January Monthly Report: adjustments are underway in the peripheral countries
According to the Deutsche Bundesbank, there are signs of a gradual improvement in the economic situation in the countries most severely affected by the crisis, ie Cyprus, Greece, Ireland, Italy, Portugal and Spain.
"In comparison to the situation at the start of the crisis, the current situation and trends in the countries affected show that a great deal has already been achieved," says the report, published on Monday. The key topics addressed by the report are the adjustment processes and reform measures in the real economy, the progress made in consolidating public finances, private debt levels and the reduction of cross-border interdependencies in the relevant countries.
Current account deficits largely reduced
According to the Monthly Report, current account deficits have largely been reduced. The Bundesbank attributes this turnaround not only to weaker economic activity and domestic demand, but also to an improvement in price and cost competitiveness as well as attempts by the countries to tap into new foreign markets. The dramatic rise in unemployment also appears to be coming to a halt, albeit at a depressingly high level. The Bundesbank believes that these developments could also be the first signs of the positive impact of the reforms implemented by the countries to overcome the crisis. These reforms were comparatively far-reaching on the labour market, especially in terms of job protection, unemployment benefits and collective bargaining law.
"In many of the countries most severely affected by the crisis, the conditions for sustainable growth are better than before the crisis as a result of the processes and reforms initiated," the Bundesbank reports.
Debt reduction is a key challenge
In the Bundesbank's opinion, the main challenge currently facing the crisis countries is the reduction of the very high levels of private and public debt. According to the report, there has been a further marked increase in government debt ratios, some of which are now well above 100 % of nominal gross domestic product. This means that public finances remain susceptible to negative shocks.
"It is extremely important that public deficits are rapidly reduced to European TARGET levels," the report says: the countries hit especially hard by the crisis ultimately need to restructure their economic and fiscal policy so that they are once again able - using their own resources and on a lasting basis - to keep pace with the requirements of a monetary union which has a single, stability-oriented monetary policy. Although progress has been made in cutting private sector debt, there is still an urgent need for further adjustments to balance sheet structures.
The Monthly Report also discusses the advantages and disadvantages of a one-off levy on private wealth in order to reduce government debt levels in the countries most affected by the crisis. The Bundesbank believes that such a levy should only be considered in extreme cases in which there is a risk of sovereign default (see link on the right).