A new way for Germany and Europe

When the new German government takes over, it should not wait for long until it makes the euro area a central topic on its agenda.

By: and Date: September 30, 2013 Topic: Macroeconomic policy

Related publication:Memo to Merkel: Post-election Germany and Europe

When the new German government takes over after Sunday’s election in Berlin, it should not wait for long until it makes the euro area a central topic on its agenda.

Although the architecture of the euro area has been improved since the crisis hit, not all elements are in place to make monetary union work efficiently. Major risks remain: economic recovery is shallow, relative price levels adjust too slowly and hence public debt sustainability is far from being achieved. Unemployment numbers are high, the banking system is weak and decision making is complicated so that accidents such as the one of Cyprus can reproduce. All of those risks can undermine the stability of monetary union and would hence have serious repercussions on Germany. There is thus no time for complacency and more reforms are needed. We see three central elements that the German government should pursue, which include a change in the philosophy of crisis management.

First, while an overall inflation rate of 2% should be maintained for the euro area, it is in Germany’s interest to allow market forces to drive German inflation rates above 2% If this does not happen, the necessary relative price adjustment will drive inflation rates in the South of Europe to zero or even below zero. As a consequence, the ECB would miss its inflation target of close to but below 2%. More worryingly, simple simulations show that these developments may make it very difficult to guarantee debt sustainability in the South. Also, the balance sheets of banks, corporations and households would be further stressed. More financial aid to crisis countries would be the consequence unless governments decide to let a country default. The market-driven adjustment process in Germany would be greatly supported by a significant increase in public investment, both in infrastructure and education. On both counts Germany significantly underperforms the rest of the EU which risks undermining its competitiveness in the medium-term. The new German government should also carefully review which parts of the services sector could be liberalized to unleash the growth potential in this sector.

The second important task is to complete banking union. This is of central importance to end financial fragmentation in the euro area which currently makes a meaningful recovery in Southern Europe illusionary as investment will remain subdued. To complete banking union, the most important element is to agree on a centralized resolution authority with bail-in and fiscal back-stop. To achieve quick resolution that leads to less fragmentation along national borders, it is of central importance to create a mechanism that does not operate on a unanimity basis. There is still a fair chance that a decisive step in this direction before the European election would allow to overcome the banking crisis in the summer of 2014 finally ending fragmentation and restoring the foundations of growth, namely functioning financial intermediation.

To further support this process, the capital of the European Investment Bank should be increased and the activities of the EIB should be more targeted to meaningfully finance SME investment in Southern Europe. Moreover, the desperation of the Southern European member states to overcome unemployment should be taken seriously. A European Youth Unemployment Fund should provide support for training, incentive for corporates to hire and train youths and enable cross-border mobility. These measures should help prepare the grounds for deeper-running governance reform.

The overall strategy to reform the euro area governance structures should be changed. At the height of the crisis, it was crucially important to quickly create new and powerful instruments. Those included a stepping up of fiscal governance and economic policy coordination as well as the creation of the European Stability Mechanism. However, the ESM, which could turn out to become the center piece of economic governance in the euro area, has been created in an intergovernmental logic, in which every member state has a strong veto power. Germany, as the most important economy and the most powerful country, has become the central veto player in this set-up. This increase in power has gone hand in hand with a decreasing relevance of community institutions and in particular the European Commission. This development is neither in Germany’s nor in Europe’s long term interest as it undermines legitimacy and increase antipathy between countries. The more integrated Europe becomes, the more decision making will have to be done and legitimized at the European level. Well functioning community institutions can best define the common interest and can derive legitimacy from the European level. A meaningful transfer of competences in those areas needed together with the repatriation of competences in other areas should be combined with a transfer of parliamentary legitimacy. This will require a Treaty change and Germany should promote this among its partners.

Related publication:Memo to Merkel: Post-election Germany and Europe

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic

Upcoming Event


How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy
Read about event More on this topic

Upcoming Event

May - Jun


Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Filippo di Mauro, Wolfhard Kaus, Steffen Müller, Gianluca Santoni, Verena Plümpe, Andrea Roventini, Valerie Smeets, Nicola Viegi, Markus Zimmermann and Javier Miranda Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article


European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author


The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts