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The Political Economy of Germany in the Sovereign Debt Crisis 143 Daniela Schwarzer PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL SPECIAL REPORT 21 Resolving the European Debt Crisis William R. Cline and Guntram B. Wolff, editors February 2012 Resolving the European Debt Crisis William R. Cline and Guntram B. Wolff, editors PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS BRUEGEL Washington, DC February 2012 00--FM--i-x.indd 1 2/24/12 3:20 PM William R. Cline has been a senior fellow Typesetting by BMWW at the Peterson Institute for International Printing by Versa Press, Inc. Economics since its inception in 1981. While on leave during 1996–2001, he was deputy BRUEGEL managing director and chief economist of 33 Rue de la Charité/Liefdadigheidsstraat 33 the Institute of International Finance. Since B-1210 Brussels, Belgium 2002 he has held a joint appointment with the Phone: +32 2 227 4210 Center for Global Development. He has been Fax: +32 2 227 4219 a senior fellow at the Brookings Institution www.bruegel.org (1973–81); deputy director for development and trade research, US Treasury Department Jean Pisani-Ferry, Director (1971–73); Ford Foundation visiting professor in Brazil (1970–71); and lecturer and Copyright © 2012 by the Peter G. Peterson assistant professor of economics at Princeton Institute for International Economics. All University (1967–70). He graduated summa rights reserved. No part of this book may cum laude from Princeton University in 1963 be reproduced or utilized in any form or and received his PhD in economics from by any means, electronic or mechanical, Yale University in 1969. He is the author of including photocopying, recording, or by 24 books, including Financial Globalization, information storage or retrieval system, Economic Growth, and the Crisis of 2007–09 without permission from the Institute. (2010), Global Warming and Agriculture (2007), and The United States as a Debtor Nation (2005). For reprints/permission to photocopy please contact the APS customer service Guntram B. Wolff is deputy director department at Copyright Clearance of Bruegel. He worked for the European Center, Inc., 222 Rosewood Drive, Commission’s Directorate General for Danvers, MA 01923; or email requests to: Economic and Financial Affairs, where he [email protected] researched on the macroeconomics of the euro area and the reform of euro area governance. Printed in the United States of America Prior to joining the Commission, Wolff was 14 13 12 5 4 3 2 1 an economist in the economics and research departments of the Deutsche Bundesbank, Library of Congress Cataloging-in- where he coordinated the research group Publication Data on fiscal policy. He holds a PhD from the Resolving the European debt crisis / [edited by] University of Bonn, where he was a research William R. Cline and Guntram Wolff. fellow at the Center for European Integration p. cm. Studies (ZEI). He has taught economics at the Papers presented at a conference held at a University of Pittsburgh and is currently an conference center near Paris, on Sept. 13–14, adviser to the International Monetary Fund. 2011. Includes index. ISBN 978-0-88132-642-0 PETER G. PETERSON INSTITUTE FOR 1. Debts, External—European Union INTERNATIONAL ECONOMICS countries—Congresses. 2. Financial crises— 1750 Massachusetts Avenue, NW European Union countries—Congresses. Washington, DC 20036-1903 3. European Union countries—Economic (202) 328-9000 FAX: (202) 659-3225 policy—Congresses. 4. Euro area—Congresses. www.piie.com I. Cline, William R. II. Wolff, Guntram. HJ8615.R47 2012 C. Fred Bergsten, Director 336.3’4094—dc23 Edward A. Tureen, Director of Publications, 2012000905 Marketing, and Web Development The views expressed in this publication are those of the authors. This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the Board or the Advisory Committee. 00--FM--i-x.indd 2 2/24/12 3:20 PM Contents Preface v 1 Overview 1 William R. Cline and Guntram B. Wolff I Political-Economic Environments 2 Greece in the Euro Area: Odd Man Out, or Precursor of Things to Come 19 Loukas Tsoukalis 3 Political-Economic Context in Ireland 37 Alan Ahearne 4 Understanding Portugal in the Context of the Euro Crisis 51 Pedro Lourtie 5 Italy and the Euro Crisis 95 Riccardo Perissich 6 Spain and the Euro Area Sovereign Debt Crisis 109 Guillermo de la Dehesa 7 France, the State, and Globalization 131 Zaki Laïdi 00--FM--i-x.indd 3 2/24/12 3:20 PM 8 The Political Economy of Germany in the Sovereign Debt Crisis 143 Daniela Schwarzer II Lessons from Past Debt Crises 9 How to Do a Sovereign Debt Restructuring in the Euro Area: Lessons from Emerging-Market Debt Crises 165 Jeromin Zettelmeyer 10 Sovereign Debt Restructuring: The Legal Context 187 Lee Buchheit III Pros and Cons of Alternative Policy Options 11 Alternative Strategies for Resolving the European Debt Crisis 197 William R. Cline 12 The Euro Area Crisis: Policy Options Ahead 235 Guntram B. Wolff 13 Comments on Policy Strategies 253 Gertrude Tumpel-Gugerell and Rodrigo de Rato 14 Does the Euro Have a Future? 257 George Soros IV Policy Simulation Game 15 The Simulation Exercise: A Real Time Economic and Political Stress Test 265 Steven R. Weisman with Silvia B. Merler About the Contributors 275 Index 281 00--FM--i-x.indd 4 2/24/12 3:20 PM Preface More than three years after the most acute phase of the Great Recession and global financial crisis, the most severe stress on global financial and economic stability is centered in the sovereign debt crises and banking sector in the euro area. What began as a relatively localized Greek crisis in early 2010 soon escalated to envelop Ireland and Portugal, both of which lost capital market access and required emergency lending. By the second half of 2011, the conta- gion had spread to the far larger economies of Italy and Spain, which by late October had to pay sovereign risk premia on the order of 500 basis points and whose public finance sustainability was therefore at risk. Large maturities come due in the first few months of 2012 in both economies, and the first half of the year seems likely to witness either a new phase of more successful man- agement of the debt crisis or a severe unraveling with major negative spillover effects on the world economy. At each successive phase in this unfolding financial drama, European policymakers have taken incremental steps designed to reassure markets, only to find that the actions were widely regarded as too little too late. In 2010 precious time was lost discussing the pros and cons of financial support and International Monetary Fund (IMF) intervention and later the conditions for bailing in private creditors, but no concrete decision was taken on Greek debt restructuring. In 2011 the July decision to increase support to Greece and ac- cept a modest “private sector involvement” in the reduction of the Greek debt was superseded by the late-October decision to require much deeper (50 per- cent) “haircuts” for private creditors, supplemented by an announced policy intended to build a firewall through major leveraging of the European Fi- nancial Stability Facility (EFSF). Then a landmark summit in early December committed EU members (except the dissenting United Kingdom) to a treaty- based tightening of the fiscal rules. The summit also announced a plan for v 00--FM--i-x.indd 5 2/24/12 3:20 PM €200 billion in EU lending to the IMF, to be supplemented by corresponding lending by other economies (especially large emerging-market economies with ample reserves) for purposes of emergency support to euro area sovereigns. In mid-2011, the Peterson Institute and Bruegel joined forces to plan a conference designed to contribute to the formulation of policies that could help resolve the euro area debt crisis. This volume presents the papers pre- pared for that conference, held in Chantilly, France, on September 13–14, 2011. Several of the papers have been updated to take account of develop- ments through end-2011. Sovereign debt crisis resolution turns crucially on political will, and the first set of papers accordingly examines the political context in each of five economies facing debt difficulties—Greece (Loukas Tsoukalis), Ireland (Alan Ahearne), Portugal (Pedro Lourtie), Spain (Guillermo de la Dehesa), and Italy (Riccardo Perissich)—as well as the two key stronger economies of Germany (Daniela Schwarzer) and France (Zaki Laïdi). Two other papers review past experience with sovereign debt restructur- ing from the economic (Jeromin Zettelmeyer) and legal (Lee Buchheit) stand- points and consider implications for (and the special circumstances of ) the euro area. The two final papers, authored by the two editors of this volume, are par- allel examinations of the set of policy options available. The salient issues in both include questions of debt sustainability, whether private sector involve- ment spurs contagion, the merits and drawbacks of alternative restructuring approaches, how to assemble a large emergency financing capacity in case it is needed for Spain and Italy, whether the European Central Bank (ECB) should perform the role of lender of last resort, whether joint-liability eurobonds would be feasible and desirable, and the implications of a possible breakup of the euro. Following the views of George Soros, who presented the luncheon address, the final chapter (by Steven Weisman with Silvia Merler) describes a policy simulation game played on the second day of the conference by about fifteen market participants and experts representing the roles of governments, banks, and political sectors of the seven euro area nations as well as the ECB, IMF, G-7, and credit-rating community. Building on practice that is common in the financial community but very rarely applied to macroeconomic and macro- financial policy, this innovative approach was intended to shed light on the interdependence between policy decisions and market responses as well as on the interdependence and cooperation among policy players.
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