Delivering the Eurozone ‘Consistent Trinity’
Marco Buti, Maria Demertzis, João Nogueira Martins, 30 March 2014
Although progress has been made on resolving the Eurozone crisis – vulnerable countries have reduced their current-account deficits and implemented some reforms – more still needs to be done. This column argues for a ‘consistent trinity’ of policies: structural reforms within countries, more symmetric macroeconomic adjustment across countries, and a banking union for the Eurozone.
As argued in an earlier commentary, the financial crisis exposed important economic inconsistencies in the way that EMU operated.1 Although progress has been made, the reality is that more needs to be done.
Topics: Europe's nations and regions, Macroeconomic policy
Tags: banking union, debt, EMU, euro, eurozone, Eurozone crisis, fiscal consolidation, fiscal policy, imbalances, internal devaluation, Stability and Growth Pact, structural reforms
Considering QE, Mario? Buy US bonds, not Eurobonds
Jeffrey Frankel, 24 March 2014
The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do.
Topics: Macroeconomic policy, Monetary policy
Tags: ECB, euro, quantitative easing
TARGET balances, Bretton Woods, and the Great Depression
Michael Bordo, 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.
Topics: Economic history, International finance
Tags: Bretton Woods, Central Banks, ECB, euro, Eurosystem, eurozone, Eurozone crisis, financial crisis, global imbalances, Great Depression, TARGET
A fiscal shock absorber for the Eurozone? Lessons from the economics of insurance
Daniel Gros, 19 March 2014
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.
Even before the euro crisis started, it had been widely argued that the Eurozone needed a mechanism to help countries overcome idiosyncratic shocks. The experience of the crisis itself seemed to make this case overwhelming, and throughout the EU institutions it is now taken for granted that the Eurozone needs a system of fiscal shock absorbers.
Topics: EU institutions, Macroeconomic policy, Welfare state and social Europe
Tags: euro, eurozone, Eurozone crisis, fiscal policy, fiscal shock absorbers, fiscal shocks, fiscal union, insurance
The euro in the 'currency war'
Agnès Benassy-Quéré, Philippe Martin, 6 February 2014
The euro has appreciated sharply since July 2012. CEPR Policy Insight 70 argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated Euro, which will support aggregate economic activity and help inflation stay close to 2%.
CEPR Policy Insight No.69 is available to download free of charge here.
Topics: Macroeconomic policy
Tags: Currency wars, ECB monetary policy, euro
A looser monetary policy will favour a weaker euro and a stronger economy
Agnès Benassy-Quéré, Pierre-Olivier Gourinchas, Philippe Martin, Guillaume Plantin, 6 February 2014
The euro has appreciated sharply since July 2012. This column introduces a CEPR Policy Insight which argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated euro, which will support aggregate economic activity and help inflation stay close to 2%.
Since July 2012, the euro appreciated more than 10% against the dollar, 6% against the pound sterling, and almost 50% against the yen (IMF 2014). Does this mean that the euro a casualty of a ‘currency war’? We believe the answer is ‘no’. The strength of the euro is the result of an overly restrictive monetary policy by the ECB.
Topics: Macroeconomic policy
Tags: Currency wars, ECB monetary policy, euro
How the euro synchronised EZ cycles
Ayako Saiki, Sunghyun Henry Kim, 2 February 2014
Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.
Prior to the introduction of the euro, the topic of whether the Eurozone fulfils the conditions for an optimum currency area was highly debated (e.g. Bayoumi and Eichengreen 1992).
Topics: EU institutions, International finance, International trade
Tags: business cycles, East Asia, euro, eurozone, optimum currency area, supply chains, trade
The latest on the dollar’s international currency status
Jeffrey Frankel, 6 December 2013
Except for the period 1992-2000, the dollar’s role as an international currency has been slowly declining since 1976. Since 2010, there has been another pause in this decline – somewhat surprising, given that the financial crisis began in the US, and given Congress’ recent flirtations with default. The dollar’s resilience as the world’s reserve currency is due to a lack of good alternatives – the euro has its own problems, and the yuan only accounts for 2.2% of forex transactions.
As most people know, the general trend in the dollar’s role as an international currency has been slowly downward since 1976.
Topics: International finance
Tags: dollar, euro, foreign exchange, reserve currency, yuan
Moving closer? Changing patterns of labour mobility in Europe and the US
Mai Dao, Davide Furceri, Prakash Loungani, 1 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.
On 21 September 1992, four famous professors – Olivier Blanchard, Rudi Dornbusch, Stan Fischer, and Paul Krugman – took part in a panel discussion at MIT on the merits of the proposed European currency union.
Topics: Labour markets
Tags: currency union, euro, eurozone, labour mobility
The euro and price convergence: You wanted it … you got it!
Alberto Cavallo, Brent Neiman, Roberto Rigobon, 29 November 2013
During the recent turmoil in the Eurozone, little attention has been paid to one of the euro’s founding objectives – price convergence. This column argues that the euro has in fact been very successful in this regard. In a study of the pricing behaviour of Apple, IKEA, H&M, and Zara, the authors find that price dispersion is 30–50% lower for countries in a currency union than for those with a fixed exchange rate.
Remember some of the objectives of the creation of the euro? A single currency area within Europe would carry with it:
- Enhanced factor mobility
- Greater productivity growth
- Acceleration of financial development; and
- Improved macroeconomic policies.
Or, at least, that was the hope (Wyplosz 1997).
Topics: Exchange rates, International trade
Tags: euro, eurozone, price convergence, real exchange rates