Europe's nations and regions
The roots of the Italian stagnation
It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, and austerity measures for the current recession. This column argues that while the severity of the downturn is clearly a cyclical phenomenon, the inability of the country to grow out of it is the legacy of more than a decade of a lack of reforms in credit, product and labour markets. This lack of reform has suffocated innovation and productivity growth, resulting in wage dynamics that are completely decoupled from labour productivity and demand conditions.
From sovereign turmoil to private-sector woes: Italian sovereign spreads and their pass-through to bank lending conditions
What has driven Italian sovereign spreads movements? This column presents new research looking into increased volatility in sovereign debt since the summer of 2011. Shocks in investor risk appetite, news related to the Eurozone debt crisis, and consistently bad news in Italy, have been important drivers of Italian sovereign spreads. These findings mean that we need to reduce country-specific vulnerabilities as well as sorting out the Eurozone.
Fiscal implications of the ECB’s bond-buying programme
The monetary-fiscal policy connection is under scrutiny by the German Constitutional Court in the context of the ECB’s OMT bond-buying programme. This column argues that most analyses are deeply flawed by the misapplication of private-company default principles to the central bank. ECB bond-buying transforms public bonds into monetary base, and sovereign-default risk into inflation risk. The real question is: What is the non-inflationary limit to money-base expansion? This depends upon the economic situation and is much higher in the current liquidity-trap setting.
EZ banking union with a sovereign virus
The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign.
The wisdom of Karlsruhe: The OMT court case should be dismissed
An ongoing German Constitutional Court case threatens to make the Eurozone Crisis much worse. This column argues that a Eurozone breakup could well be self-fulfilling given the absence of large-scale fiscal backstopping. The ECB’s Outright Monetary Transactions (OMT) programme has so far blocked speculation that could lead to such a breakup. A German court ruling against the OMT would destroy the programme’s credibility. The court would be wise to dismiss the case, if it does not want to risk becoming a threat to Eurozone stability and to taxpayers in Germany and beyond.
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The wisdom of Karlsruhe: The OMT court case should be dismissed
Giavazzi, Portes, Weder di Mauro, Wyplosz
CEPR Policy Research
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Events
- Understanding banks in emerging markets5 - 6 September 2013 / EBRD, London / European Bank for Reconstruction and Development (EBRD) and Tilburg University
