andreas dombret : the yin and yang of resolving the european sovereign debt crisis speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the peterson institute, washington dc, 17 october 2013. * 1. * * introduction ladies and gentlemen thank you for having me here today. it is a great honour to speak at an institution as distinguished as the peterson institute. for more than 30 years now, the institute has provided essential analytical input for the work of policymakers around the world. and when i say policymakers, i explicitly include central banks, as the institute ’ s president, adam posen, has intimate knowledge of our trials and tribulations. he served on the bank of england ’ s monetary policy committee and has worked with many other central banks including the bundesbank. he is therefore in a unique position to provide analysis and advice to central bankers such as myself. such advice is especially valuable in turbulent times such as these. looking back, we see a crisis that has spanned more than six years. it began with turbulence on the us housing market, followed by a global financial crisis, a global recession and a sovereign debt crisis in the euro area. it is this last episode i would like to focus on in my speech. mark twain once said : “ a man who carries a cat by the tail learns something he can learn in no other way ”. applied to the euro area, it seems that we have had the cat by its tail more often than not over the past three years. and as mark twain predicted, we have learnt a lot. we have learnt a lot about the inner workings of the european monetary union – both economically and politically. true, everybody looks at the crisis from a slightly different angle but it seems that most of us have learnt the same lessons. at least in terms of the causes of the crisis, most of us seem to have made the same diagnosis. according to this diagnosis, the main causes of the crisis can be found at the national and at the european level. at the national level, there was high public debt and a lack of competitiveness in those countries that are now at the centre of the crisis. at the european level, there were weaknesses in the institutional framework of monetary union. but if most observers agree on the diagnosis of the crisis, why can ’ t they agree on the appropriate therapy? why is such a vast array of cures proposed? in my speech, i would like to

beyond the borders of europe. after all, europe is not an island but part of a globalised world. and at the global level, we are competing with economies such as the united states and china. now, what would happen if the euro - area countries followed the approach of meeting in the middle in terms of competitiveness? well, ultimately the euro area as a whole would become less competitive vis - a - vis the rest of the world. in my view, this is not the right path to follow. to succeed, europe as a whole has to become more dynamic, more inventive and more productive. any attempt to shield one european country from competition by lowering the competitiveness of another would be doomed to fail. 3. 3 adjustment is under way now, what is my conclusion with regard to burden sharing and efficiency? have i just been arguing for efficiency while rejecting the notion of sharing the burden? well, again it is not a matter of “ either / or ” but a matter of degree. true, in my view, the initial adjustment has to take place in the deficit countries. at the end, they operated an unsustainable model based on structural deficiencies. reforming this model is the most promising approach to facilitate rebalancing. not every deficit country needs the same structural reforms, of course, but all require some sort of adjustment. and a number of reforms have already been undertaken. the process of rebalancing through structural reforms is therefore well under way. the current accounts of deficit countries have improved dramatically since 2008. the improvements range from nearly 9 percentage points of gdp in ireland to more than 15 percentage points in greece. according to recent estimates by the european commission, most crisis countries will achieve a current account surplus this year. even more importantly, this adjustment is being accomplished not only by shrinking imports, but also by growing exports. all the crisis countries are projected to see some export growth this year, ranging from just under 1 % in portugal to about 4 % in spain. and when the current accounts of deficit countries improve, the current accounts of surplus countries will automatically adjust. in the end, not every country can have a current account surplus. in a sense, we will consequently meet in the middle eventually. moreover, the burden of the initial adjustment, though not being shared in the narrow sense of the word, is at least being alleviated. what are the rescue packages other than publicly guaranteed interim loans to facilitate the adjustment? thus, at the