The European debt crisis and its effects on Germany's economic competitiveness

Inhaltsverzeichnis

Abkürzungsverzeichnis

1 Introduction
1.1 Motivation, Research Question and Objective
1.2 Structure of the Work and Methodological Approach

2 The European Debt Crisis: Development, Causes and the Role of Germany
2.1 Evolution of the European Debt Crisis
2.2 Causes of the Crisis and the EU’s Recovery Strategy
2.3 The Euro Crisis’ possible influence on Germany’s competitiveness

3 Economic Competitiveness as an Indicator for a Country’s Prosperity
3.1 Different Approaches to the Term “Competitiveness”
3.2 Ability to Sell as a Measure of Competitiveness
3.3 Country Rankings as an Alternative Indicator for Competitiveness

4 Germany’s Competitiveness Indicators in the Context of the Euro Crisis
4.1 Assessment of Unit Labour Costs
4.2 Assessment of Real Effective Exchange Rates
4.3 Assessment of the Current Account Balance
4.4 Assessment of the Global Competitiveness Index

5 Conclusive Implications
5.1 How has Germany’s competitiveness been affected by the Euro crisis?
5.2 Limitations of the Study and Suggestions for Further Research
5.3 Conclusion and Policy Recommendations for Germany

6 Reference List

7 Appendix

Abkürzungsverzeichnis

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1 Introduction

1.1 Motivation, Research Question and Objective

“The red line has been reached. We cannot indefinitely finance other countries that do not play by the rules.”^[1]

– Markus Söder, Bavarian finance minister, November 6, 2011

“The to-be-passed aids for Greece are without any alternative to ensure financial stability in the Euro area. Therefore, we protect our own currency if we act.”^[2]

– Angela Merkel, German chancellor, May 5, 2010

Since the eruption of the European debt crisis, or simply “Euro crisis”, in the end of 2009, financial aids for other countries in the Euro area and the general strategy on how to react to the symptoms of the crisis remain a highly controversial topic in German politics. These two quotes from politicians of the same governing party alliance demonstrate the discord on the right approach among policymakers.

Besides debates on whether to support other Eurozone countries at all, disagreement among various politicians and economists on the right form of support dominates the public debate since the beginning of the crisis. On the one hand, the so-called “Troika”, consisting of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), has been standing by its position of primarily demanding structural reform programmes in exchange for financial aids up until the most recent negotiations about additional rescue packages in the case of Greece (European Commission, 2016). On the other hand, a large number of international economists and politicians, mainly from aid-receiving countries, heavily criticize the Troika’s strategy of solving the crisis through financial austerity but instead demand extensive spending programmes in line with Keynesian economics. These protests even culminated in the publishing of a “manifesto for economic sense” by Krugman & Layard (2012) and multiple political crises and resulting new elections throughout Europe. As a result, the European debt crisis with its multitude of financial, economic and political challenges has been a constantly recurring, heated debate throughout Europe since 2009.

Germany has been playing a special role in this crisis. As the largest economy in the European Union (EU) and the Eurozone, its government used its influence in the European Commission to play a key role in the shaping of the bailout programmes as well as the reform requirements. The German government has since then remained a primary advocate of financial austerity for the aid-receiving countries. Germany’s exceptional status in the public debate becomes apparent when considering that many commenters just mention Germany as a synonym for the Troika (Krugman, 2015) or only name Prime Minister Tsipras and Chancellor Merkel (Müller, et al., 2015) as the two primary negotiation partners in the case of Greece and the Troika.

Alongside the debates of politicians and economists, the public opinions in the involved countries have been highly controversial as well. Especially in Greece the unpopular saving measures resulted in a very negative sentiment by the media and population towards the Troika and Germany in particular. A poll showed most Greeks hold a negative opinion of Germany as a whole (Rahmann, 2013) and disparagements of German politicians by Greek media outlets are common (Aswestopoulos, 2012) to protest against the steep financial cuts. Conversely, many German media outlets also shaped a negative image of Greece. While some, in line with Markus Söder’s stance, encouraged the end of financial aids and a “Grexit” scenario(Iken, 2015), others, for example Bild (Spyropoulou & Tsakiris, 2017), simply vilified the Greek population with the term “bankrupt Greeks”^[3]. Especially the financial guarantees the German state undertook as part of the rescue packages are in the focus of the German public opinion. As Diekmann (2015) calculated, direct and indirect guarantees by the German taxpayer related to the crisis amount to €84.5 billion in total. These guarantees are perceived very negatively in the German population with a recent poll (WeltN24, 2015) showing 80% of respondents opposing additional financial aids and a majority of 52% preferring a Grexit scenario. Chancellor Merkel justified these aids in the introductory quote as the “price” for protecting the Euro currency as a whole. All in all, it seems that there is a dominant opinion in Germany that the European debt crisis is the fault of a few Southern European countries and primarily the German taxpayer has to rescue the Euro project.

However, research has been published in recent years that sheds a different light on Germany’s role in the European debt crisis. A much-quoted study by Dany, Gropp, Littke, & von Schweinitz (2015) claims that the “German public sector balance benefited significantly from the European/Greek debt crisis, because of lower interest payments on public sector debt”. The authors estimate net savings of around €100 billion in interest expenses from 2010 to 2015 which would even overcompensate the mentioned total guarantees of €84.5 billion. This would imply that Germany even benefitted from the crisis, contrary to the current public opinion.

It becomes apparent that discussions about Germany’s role in the crisis are often one-sided or not scientifically profound due to the complex relationships of all involved political and economic players. More level-headed, objective analyses of certain elements of the crisis could therefore help to create a more fact-based groundwork for the public discussion. This thesis aims to contribute to that, particularly in the field of Germany’s controversial part in the crisis.

Current research on Germany and the crisis is often based in the fields of political ramifications or history, for example the changing political role of Germany in Europe (Meiers, 2015) or comprehensive chronologies of the crisis (Djankov, 2014). In the field of economics, Germany has often been the subject of analyses that criticize its austerity agenda (Krugman, 2013) or even see it as a core cause for the crisis (Bibow, 2012) with corresponding counter-arguments (Becker & Fuest, 2017). Further, fiscal policy is in the focus of most studies. Examples would be the already mentioned interest savings study by Dany, Gropp, Littke, & von Schweinitz (2015) or the newest “cepDefault-Index” of the Eurozone by Gerken, Kullas & Brombach (2017).

Thus, an analysis of other economic metrics of Germany in the context of the Euro crisis could provide valuable insights. In that regard, this thesis will concentrate on Germany’s economic competitiveness.

For Germany, as a strongly export-oriented economy, competitiveness on the international markets is of critical importance for its wealth and economic growth. A loss of competitive advantages could therefore severely affect the German economy and as Chancellor Merkel stated in her introductory quote, the European debt crisis poses such a threat to the Eurozone and Germany with it. The aim of this thesis is therefore to answer the research question if and in what way this threat affected Germany’s economic competitiveness. The results could then further define the publicly dominant disadvantages as well as possible advantages for Germany as a consequence of the crisis. In the end, the thesis also has the objective to give policy recommendations for the euro crisis from a German perspective. The results could subsequently contribute to the discussion whether Germany’s current policy is really “without any alternative”.

1.2 Structure of the Work and Methodological Approach

In order to achieve the overall research goal, a combination of literature review and comprehensive data analysis is used. First, to provide a first “pillar” of contextual background for the following analysis, an overview over the development and causes of the European debt crisis is given by referring to existing literature. Also, this section presents the financial and economic consequences of the described events in a graphical manner. Second, to construct the second pillar of conceptual framework, the term “economic competitiveness” is defined by a comprehensive literature review. Emphasis is laid upon the concept of “ability to sell” and the measurement method of the country rankings while a short overview over other concepts is also provided. Third, in combining theory and practice, an in-depth data-based analysis of the development of Germany’s economic competitiveness is given. With the help of different publicly available data sources, Germany’s ability to sell and other competitiveness metrics are tracked and elaborated on over the last centuries with a special emphasis on the timeframe of the European debt crisis. Furthermore, comparisons to other countries are made to emphasize characteristics unique to Germany. Ultimately, the results of the analyses are evaluated and concluded in a short discussion about Germany’s current policy in the euro crisis.

Because of the extraordinary large scientific scope the European debt crisis and Germany’s economic competitiveness could provide, this thesis focuses sharply on a few concepts and following analyses. Thus, the first part of contextual background about the European debt crisis does not aim for an in-depth chronology or discussions about right or wrong crisis management. It aims at a solid understanding of the most commonly agreed upon causes and major events that could have had an effect on Germany’s competitiveness. Similarly, the second part of defining the concept of economic competitiveness omits the in-depth depiction of competitiveness metrics that are not widely used in science. The third major part of the thesis aims at visualizing several competitiveness metrics and portraying the development during the Euro crisis. At this, the chapter does claim to find definite causal relationships between certain events of the Euro crisis and competitiveness, it rather puts the two fields in context in a descriptive manner.

2 The European Debt Crisis: Development, Causes and the Role of Germany

2.1 Evolution of the European Debt Crisis

Since the European debt crisis must be observed in a macroeconomic context and as an ongoing process, multiple definitions of the crisis’ onset exist in current literature. Some authors do not distinguish between the events of the global financial crisis of 2008 and the Euro crisis and see the first relevant event in the bankruptcy of Lehman Brothers in September 2008 (CBC/Radio-Canada, 2013), while others even see the Maastricht Treaty of 1992 as the first relevant event (Bruegel, 2015). Yet, most authors mention October 2009 for the first events that would coin the term “Euro crisis”, for example Pisani-Ferry (2014) or Djankov (2014) as well as other institutions like BBC (2012) or Guardian (2014). Therefore, this thesis defines October 2009 and onwards as the timeframe of the Euro crisis.

2.1.1 Onset and Escalation of the Crisis (2009-2011)

2009

As outlined by Djankov (2014) and his analysis of “tipping points” of the crisis, the newly elected Prime Minister of Greece, Giorgos Papandreou, publicly admitted on October 23, 2009 that Greece’s 2009 budget deficit had to be revised to 12,5%. This was more than double the amount that was originally reported and four times higher than the desired 3% under the Maastricht criteria. Djankov (2014, p. 64) called this event the “first tipping point” and the onset of the European debt crisis. Greece’s dire financial situation gained worldwide media attention in the following weeks when investors made first speculations about a possible sovereign default of Greece. During December 2009, the Greek government announced its first austerity measures with steep budget spending cuts for the 2010 budget in order to regain credibility among investors. However, the overwhelming amount of public debt of around €300 billion caused the first credit downgrade below investment grade in a decade by the major rating agencies Standard & Poor’s (S&P), Moody’s and Fitch. Figure 1 and Table 1 illustrate the public finance situation in the Eurozone at the end of 2009 during the onset of the crisis:

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Figure 1: Public Debt / Gross Domestic Product (GDP) ratio in Q4 2009 of the Eurozone countries^[4]. Own Illustration, Data Source: Eurostat (2017)

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Table 1: S&P Sovereign Credit Rating as of December 31, 2009^[5]. Own Illustration, Data Source: Trading Economics (2017)

Greece stood out with the highest Debt/GDP-ratio^[6] and lowest credit rating at the time which also indicates the excessive public indebtedness as the main cause for concern at the start of the crisis. Yet, most other Eurozone members did not meet the 60% Debt/GDP-ratio goal of the Maastricht convergence criteria too, but could retain their investment grade rating by S&P for now.

2010

During the beginning of 2010, Greece remained in the spotlight. After being condemned by the EU for their accounting irregularities, the Greek government announced several additional austerity programmes. This did not help enough though, as Figure 2 illustrates, increasing Greek bond yields made it more and more difficult for Greece to refinance during early 2010.

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Figure 2: Selected 10-Year Government Bond Yields in % in 2010. Daily Data Points. Own Illustration, Data Source: Fusion Media Limited (2017)

Although Prime Minister Papandreou claimed in March that no bailout by the EU would be needed, increasing pressure resulted in a formal bailout request by the Greek government to the EU in April and a bailout deal being reached on May 2. This first bilateral financial aid agreement between Greece, the EU and the IMF involved €110 billion over 3 years in credits in return for structural reforms and further austerity measures by Greece. One week later, the EU agreed on the instalment of a temporary €440 European bailout fund, the European Financial Stability Facility (EFSF). Together with the ECB’s announcement that every Greek bond, regardless of its rating, would be eligible as collateral, these actions significantly reduced Greek borrowing costs over night. Although now able to repay its immediate obligations, relief was only short-timed for Greece as government bond yields began to rise during the summer months again.

While the problems with Greece remained, attention also shifted to other Eurozone countries. As also shown in Figure 2, primarily Ireland, Portugal, Spain and Italy were affected by rising borrowing cost rates significantly above the Eurozone average during 2010. Investors had doubts about the financial stability of particularly these countries, which were even grouped under the term “PIIGS” by the media (The Economist, 2010). Especially Ireland attracted attention in the summer of 2010. Although, with 62% Debt/GDP-ratio in 2009 not severely in debt (see Figure 1), debt levels rose sharply during 2010 as its struggling banking sector required substantial recapitalizations. Subsequently, Ireland became the second country to officially request and receive a bailout by the EFSF and IMF in November (€85 billion). Meanwhile the EU, by the initiative of France and Germany, in October agreed on the future replacement of the temporary EFSF by a larger, permanent Eurozone bailout fund to be called “European Stability Mechanism” (ESM). As stated in the agreement, this fund would also include “private sector participation” which Djankov (2014, p. 80) describes as the second tipping point of the crisis. Government bond yields, as good “crisis barometers”, rose sharply (see Figure 2) during the last three months of 2010 as the fear among investors spread that the private sector, especially banks, could bear substantial losses in the crisis.

2011

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Figure 3:Selected 10-Year Government Bond Yields in % in 2011. Daily Data Points. Own Illustration, Data Source: Fusion Media Limited (2017)

During the first months of 2011, Portugal stood in the focus of the crisis. Increasing debt levels, several credit rating downgrades^[7] and a political crisis that resulted in new elections let Portuguese bond yields rise to over 10% in May, as illustrated by Figure 3. Being in a similar situation as Greece and Ireland before it, Portugal requested financial help by the EU and IMF in April and received a bailout of €78 billion in May.

Greece’s situation remained an exception though. In June, S&P downgraded Greece to their “CCC” level, as Djankov (2014) emphasized, the lowest rating for any country in the world at that time. Even though its government passed additional spending cuts of about €63 billion in June, investors’ confidence did not return and the country still faced enormous borrowing costs and an ongoing economic crisis that made refinancing without the help of the EU unbearable. Figure 4 demonstrates the severity of Greece’s recession:

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Figure 4: Annual Real GDP Growth Rate in % of Selected Eurozone Members from 2007 to 2012. Annual Data Points. Own Illustration, Data Source: Eurostat (2017)

As the figure shows, the real growth rates of the most affected Eurozone members developed uniformly, except Greece’s. All countries suffered from declining and negative growth rates during the global financial crisis in 2008 and 2009, but stabilized in 2010 and 2011 while Greece’s economy continued to show significant negative growth rates of -5,5% in 2010 and -9,1% in 2011. The “nervous summer” (Djankov, 2014, p. 94) in June 2011 marked the height of the crisis as talks between the EU and Greece for additional financial help were overshadowed by voices all over the world questioning Greece’s continuance in the Eurozone and the future of the Euro as a currency itself. The BBC (2011), for example, called this time “the endgame of the Euro”. EU leaders reacted by agreeing on a first draft for a second bailout, with a volume of €109 billion the largest so far, in July through the EFSF and IMF. As Djankov (2014) points out, that agreement involved the private sector agreeing on cuts on Greeks bonds for the first time. These measures secured Greece’s short-term liquidity, but only brought a short-lived relief on the bond markets (see Figure 3).

During the second half of 2011, Italian and Spanish government bond yields came under pressure. Weak growth prospects, fragile political environments as well as very high public debt levels in the case of Italy and a banking crisis in the case of Spain raised concerns among investors. Additionally, these countries were seen as a much larger risk factor due the significantly larger sizes of their economies. The ECB started to be more active in the crisis and announced in August that it would buy Italian and Spanish bonds on the secondary market to lower yields in order to avoid crisis contagion. These “Outright Monetary Transactions”^[8] (OMT) however did not prevent further credit rating downgrades for Italy and Spain during the fall of 2011^[9].

In the meantime, on September 20, the European Commission, Council and Parliament agreed on an economic governance plan for the Eurozone that comprised of six legislative directions such as stronger fiscal sustainability or national budgetary frameworks for future crisis prevention, the so-called “Six-Pack” (European Commission, 2011). The EU institutions also agreed on further actions regarding Greece on a crisis summit on October 27. After long negotiations, the second bailout for Greece that was drafted in July was finalized. The agreement involved a 50% writedown on privately held debt which Djankov (2014, p. 97) describes as his third tipping point, the first in a positive way due to debt relief for Greece and positive market reactions.

Directly afterwards, on October 31, Prime Minister Papandreou surprisingly announced new elections due to the additional austerity measures for the second bailout and shortly afterwards resigned. Markets and EU leaders were not prepared and in shock of what was the fourth tipping point of the crisis for Djankov (2014, p. 105). Greek bond yields sharply rose until the end of the year and the EU temporarily stopped aid payments until the referendum.

2.1.2 Crisis Containment by the ECB and Signs of Recovery (2012-2017)

2012

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Figure 5: Selected 10-Year Government Bond Yields in % in 2012. Daily Data Points. Own Illustration, Data Source: Fusion Media Limited (2017)

Uncertainty and anxiety on the financial markets regarding the Eurozone were still prevalent in the beginning of 2012, as indicated by Figure 5. In the same line as the “Six-Pack” plan, the EU further defined its plans for future financial stability with the agreement of nearly all^[10] EU member states on a “Fiscal Stability Treaty” or in short “Fiscal Compact” on January 30. With this treaty, the participating states obliged themselves to strictly enforce budgetary consolidation with structural deficits not larger than 0,5% per year. Djankov (2014, p. 107) called this agreement a “step toward a European Fiscal Union” because this legal limit on deficit spending was enforceable, unlike the Maastricht criteria. Markets reacted positively to the agreement but remained volatile in the following months. In March, the agreed upon second bailout for Greece was put into action which sharply reduced Greek bond yields (see Figure 5). However, political uncertainty due to the mentioned new elections let Greek bond yields rise to 30% again in June.

Besides Greece, also Spain and the European banking sector remained in the focus of the crisis in the spring of 2012. The prevalent banking crisis in Spain culminated in the nationalization of the “Bankia”-Group whilst the sovereign debt rating was downgraded several times^[11], resulting in rising borrowing costs in the first half of the year. Consequently, Spain became the fourth Eurozone country to officially request a bailout from the EU in June 2012. This bailout of up to €100 billion through the ESM however was officially not meant for Spanish sovereign obligations, but only for recapitalizations of its crisis-ridden banking sector. It became apparent, that the crisis, besides being a debt- and economic crisis, also showed clear characteristics of a banking crisis. Figure 6 showing the “Euro Stoxx Banks”-Index demonstrates the precarious situation of European banks in 2012:

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Figure 6: EURO STOXX Banks Index Closing Prices from Jan. 2010 to Dec. 2012^[12]. Daily Data Points. Own Illustration, Data Source: finanzen.net GmbH (2017)

While the European Banks Index hit ten-year lows in early 2012, the ECB under newly appointed president Mario Draghi began to play a key role in the crisis management and pursued a more lenient monetary policy. Besides the already mentioned outright purchases on the secondary market, the ECB also started the first “Long-Term Refinancing Operations” (LTRO), additional liquidity provisions for the fragile European banking sector, in December 2011 and February 2012. Just through this, it provided additional liquidity of around €1,02 trillion and Mario Draghi promised to continue the program in June 2012. Furthermore, the ECB started to significantly lower their base rate of the “Main Refinancing Operations” (MRO) throughout 2012. Figure 7, showing development of the most important ECB rates, illustrates the shift to an expansive monetary policy during 2012:

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Figure 7: Key ECB Interest Rate Development in % from Oct. 2008 to May 2017. Own Illustration, Data Source: European Central Bank (2017)

Yet, according to Djankov (2014), the most important measure the ECB undertook to fight the crisis was Mario Draghi’s often cited press conference on July 26, 2012. In a climate of ongoing crises throughout Europe that questioned the future of the Eurozone, Draghi announced that the ECB would “do whatever it takes” to save the Euro. For Djankov that statement was his fifth tipping point and the most important positive one. As Figure 5 illustrates, bond yields throughout Europe steadily declined through the rest of 2012 as investors regained confidence in the Eurozone through that statement. This event marked the turning point of the crisis as Djankov (2014, p. 120) describes it with: “That did the trick—it saved the euro zone”. Although structural problems like high debt levels and the ongoing banking crises remained, the breakup of the Eurozone was not considered a possibility anymore. Alongside expansive monetary policy, the ECB also undertook further responsibilities as a result of the crisis. As decided on an EU summit on December 14, 2012, the ECB also became the head of the European banking supervision, with direct responsibility for European banks that exceeded assets of €30 billion. This major change in legislation, commonly called “Banking Union”, marks the sixth tipping point of the crisis for Djankov (2014, p. 142) as the EU hoped to better address the banking crises in Europe through a single supervisor system.

2013-2017

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Figure 8: Selected 10-Year Government Bond Yields in % from Jan. 2013 to May 2017. Daily Data Points. Own Illustration, Data Source: Fusion Media Limited (2017)

Figure 8 exhibits the course of the crisis for the remaining years until today. In March 2013, Cyprus became the fifth, and until today the last, country to request and receive a financial bailout by the ESM and IMF. Being a major creditor of Greek bonds, the Cypriot banking system needed that financial aid of about €10 billion for recapitalizations. As part of the arrangement, private deposits of Cypriot banks above €100’000 were hit with levy-offs of up to 60% and strict capital controls. Albeit being only a minor bailout compared to the others, Djankov (2014, p. 150) classified it as the seventh and final tipping point of the crisis. The Euro members clearly indicated with the agreement that the burden for future bailouts would be shifted from mainly taxpayers, as in all prior bailouts, to creditors and depositors.

During the rest of 2013 and 2014, crisis severity and media coverage subsided noticeably. As indicated by Figure 7 and 8, the ECB continued its expansive monetary policy with lowered base rates which influenced borrowing costs for the Eurozone positively until 2015. Consequently, several crisis-ridden countries could report positive signs of recovery. Ireland was able to clearly improve its public finance situation and exited the bailout programme of 2010 in December 2013. Likewise, after a deep recession in 2012, Portugal and Spain could report positive growth figures again^[13] and could end their bailout programs in April and January 2014 respectively (Bruegel, 2015). Moreover, these three countries were all able to place bonds on the financial markets in 2013 and 2014 again. In order to further support the recovery of the Eurozone and to meet the danger of deflation, the ECB on January 22, 2015 launched the first quantitative easing programme as part of its non-standard monetary policy measures (European Central Bank, 2017). These purchases of assets mainly from the crisis-ridden countries have since then continued until at least the end of 2017.

The situation in Greece did not show the same signs of recovery though, as Bruegel (2015) showcases in its timeline of more recent crisis events. After several snap elections, the far-left and anti-austerity party Syriza won the election on January 25, 2015 while Greece’s obligations in 2015 made a third bailout package necessary. First talks for the bailout took place in the first half of 2015 and new Prime Minister Tsipras strictly argued against further spending cuts for the Greek population. This deadlocked situation let Greek bond yields rise again to over 10% after they had fallen from over 40% to nearly 5% in 2014 (see Figure 8). Uncertainty peaked in on June 26, when Tsipras announced a referendum on the EU’s reform demands for July 5. Since a bankruptcy and subsequent Eurozone exit of Greece was imminent, Greek authorities declared a bank holiday and capital controls for domestic banks that lasted from June 28 to July 9. Although the referendum held on July 5 rejected the Troika’s demands, the Greek government and EU leaders came to a provisional agreement on a third bailout package on July 13 and reform demands were approved by the Greek parliament. Since then, talks about the shape of a third bailout package have continued as Greek risk premiums fell again throughout 2016 and 2017^[14]. Bond yields for the rest of the Eurozone remained relatively stable without major new crisis phases as the ECB continued its expansive monetary policy through 2016 and 2017 (see Figure 8).

2.1.3 Current Situation in May 2017: A Mixed Picture

As of May 2017, the Euro crisis has not been in the focus of media attention since the last critical phase in June/July 2015. Attention however shifted to the ECB and its controversially discussed, expansive monetary policy. For example, in German media, Sinn (2016) recently argued against the “dispossession of German savers” by ECB policies. Nevertheless, as the ECB’s measures can be seen as a direct consequence of the Euro crisis, discussions and new developments on the broader topic will continue to happen in the future.

Current economic metrics of the Eurozone show a mixed picture of negative and positive signs. To mirror the situation at the onset of the crisis, the Debt/GDP-ratio and current credit ratings as of May 2017 demonstrate the development and current shape of the Eurozone^[15] regarding public debt levels:

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Figure 9: Comparison of the Public Debt / GDP ratio in Q4 2009 and Q4 2016 of the Eurozone countries. Own Illustration, Data Source: Eurostat (2017)

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Table 2: Comparison of the S&P Sovereign Credit Rating as of December 31, 2009 and May 1, 2017. Own Illustration, Data Source: Trading Economics (2017)

Figure 9 shows that high public debt levels are still prevalent in 2017 throughout the Eurozone. While only Germany and Malta reduced their Debt/GDP-ratio since the onset of the crisis, particularly the crisis-ridden countries Greece, Spain, Portugal, Cyprus and Slovenia significantly incurred new debts. Likewise, Table 2 also exhibits a situation worse than 2009 concerning credit ratings. Out of 16 Eurozone countries, 12 have a lower credit rating than before the crisis and only four retained their rating. It becomes apparent that exceeding debt levels have not yet been reversed and that the Eurozone clearly has a lower creditworthiness today than before the crisis.

However, there are also recent positive signals regarding Eurozone debt levels.

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Figure 10: Public Debt / GDP-ratio in % for the Eurozone Average from Q1 2008 to Q4 2016. Quarterly Data Points. Own Illustration, Data Source: Eurostat (2017)

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Figure 11: Real GDP growth development in % from 2008 to 2016 for the Eurozone Average. Yearly Data Points. Own Illustration, Data Source: Eurostat (2017)

As Figure 10 illustrates, the average public debt level slightly, but steadily declined since it peaked in 2014 which could indicate a turning point in the development of debt levels. Correspondingly, after a recession in 2012 and 2013, the Eurozone was able to report positive real GDP growth numbers for the last three years.

Outlooks for the mid-term future development of the Eurozone assume a continuation of that trend. The ifo Institute (2017) projects “robust growth” for the Eurozone in its most recent economic outlook for the Eurozone. Similarly, Bouzanis (2017) of Focus Economics predicts “bright prospects” as “growth continues to show signs of broadening as the Eurozone’s recovery benefits from strengthening internal and external demand”.

To conclude the indications of the current situation in May 2017, a mixed picture can be observed. The Eurozone still has not recovered to pre-crisis levels in terms of public debt levels and creditworthiness. Yet, most economic outlooks and the development of the last three years indicate that the Eurozone is over the “peak” of the crisis and should experience steady recovery throughout the next years. It remains to be monitored whether the current phase of de-escalation continues or new critical situations occur.

2.2 Causes of the Crisis and the EU’s Recovery Strategy

After presenting the most critical events, awareness of the underlying causes and current recovery proposals is needed to fully comprehend the context of the crisis and its dynamics. Therefore, a concise summary of the Euro crisis’ causes as well as the Eurozone’s current recovery proposals is given by referring to selected literature.

2.2.1 Crisis Components and Underlying Structural Problems of the Eurozone

The European debt crisis, as the name already implies, is often portrayed as primarily revolving around excessive public debt levels in southern European countries. However, this view is too one-sided as current research proves. In an assessment of the Euro crisis conducted by the German Sachverständigenrat^[16] (Bofinger, Buch, Feld, Franz, & Schmidt, 2012) for the German government, it is stated that the Euro crisis is a “manifold crisis” which comprises of three interconnected problem areas, namely a sovereign debt crisis, a banking crisis and a macroeconomic crisis. Equally, Shambaugh (2012, p. 1) depicts the Euro crisis as “The Euro’s Three Crises”. The interconnections and self-intensifying problems are exhibited in Figure 12:

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Figure 12: The Euro’s Three Crises. Reprinted from: (Shambaugh, 2012, p. 47)

In the different crisis-ridden countries, each of these problem areas played a key role to different extents. The dynamics of this “vicious cycle” can be described by linking the events presented in chapter 2.1 and the explanations of the three crises by (Shambaugh, 2012) and (Bofinger, Buch, Feld, Franz, & Schmidt, 2012).

To begin with, sovereign debt crises intensified banking crises since rising borrowing costs negatively impacted bank balance sheets which was for instance the case in Cyprus where banks were heavily invested in Greek bonds. Conversely, bank bailouts led to surging public debt levels which can be best represented by Spain and its Debt/GDP-ratio doubling during the crisis (see Figure 9).

Secondly, sovereign debt crises and subsequent spending cuts worsened already low growth rates, for example in Greece (see Figure 4). In reverse, lost tax income and increasing unemployment costs due to recessions further aggravated public finances.

[...]

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^[1] Own translation; Original quote: „Die rote Linie ist erreicht. Wir können nicht unbegrenzt andere Länder finanzieren, die sich nicht an die Spielregeln halten.“ (Issig, 2011)

^[2] Own translation; Original quote: „Die zu beschließenden Hilfen für Griechenland sind alternativlos, um die Finanzstabilität des Euro-Gebietes zu sichern. Wir schützen also unsere Währung, wenn wir handeln.“ (Bundesregierung, 2010)

^[3] Own translation; Original quote: „Pleite-Griechen“ (Spyropoulou & Tsakiris, 2017)

^[4] As of May 2017, the Eurozone comprises of the Euro-19 group. At the end of 2009, the Eurozone comprised of the Euro-16 group, with Estonia, Latvia and Lithuania joining the Eurozone in 2011, 2014 and 2015 respectively. Hence, different Eurozone definitions apply in the context of different years throughout this work.

^[5] For the development of S&P credit ratings for all Eurozone members from 2000-2017 see also Figure 29 (Appendix)

^[6] For the development of the Debt/GDP-ratio in the Eurozone from 2000-2017 see also Figure 28 (Appendix)

^[7] See also Figure 29 (Appendix)

^[8] Until September 2012 these transactions were executed under the “Securities Markets Programme”

^[9] See also Figure 29 (Appendix)

^[10] The Czech Republic, the United Kingdom and Croatia did not sign the treaty

^[11] See also Figure 29 (Appendix)

^[12] For the development of the EURO STOXX Banks Index from 2007-2017 see also Figure 32 (Appendix)

^[13] See also Figure 31 (Appendix)

^[14] As of May 2017, the Troika and Greece recently agreed on spending cuts as a requirement for the final approval of the third bailout (Frankfurter Allgemeine Zeitung, 2017)

^[15] In this case only the Euro-16 group without Latvia, Lithuania and Estonia since they joined the Eurozone after 2009

^[16] Short form of “Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung“