
9.4 Deadweight Loss
9.5 Conclusion

10 Conclusion

11 Discussion

Appendices A

References D

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Figures

Figure 1: Public Debts of PIIGS in % of the GDP

Figure 2: Historical Milestones to the Current EU and ECB

Figure 3: Organizational Structure of the ESCB

Figure 4: Growth of Money and GDP – Annual Percentage Change in the EMU

Figure 5: Pre-Crisis New Indebtedness Rate

Figure 6: Labor Productivity

Figure 7: Labor Costs and Labor Productivity 2000 –

Figure 8: Shift in Real Wages 2000 – 2008

Figure 9: Development of the US Subprime Crisis

Figure 10: Conclusion of Critical Figures during the Pre-Crisis Period

Figure 11: Allocation of Monthly Asset Purchases by the Eurosystem

Figure 12: Unconventional Monetary Policy – Timetable

Figure 13: Interest Rate and Inflation Rate 2004 –

Figure 14: 3 Month-Rate ECB, EURIBOR, LIBOR 2000-

Figure 15: Overnight Deposits and Loans ECB

Figure 16: Rate of Growth in International Bank Claims

Figure 17: Risk Premiums for European Countries

Figure 18: Sovereign Debts and GDP Growth-Rate of PIIGS States

Figure 19: Assumed Euro Rescue Costs of Germany,

Figure 20: ECB Holdings out of Assets Purchase Programs

Figure 21: Deadweight Loss of Monetary Interventions

Figure 22: Real Interests of Germany as Difference between ECB Interest Rate and Inflation

1 Introduction

A few years after the implementation of the euro, the EMU echoes in an European debt crisis and scientists argue about the reasons and ways out of this dilemma. Some assume a collapse of the financial markets, others ask for higher regulations, or recommend a consolidation of liability and decision-making.1 Nevertheless, with the global financial crisis 2007 et. sqq., the so called PIIGS states got into serious financial hassle as they tried to rescue their financial system among other things and raised their public debts over an unbearable level.2 Ireland for example, had an increase in public debts of 46% in 2009, and Greece could exhibit a debt level of 126.8% of its GDP.3 Regardless of the stability and growth pact that limits deficits to 3% and debts to 60% of the national GDP4, most of the EU countries raised their public debts to an immense level during the next years. The expansionary fiscal stance resulted in financial difficulties and bottlenecks for some governments and brought them on the verge of insolvency. Some voices, like the publisher of DIE ZEIT Josef Joffe (2012) go so far and set the contention that the European experiment has failed.5 True is, that several scientists and politicians made demands on an exit of Greece out of the Eurozone6, which confirms the statement of Joffe (2012) and generates an ideological disintegration of the EU, as the natural idea of an economical and ethnological integration of all European states gets eroded. Otte (2015) said in an interview something similar like: “Imagine that Greece leaves the Eurozone, and nobody perceives it!7 ” Since the beginning of the European debt crisis think tanks looked for reasons and ways out of the crisis, but as we can see, the situation is not accomplished, yet. In Europe, the ECB has the most power to affect the financial markets and to regulate financial issues, as it is the unmated institution in Europe which is qualified to channel the monetary policy in the Eurozone and to intervene with monetary operations.8 Nearby, it is obvious that the ECB started a multitude of measures to lift the Eurozone out of the crisis and to stop the degradation of the currency that, in comparison to the US dollar, decreased for 22.8 percent during the last seven years.9 The monetary policy and the market interventions changed into crisis-oriented operations, also called unconventional policies, with the focus to stabilize the financial situation in the Eurozone and to bail out governments which are heavily indebted and almost en route to bankruptcy.10 Some scientists argue, the operations of the ECB had resulted in a joint liability adverse other EMU states, which would transgress against the Treaty of Maastricht and outreach the authority of the institution as the treaty prohibits the creation of a transfer union.11 In fact, the unconventional policies and bail-out efforts of the ECB saving the Eurozone at all costs, poses the question for the potential consequences for several EMU states concerning the deadweight loss in the case of liability claims and other risks like inflation. Whatsoever, the costs of the crisis are heavy and will presumably rise during the next years as many European states did not use the low-interest period since 2009 to reduce their public debts12 or to launch economical and structural reforms, making them more competitive as in the past to arise invigorated from the crisis.13

Now, who is going to pick up the tab? At least, does it make a difference whether to live beyond one`s means or to look for an economical balance? And, does there exist alternative course of actions, which can lead out of the crisis and hold the costs down? Well, the author tries to find answers on these questions in this thesis.

2 Problem Definition

With the launch of the Eurozone as a monetary union and the EU as a supranational amalgamation of sovereign countries, the European debt crisis tangents nearly all member states and does not limit itself to several countries. Exactly here the shoe pinches, as former national problems transferred into international challenges with economic and social costs for a higher group of states which have to bear the consequences.14 The first problem is, that the stability-oriented monetary policy of the ECB turned into crisis-oriented operations and unconventional monetary decisions which potentially will convert in real consequences for the EMU states and cause economic costs.

Second, the European debt crisis is not solved by bailing out countries like the PIIGS states, as governments still increase their public debts, the EU and its institutions only achieve a suspension of the problem but does not resolve it by the roots.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Public Debts of PIIGS in % of the GDP

Source: Own description

Data source: Statista, Eurostat

As figure 1 points out, most of the so called PIIGS states, did not use the low-interest period to remove the debt level and to reform their economic structure for a higher economic competitiveness which would have an effect on the GDP. Rather, some states increased their public debts and had a decrease in the GDP, which definitely turns into a grave situation.15

3 Objectives

The main objective of this work paper is to identify potential consequences for the EMU states resulting from the crisis-oriented monetary policy of the ECB in the environment of the European debt crisis. Furthermore, to debate alternative approaches for a long-term solution of the debt crisis, including financial and economical perspectives for every EU member under consideration of the differing potential of the member states.


The thesis will begin with a theoretical dispute about the European system of central banks under consideration of the historical development, the organizational structure, and the instruments of monetary control to get the basis for further argumentation and a critical elaboration about the current scientific findings. The next step is very important as the author will analyze the causes leading to the European debt crisis which Europe faces today, including research on the development of the crisis. This step is necessary to find out which are the real causes of the European debt crisis, because only that way is right to value of the operations of the ECB helped finding a solution for the crisis. Subsequent, the author will summarize the monetary measures of the ECB affecting the debt crisis through a chronological listing using the latest research publication with a critical analysis afterwards. In addition, a deflection and evaluation of the monetary measures and their impact on the welfare of the EMU states should deliver answers on the first objective and help identifying the consequences of the crisis-oriented monetary policy of the ECB. In a final step, some suggestions about how to solve the European debt problem in the long-run will bring the thesis down to a round figure.

5 The European System of Central Banks

This chapter will concern with the role, function, strategies and instruments of the European Central Bank, as one of the main protagonist of the European debt crisis. It will also disclose and evaluate the monetary actions of the ECB and its effects on the European debt crisis during the last years.

5.1 History and Development

The European Economic and Monetary Union with the European Central Bank as a monetary institution have a long previous history and cannot be fixed on one single date or occurrence. As disclosed in the following, enhancements of treaties and combination of approaches had finally leaded to the economic and monetary union known as EMU, today. In 1951, the signing of the European Coal and Steel Community (ECSC), known as the Paris Treaty between Belgium, France, Italy, Luxembourg and the Netherlands, marked the first step towards something like an European Union, followed by the Treaty of Rome in 1957. The Treaty of Rome regulated the establishment of the first European Economic Community (EEC) and the European Atomic Energy Community (Euratom), with the same six member states as six years ago.16 In October 1962 the European Commission`s Memorandum called to lead on to an economic union with irrevocably fixed exchange rates between the member states. This action should be initialized by a Committee of Governors of the central banks of the member states of the EEC. This institution was formed to institutionalize the cooperation among the EEC central banks, and should become very important during the end of the 1960s. In 1971 the Werner Report, a result of the Committee of Governors, proposed to initialize economic and monetary union in several steps. A community system, called the “snake” should ensure a progressive narrowing of the member state currencies, and the European Monetary Cooperation Fund (EMCF) should act as its operational institution. However, economic shocks and national interests lead to a negligence of the snake system and concentrated the focus on the Deutsche Mark as one of the currency benchmarks at this time period.17 In 1979, the monetary integration seemed to move on a next step, as the authorities tried to combine and keep most of the currencies in a single exchange rate system, with the European Currency Unit (ECU), as a basket of fixed quantities of the currencies of the member states.18 The main goals of the EMS where, to create and implement an exchange rate arrangement, to grant monetary credits on a high scale, to issue a new reserve asset, and a member pooling as a part of their monetary reserve. These four features are completed by fixed convergence criteria in the economical meaning.19 Additionally, the Single European Act signed in 1986, should create a single European market without anti-trade borders. But Padoa-Schioppa, former minister of finance of Italy and former member of the executive board of the ECB detected barriers within the characteristics of the EMS and calls it “the inconsistent quartet”. On the one hand the EMS tries to achieve a free trade system, with full capital mobility, and fixed exchange rates, but on the other hand it promises national autonomy in the conduct of monetary policy.20 This fact was also identified by the twelve officials of the EEC, who decided to resurrect the vision of the one currency solution within the European Monetary Union. The Delors Report of 1989 schedules a three-stage program for European integration towards the European Economic and Monetary Union. The first step should finalize the single market strategy and eliminate barriers, to ensure a barrier-free trade within the EMU. The second step should prepare a unique institution like the ECB and should strengthen economic convergence. Finally, the third step should transfer the monetary power to the ECB and launch the euro as the single currency.21 Last but not least, the Maastricht Treaty was signed in 1992, and should establish the European Union, as it is known today. It introduced three pillars of the European Union – the European Community (EC) pillar, the Common Foreign and Security Policy (CFSP) pillar, and the Police and Judicial Co-operation in Criminal Matters (PJCC) pillar.22 The former organizational pillar-structure of the EU was unsustainable, primarily after the Treaty of Lisbon in 2009. Now, the EU is structured into seven institutions, which again represent the legislative, the executive and the judicial branch. The ECB is one of the institutions, and determines in cooperation with the national central banks the monetary policy the EMU.23 Figure 1 shows the several historical steps which at least, lead to the ECB.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Historical Milestones to the Current EU and ECB

Source: Own description.

Finally, after a transitional period from 1 January 1999 to 31 December 2001, the euro started to replace the national currencies of eleven member states and a new monetary union was born after a hard and long way.24 Summing up, until the foundation of the ECB in 1998 and the European Central Bank System, as it is known today, many treaties and programs had to be initialized and established. As conceivable, the road to the European Central Bank System is only an output or side product of the long way to the European Union (EU) with its 28 member states in 2015. Debating about the ECBS is like debating about a vision which was born after the second world war and should integrate and consolidate the European neighboors.

5.2 Organizational Structure, and Objectives of the E(S)CB

Basically, there exist two terms affecting the organizational structure which have to be defined. On the one hand the Eurosystem became responsible for the monetary policy in the Eurozone by the Maastricht Treaty, and constitutes the decision-making structure. The Executive Board and the Governing Council are the two institutions beside the ECB and represent the decision-making bodies of the ESCB, as shown in figure 2.25 The Governing Council meets every two weeks in Frankfurt, where the 25 members debate about monetary decisions which bother the Eurozone and other monetary unions. Until 2015, each member of the Governing Council had one equal voice, irrespective of the size or the GDP and each voice counted in every decision. With the euro entry of Lithuania, the voting rules changed to a two-group rotation system to shorten the decision-making process. The membership to a group depends on the economic and financial weighting of the represented country and determines the quantity of voting. The first group is composed of 5 national central bank governors with 4 voting rights and the second group consists of 14 governors with 11 voting rights which means, that every month four governors have no votes. This voting procedure does not value for decisions on issues bothering article 10.3 of the ESCB-charter.26 The decisions are carried out to the NCB`s of the EMU with the help of the Executive Board through the ECB.27 The Executive Board, which represents the executive institution in the ESCB contains of the president, the vice president and four other members, which each has a specific focus division. Every member is elected by the European Council for a term period of eight years.28

Abbildung in dieser Leseprobe nicht enthalten

Figure 3: Organizational Structure of the ESCB

Source: Own Description

On the other hand the ESCB additional includes the national central banks of all EU member states, which are 28 in 2015. As shown in figure 2, the ESCB incorporates an institution called General Council where beside the president and vice president of the ECB, all governors of the NCB`s of the EU are considered. The Governing Council is a non-decision-making institution, but the central banks of the EU countries that have not adopted the euro, have the opportunity to debate about monetary issues and to have an influence on decisions of the Governing Council.29 Nevertheless, the ECB was founded as an independent institution to avoid political control and to ensure that the ECB exclusively pursues its goals.30 A distinction is drawn between five types of independence. The institutional independence indicates that no other institution or government or their bodies are allowed to give instructions to the ECB, rather they are obliged to abstain from interferences. The legal independence legitimates the ECB to bring up actions before the ECJ. Additional, the personal independence ensures with the help of long fixed terms of office, non-renewable terms of office (only Executive Board), and a dismissal protection that the decision-makers are not influenced by outstanding powers. The functional and operational independence facilitates the ECB to be the only institution in the euro area which is authorized to shape the monetary policy. Last but not least, the financial and organizational independence indicates that the ECB has its own financial resources and income, which allows the Eurosystem to hold down its job.31 In January 2015, the capital stock of the ECB is about 10.8 billion euros, thereby every member has to pay into the bank the sum depending on a specific key which considers the population and the GDP of a country.32 Detailed information about the participation quote of each member state, can be looked-up in the appendix 1. Supplementary, the Governing Council has established several ESCB committees which should support the decision-makers and supply them with information.33 Closer information about the committees are to find under the appendix 2, as they have no closer relevance to this thesis. Summing up, the organizational structure of the ESCB is focused on a short decision-making process, a high information, an independent work environment, centralized decision-making process, and a decentralized execution.

A critical reflection on the organizational structure creates the perception that, national interests could be focused in the Governing Council meetings, as 19 of the 25 board members are governors of the national central banks and influenced by national prospects. In Economics of Monetary Union, Paul De Grauwe (2014) recommends a system comparable to the FED decision-making body, where the majority of the personnel is elected by the Congress and represents the interests of the system as a whole.34 Otherwise, Tommaso Padoa-Schioppa (2004) defends the councillorship of the Governing Council and brings up two principles which shelter the system from the risk of national influence. Firstly, the institution can act by a simple majority and secondly, each member has one equal vote which prohibits a strong exercise of influence from the big countries in the Eurozone as there does not exist something like an allocation formula which weights the single votes. The countries already adopted the euro would not have accepted the actual voting system, if they did not pursuit an independent central bank.35 But De Grauwe (2014) sees the risks elsewhere, he deplores the overhang of governors of small countries, which at least only represent one third of the size of the Eurozone. And with every new member the group of votes representing smaller economies continuously expands. From his point of view, the rotating voting system is a small improvement into fair redistribution of voting rights.36 Summing up, De Grauwe (2014) implies a jaundice against the governors of the Governing Council, and on the other hand Padoa-Schioppa (2004) argues on the assumption that all governors act for the Eurosystem as a whole. However, the truth lies somewhere in the middle, as national interests or circumstances certainly affects the consultation in ECB meetings, especially in times where some countries have visible problems with their public debts or the financing of their households. Otherwise, every member of the Eurozone is part of the system and their problems are the problems of the Eurosystem as they have an effect on the price stability of the currency. Secondary, the ECB shall support the general economic policies in the Community, without prejudice to the main goal, the price stability37. Under these circumstances, even if the majority of the voting governors represents only one third, together they can influence the ESCB as a whole. Consequently, a voting-system where all voters pursuit the thing as a whole, is a system where the whole has to be considered and weighed up by its importance and effect on the whole.

Concluding, the following article describes the main objective of the ECB: “The primary objective of the European System of Central Banks (hereinafter referred to as ‘the ESCB’) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union…”38 Beside the price stability, the ECB has to define and implement the monetary policy of the union as its main institution. It has to conduct foreign exchange-operations, to hold and manage the official foreign reserves of the member states, and to promote the smooth operation of payment system.39 Additional, it decides about the monetary instruments and their application, it implements guidelines and instructions, and the ECB adopts the strategic planning and the coordination of the banknotes in the Eurosystem. Further duties and responsibilities are the conveyance of international cooperation, an ongoing reporting, and the monitoring of financial risks, the consultation of institutions, and the representation of an operative IT-platform for the ESCB-System.40

5.3 Strategy and Instruments of Monetary Control

The monetary strategy of the ECB was a completely new orientation on the difficulties and challenges coming up with the consolidation of the most European monetary systems. The stability-oriented monetary policy is a new monetary strategy and reflects the circumstances that will come up with the Eurosystem. Basically, the strategy was based on two pillars. The first pillar describes a monetary analysis and a regulation with the help of the money stock M3, as inflation is considered to be a monetary phenomenon. The money stock M3 describes the sum of money which is in circulation (C), overnight deposits (OD), time deposits with a maturity of up to two years (TD), savings deposits (SD), other short term liabilities of the banking system (OSL).41 The following formula summarizes the content:

The second pillar focuses an economic analysis and occupies with real activities and financial conditions on the market.42 The goal is to keep the inflation rate of the euro area below but close to 2%, which is measured by the HICP.43 Working against inflation or deflation, the ECB has several instruments which the institution can make use of. Actually, one can divide the instruments in two main groups, the open market operations and the standing facilities. Standing facilities are overnight facilities with the opportunity to lend or deposit money overnight. Open market operations differ in that point that they have maturity terms from one week up to three months. The main refinancing operations have a maturity of one week and the longer term refinancing operations have a term of three month. Beside these instruments, the ECB has the possibility of fine-tuning operations and structural operations by issuing debt certificates, doing outright sales or purchases, or handling foreign exchange swaps. Another instrument is the compulsory reserve, which delimits the possibility of financial institutions to create money on an infinite level. Additional, the ECB can intervene on the exchange market, by handling foreign currency reserves.44 However, the ECB tries to control the inflation by regulating the money growth rate using interest rates. This approach is well known as the Fisher Effect, which indicates an adjustment of the nominal interest rate to the inflation rate. When the ECB increases the money growth rate, in the long run, the result is a higher inflation rate and higher nominal interests.45 It is also proven that inflation risks raise if the growth of the GDP does not accord to the development of the money growth rate, which can be influenced by the ECB.46 Consequently, the efficiency of the instruments of the ECB are scientifically proven.

Figure 4 shows the connection between the money growth rate and the GDP of the Eurozone between 2004 and 2014. It is nice to detect, that the growth rate of the money and the GDP correlate and that effect caused an inflation rate about 1.9% during that period47, which laid under the maximum admissible inflation rate of 2% that the ECB set itself as target.

Abbildung in dieser Leseprobe nicht enthalten

Figure 4: Growth of Money and GDP – Annual Percentage Change in the EMU

Source: Own description.

Data Source: Statista, ECB.

Since the Financial Crisis of 2007, the ECB has another interaction tool called Outright Monetary Transactions (OMT), which entitles the ECB to purchase sovereign debts on the secondary markets. From this moment, the ECB was able to buy bonds with a first-best credit assessment, but also junk-bonds, if the issuing government is a current member of an assistance program of the euro area.48 On the 22nd January 2015, the Governing Council decided to launch an expanded Asset Purchase Program (APP), and to buy assets ad valorem of 60 billion euros per month until the end of September 2016.49 To make projection, again the ECB decided to flood the market with 1 trillion euros during the next year. Gropp (2015) identified additional risks for some member states of the EMU, which do not only use the low interests to restructure their household, and to implement structural reforms, or to minimize their debts, but to increase government commitments and consequently launch fiscal problems.50 Beside voices, who see this instrument as a violation of the Maastricht Treaty51, some scientists see this instrument as the only possibility to ease individual countries access to the credit market under reasonable conditions.52

The monetary policy of the ECB has been criticized by arguments like, imprecise definition of price stability or monetary analysis is at odds with economic analysis.53 Important differences in the behavior of governments and ECB, lead to delayed and piecemeal interactions, which indicates an indirect dependency, at least an interference of the governments.54 In fact the goal to reduce distortions caused by inflation or deflation is the right decision and chosen framework of the ECB, as they stress the economies and generate costs.55

6 Genesis and Causes of the European Debt Crisis

Many are of the mind that the global financial crisis of 2007 et seqq. is the main reason for the European debt crisis, but figuring out the facts, the problems have started much earlier so that the financial crisis merely uncovered the economic and financial problems of the EMU and sounded the death knell for it.56 Portugal`s situation for example was described as a country with an anemic productivity growth, a very low economic growth, a large budget deficit, and very large current account deficits.57 This chapter will expose the causes of the European debt crisis and what went wrong during the years of monetary union to uncover the decisive reasons which set the course for the situation of today, and to have basis for later suggestions.

6.1 Massive Consume and Increase of Public Debt after the Euro Implementation

The euro implementation in 2001, brought out a high euphoria in the participating states, as inflation and interest rates were low, which generated a new experience for some countries that were not used to it for quite some time. Italy for example had a steady high inflation rate during the years from 1970 to 1995, not till the convergence criteria forced Italy to rethink its responsibility58. Whatsoever, some countries like Ireland or Spain did no longer raise taxes or save by cutting spending, in contrast they financed their households with the cheap money from the financial markets. Other countries raised wages in the public sector and drove consume, but did not use the cheap money to increase the productivity or to restructure the economic sector. On the other hand, some northern governments invested their resources to remodel the economic structure and invented ways to cut costs. In a little while, it turned out that the northern states were saving while the southern states were spending.59 This disparity will crystallize as one of the first steps into the European debt crisis of today.

As already mentioned, some countries used the low interest rates after the euro implementation to consume and to raise public debts in the end. So did Portugal, during the first six years after the euro launch Portugal had an average new indebtedness of 10.1% per year that constitutes additional public liabilities of 42.4 billion euros in that time period.60 Another accurate example is Greece with a debt increase of 10.9% per year, between 2005 and 2008 and an escalation of 80.1 billion euros of new debts within four years that represents nearly 9% of the GDP.61 To complete the round, Cyprus exhibited an annual increase of 10.2% in the average, during the pre-crisis period from 2001 to 2005.62 Figure 5 illustrates the just analyzed situation of several EMU states before the crisis.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: Pre-Crisis New Indebtedness Rate

Data Source: Statista, Eurostat.

The reasons for an increase in public debts are various, and like in all matters a plurality of reasons are responsible for it. One indicator is the high consumption in the private and public sector which can be verified by the balance of the current account of every single country. The current account (CA) records all earnings and costs of an economy beneath the exports and imports and exists out of four components. The goods (X-M) consisting of exports (X) and imports (M), services like tourist traffic or insurance payments, the balance of income (NY) with salaries and wages and investment income, and net current (NCT) transfers like donation or social transfers into foreign countries.63 The following formula should mathematically explain the situation.

To derive a statement about the consumption behavior of an economy, it is important to identify if a country offers a deficit or a surplus in its current account. Deficits declare that the nation’s consumption was higher than the creation of value, and it causes a decline in assets as the imports are higher than the exports. A current account deficit combined with a regressive GDP is called a twin deficit and discloses real economic problems. Contrary, a current account surplus implies that the economy`s savings were higher than the national investments and result in a rise of the foreign assets.64 Deductive, a trade balance deficit implies a too high consumption, as many countries of the EU had during the pre-crisis period. Upon others, Ireland, Spain, Greece, Italy, Cyprus, and Portugal exhibited a deficit within 2002 to 2007 and could not change the situation until today. Greece had an annual deficit of -8.7% of the GDP, Portugal -9%, and Spain -6.4%. Belgium, Germany Luxembourg, the Netherlands, Austria, and Finland have traditionally a current account surplus, which discloses again the already mentioned north-south divergences in the European Union.65 Now the question is, who has the better position? A Current account surplus means that the country has exported more than it has imported, which means that the economy has saved more than it has spent. The theory of the balance of payments implies that surpluses in the current account cause outgoing payments in the capital account to equal the balance of payments, and indicates that the national savings are invested abroad.66 In a nutshell, export surpluses are always self-financed, as the national savings go abroad to finance the foreign consume. If the deficit countries run into bankruptcy the surplus countries will neither get the exported goods back nor will they get the borrowed money back, which means that they are in a typical stalemate situation.

Summing up, during the pre-financial crisis period the so called PIIGS states and other European countries built up deficits and raised public liabilities instead of reducing debts. Additionally, many countries had a high increase in consumption that caused high deficits in the current accounts which again turned into higher debts in lieu of using the low-interest period to reduce debts and to restructure the economic situation to raise competitiveness as many have uneconomic business sectors.

6.2 Productivity Deadlock and Increase in Labor Costs

Another bad development took part in the area of the productivity and the labor costs, as many countries ignored the conditions of their economy and got punished for this delay. But what is productivity? Well, productivity is the quantity of goods and services which were produced from each unit of labor input, and it determines a country`s welfare as the welfare depends on the ability to produce goods and services. The productivity of a nation is determined by several factors like the physical capital per worker that describes the stock of equipment and structures used to produce goods and services. Another determinant is the human capital per worker, which delineates the knowledge and skills that the worker dispose and acquire through education, training and experience. Natural resources like water, land, or minerals, technological knowledge, and cost savings are additional determinants and affect the productivity of an economy.67 The measurement of productivity depends on the one hand on the available data, and on the other hand on the asked result as the literature differs between single factor productivity (SFP) measures and multifactor productivity measures (MFP). This thesis will confine on the labor productivity as an SFP measurement which shows the time profile of how labor is used to generate output. The following formula mathematically explains the content:

The parameter considers and reflects influence of changes in capital, intermediate inputs, technical and efficiency changes, economies of scale, and varying degrees of capacity utilization. Some critics argue, that the labor productivity is easily misinterpreted as technical change or as the productivity of the individuals in the labor force.68 Analyzing the labor productivity of European countries during the pre-crisis period, one can ascertain that many states like Greece, Spain, Italy, Cyprus and Portugal had very low values, some even less than 32% of the highest value in the EU, excluded Eastern European countries like Bulgaria, etc. In the year 2000, Portugal had the lowest labor productivity in Western Europe with 15 euros per hour worked with, followed by Greece with 17.6 euros, Cyprus with 19.1 euros , and Spain with 27.3 euros. Only Ireland is missing to complete the PIIGS states, but Ireland had a surprisingly high labor productivity of 39.2 euros in the year 2000 and could even rise the figure up to 45.1 euros in 2007. These figures do not appreciable change during the pre-crisis period until 2007, in contrary, despite of the initial value the named economies did not succeed in raising the labor productivity noteworthy. Spain had an annual increase of 0.5%, Portugal of 1% per year, Greece, Italy, and Cyprus even had a negative performance in the meantime.69

Abbildung in dieser Leseprobe nicht enthalten

Figure 6: Labor Productivity

Data Source: Eurostat.

Figure 6 charts the circumstances and gives an overview of the critical situation in some European countries before the global financial crisis of 2007 and it gives governments a testimonial for the absence of investing in the competitiveness of the listed economies by reforms, savings, and restructuring.70 The more governments invest in determinants of the labor productivity the more output and productivity will be earned.71

On the other hand the development of the labor costs per unit deliver a good indicator for the competitiveness of a nation, as it has an indirect explanatory power about the productivity or the degree of capacity utilization. Strong difference of the labor costs between countries of the EU show the demand of adaptation to reduce inefficiency and to raise competitiveness.72 The following formulae describes the mathematically way of accountancy:

The theory signifies, if wages and productivity grow at the same rate, the labor costs per unit stay stable.73 To prove this statement it is necessary to have a look on the development of the real wages that will happen in the further remarks. Another argument is, that internally, within the EU the countries have to compete on the basis of the labor costs to win economic advantages.74 Consequently, there exist a link between labor productivity and real wages.75 As already mentioned, the second parameter are the real wages which describe the increase in wages less inflation.76 Now let us have a closer look at the performance of the labor costs and the real wages of several European countries and compare them with their growth in productivity. Figure 7 shows the increase of labor costs and labor productivity during the years 2000 to 2010.

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Figure 7: Labor Costs and Labor Productivity 2000 – 2010

Data Source: Eurostat.

Italy had an increase in labor costs of 31.4% during the years 2000 to 2010 and an increase in labor productivity of only 1.6%. This certainty makes Italy non-competitive even if the real wages increased only 7.5% from 2000 to 2008. Greece even gives a better example for misgovernment, as the wages increased by 39.6% and the productivity by only 15.9%. The labor costs exploded up to 31.8% from 2000 to 2010.77 On the other hand the real wages rocket upwards in some European countries which could not be argued by the increase in labor productivity and caused additional lost in competitiveness. Figure 8 illustrates the situation by picturing the increase in real wages from 2000 to 2008.

Abbildung in dieser Leseprobe nicht enthalten

Figure 8: Shift in Real Wages 2000 – 2008.

Data Source: Statista.

Especially Greece and Ireland had an enormous increase in real wages, whereat Ireland had the highest increase in productivity during that time-period.

Concluding, most of the European problem countries had a huge deficit in raising productivity and holding labor costs and real wages down. Inter alia, this oppositional development set the course for later financial bottlenecks and economic mismanagement. In the latest Global Competitiveness Report 2014 - 2015, published by the World Economic Forum, the so called PIIGS states got a shattering analysis and were partly ranked behind developing countries. Again Greece is one of the worst rated countries in the EMU behind Guatemala and Botswana.78

6.3 Misgovernment

Misgovernment and corruption led to the even documented economic challenges and aberration of the economy in some European governments. Sarrazin (2012) describes the situation as a South-European dilemma whereat strong political and economic divergences between the EMU states, especially the northern and the southern states, forecasted the current challenges. Sarrazin (2012) writes about divergences in economic efficiency and the innovative capacity of economies and points out differences in productivity, export, development of labor costs on the one hand and differences in political meanings and understandings on the other hand. These differentials are responsible for different qualities of education, of political activities, and administrative work, as well as the different confidence in the government.79 Of course, Sarrazin (2012) polarizes with his populist statements, but on the other hand most of his results conform to the research results in this paper, as most of the so called PIIGS states found themselves in the even described competitive situation. Nevertheless, this chapter will analyze political decisions which tangent the debt crisis of today or have pave the way for the economic challenges which at least led to the debt crisis.

Greece for example is the most corrupt state in Europe, 85% of its tax revenues are used to finance the public sectors jobs and for wasteful expenses as the construction of a highway can cost six times more than one built in any other state in Europe.80 Since 1829 the year of independence, Greece resides over 50.6 % of the time in a debt crisis or struggles with the conversion of debts.81 However, the Greek political environment was belowground and the elite turned more and more to a supplier of money and favor to the voters, which is why the budget deficits and the government debts increased year after year regardless the stability and growth pact, which limits deficits to 3% of the GDP. Additionally, the government falsified documents several times to obscure the alarming situation of the country and to go on with the exploitation of the own economy, as any political structured disappeared and corruption adopted the system the more so as important reforms and structural changes did not happen at any time.82


1 Mann (2011), p. 77.

2 Wray (2012), p. 179.

3 Eurostat (2015), General Government Gross Debt. Accessed 20th April, 2015.

4 Jones et al. (2012), p. 124.

5 Griffith (2012), pp. 15 – 17.

6 Bickerton (2012), p. 147.

7 N-tv (2015), Merkel erzählt Quatsch. Accessed 23rd April, 2015.

8 Consolidated Version of the Treaty of the Functioning of the European Union Art. 282, 2008 O.J. C 115/167 (6655/08).

9 ECB (2015), p. S6.

10 Iley & Levis (2013), pp. 90 – 91.

11 Mann (2014), p. 61.

12 Eurostat (2015), General Government Gross Debt. Accessed 20th April, 2015.

13 Gropp (2015), p. 2.

14 Cline (2012), p. 197.

15 Eurostat (2015a), Gross Domestic Product at Market Prices. Accessed 23rd April, 2015. Eurostat (2015), General Government Gross Debt. Accessed 20th April, 2015.

16 Peet & La Guardia (2014), pp. 7-9.

17 Scheller (2006), pp. 15-18.

18 Scheller (2006), pp. 19-20.

19 De Vries (1980), pp. 14-16.

20 Padoa-Schioppa (1988), pp. 372-375.

21 Peet & La Guardia (2014), pp. 11-16.

22 European Parliament Resolution on the results of the intergovernmental conferences, 1992 O.J. C 125/81 (A3-0123/92).

23 Consolidated Version of the Treaty of the Functioning of the European Union Art. 13, 2008 O.J. C 115/22 (6655/08).

24 De Haan et al. (2005), pp. 1-2.

25 De Grauwe (2014), p. 160.

26 ECB (2009), pp. 91 – 93.

27 Peterson & Schackleton (2012), pp. 205 - 207.

28 Consolidated Version of the Treaty of the Functioning of the European Union Art. 283, 2008 O.J. C 115/168 (6655/08).

29 De Haan et al. (2005), pp. 10 - 11.

30 Consolidated Version of the Treaty of the Functioning of the European Union Art. 282, 2008 O.J. C 115/166 (6655/08).

31 Scheller (2006), pp. 123 – 126.

32 ECB (2015d), Capital Subscription. Accessed 31st January, 2015.

33 Buti & Sapir (2002), p. 78.

34 De Grauwe (2014), pp. 161 – 162.

35 Padoa-Schioppa (2004), pp. 27 – 30.

36 De Grauwe (2014), pp. 162 – 163.

37 Scheller (2006), p. 45.

38 Consolidated Version of the Treaty of the Functioning of the European Union Art. 127, 2008 O.J. C 115/102 (6655/08).

39 Ibidem.

40 ECB (2015a), Organization. Accessed 12th April, 2015.

41 Bofinger (2001), pp. 46 – 47.

42 Ibidem, pp. 300 – 301.

43 Gali et al. (2004), p. 11.

44 Scobie (2003), pp. 85 – 86.

45 Mankiw (2012), pp. 655 – 656.

46 Sexton (2013), pp. 786 – 787.

47 Statista (2015), Inflation rate in the European Union and the Euro area from 2004 to 2014 (compared to the previous year). Accessed 14th April, 2015.

48 ECB (2012), pp. 7 – 11.

49 ECB (2015), p. 15.

50 Gropp (2015), p. 2.

51 Kirkegaard et al. (2012), p. 26.

52 Matthijs & McNamara (2015), p. 242.

53 De Haan et al. (2005), p. 27. Bofinger (2001), p. 305.

54 Henning (2015), pp. 17 – 20.

55 Issing et al. (2001), p. 18.

56 Stockhammer & Köhler (2015), pp. 34 – 35.

57 Lourtie (2012), p. 54.

58 (2015), Historic Inflation Italy – CPI Inflation. Accessed 23rd April, 2015.

59 Pisani-Ferry (2014), pp. 4 – 5.

60 Eurostat (2015), General Government Gross Debt. Accessed 20th April, 2015.

61 Statista (2015a), Griechenland: Staatsverschuldung 2004 bis 2014. Accessed 25th April, 2015.

62 Eurostat (2015), General Government Gross Debt. Accessed 20th April, 2015.

63 Mankiw (2012), pp. 672 – 680.

64 Carbaugh (2009), p. 347.

65 Eurostat (2015b), Balance of the Current Account. Accessed 25th April, 2015.

66 Wang (2009), p. 81.

67 Mankiw (2012), pp. 536 – 540.

68 OECD (2001), pp. 11 – 14.

69 Eurostat (2015c), Labor Productivity per Hour Worked, Accessed 25th April, 2015.

70 Froymovich (2013), pp. 55 – 58.

71 Auerbach & Kotlikoff (1998), p. 16.

72 Sarrazin (2012), p.

73 Bibow (2012), pp. 14 – 21.

74 Higgins & Klitgaard (2011), pp. 5 – 6.

75 Klein (2012), pp. 5 – 6.

76 Mankiw (2012), pp. 387 – 388.

77 Eurostat (2015d), Labor Costs. Accessed 26th April, 2015. Eurostat (2015c), Labor Productivity per Hour Worked, Accessed 25th April, 2015. Statista (2015b), Shift of the Average Real Wages in Selected European Countries. Accessed 26th April, 2015.

78 WorldEconomicForum (2014), p. 13.

79 Sarrazin (2012), pp. 328 – 331.

80 Pryce (2013), p. 60.

81 Reinhart & Rogoff (2010), pp. 168 – 170.

82 Tsoukalis (2012), pp. 19 – 25.

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The Crisis-Oriented Monetary Policy of the ECB. Consequences for the EMU-States
University of applied sciences, Nürnberg
International Management
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Financial Crisis, Monetary Policy, ECB, European Crisis, Greece, Bank Crisis, Unconventional Monetary Operations
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Diplom-Kaufmann (FH) Johann Gross (Author), 2015, The Crisis-Oriented Monetary Policy of the ECB. Consequences for the EMU-States, Munich, GRIN Verlag,


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