Saving the euro: self-fulfilling crisis and the ‘Draghi put’
Marcus Miller, Lei Zhang 26 June 2014
Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.
In surveying eight centuries of financial folly, Reinhart and Rogoff (2009) observed that:
International finance Monetary policy
ECB, eurozone, sovereign debt, financial crises, sovereign debt crisis, Outright Monetary Transactions, European sovereign debt crisis, self-fulfilling crises
Tracking the causes of Eurozone external imbalances: New evidence
Jose Luis Diaz Sanchez, Aristomene Varoudakis 06 February 2014
External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.
The Eurozone sovereign debt crisis, triggered by the 2008–09 global financial crisis, exposed macroeconomic imbalances in member countries that had accrued gradually following the advent of the euro in 1999. The growing current-account deficits in the Eurozone periphery and surpluses in the core were a main symptom of these imbalances (Figure 1).1 These patterns of intra-Eurozone current-account imbalances led to the accumulation of large external debts in the Eurozone periphery, matched by growing claims held by commercial banks in the core.
competitiveness, eurozone, global imbalances, global financial crisis, European sovereign debt crisis
Tax evasion and austerity-plan failure
Francesco Pappadà, Yanos Zylberberg 03 February 2014
Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.
Austerity plans in southern European countries (Greece, Portugal, Spain, and Italy) have so far yielded mixed results (Salto 2013). On the one hand, the primary budget balances of these countries have improved, and their risk premiums are now stabilised at a much lower level than during the crisis peak.
Financial markets Taxation
VAT, transparency, tax evasion, Greece, credit, austerity, European sovereign debt crisis
Privatisation and debt: Lessons from Greece’s fiasco
Paolo Manasse 31 January 2014
Sales of state-owned assets have been proposed as a way for highly-indebted countries to ease the pain of fiscal consolidation. This column argues that, despite the potential merits of privatisation in terms of long-run efficiency, in practice it is unlikely to improve short-run fiscal solvency. Since governments rarely alienate control rights, the efficiency gains from privatisations are often small. Moreover, financial markets may not fully reflect these gains – particularly during a financial crisis. The implication is that the Troika policy of linking financial assistance to privatisations is inappropriate and self-defeating.
In the midst of the European debt crisis, it is tempting to think that high-debt countries could alleviate the recessionary impact of the budget-consolidation process by selling (poorly managed) assets and stakes in their state-owned enterprises (SOEs), and by using the proceeds to buy back their debts (Hope 2011). In addition to providing a cushion for ongoing adjustment programmes and improving solvency, privatisations are deemed to entail long-term efficiency and welfare gains by attracting foreign direct investment and managerial expertise, thus spurring competition and growth.
Financial markets International finance
sovereign debt, privatisation, debt, Greece, European sovereign debt crisis