The Euro Debt Crisis and Germany’s Euro Trilemma

Levy Economics Institute, Working Papers Series

43 Pages Posted: 16 May 2012

See all articles by Jörg Bibow

Jörg Bibow

Skidmore College - Department of Economics; Bard College - Levy Economics Institute

Date Written: May 15, 2012


This paper investigates the causes behind the euro debt crisis, particularly Germany’s role in it. It is argued that the crisis is not primarily a “sovereign debt crisis” but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany’s part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all — perpetual export surpluses, a no transfer/no bailout monetary union, and a “clean,” independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro’s survival. The crisis in Euroland poses a global “too big to fail” threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

Keywords: Euro, Monetary Union, Banking Crisis, Balance-of-Payments Crisis, Sovereign Debt Crisis, Competitiveness Imbalances, Fiscal Transfers, Bailouts, Austerity

JEL Classification: E42, E52, E58, E65, F36, G01

Suggested Citation

Bibow, Jörg, The Euro Debt Crisis and Germany’s Euro Trilemma (May 15, 2012). Levy Economics Institute, Working Papers Series, Available at SSRN: or

Jörg Bibow (Contact Author)

Skidmore College - Department of Economics ( email )

Saratoga Springs, NY 12866
United States

Bard College - Levy Economics Institute ( email )

Blithewood Rd
Annandale on Hudson, NY 12504
United States

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