To end the Eurozone crisis, bury the debt forever
Pierre Pâris, Charles Wyplosz 06 August 2013
The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis.
The Eurozone’s debt crisis is getting worse despite appearances to the contrary.
Eurozone bond rate spreads have narrowed – leading some to think that the crisis is fading.1 Yet the narrowing is not due to an improvement in fundamentals. It happened after the ECB announced its Outright Monetary Transactions (OMT) programme. Mario Draghi’s, “Whatever it takes”, did the trick; investors believe the ECB could and would counter rising spreads in the medium term.2
EU institutions Macroeconomic policy
Debt crisis, Eurozone crisis, debt monetisation
How have financial markets reacted to financial-sector reforms after the crisis?
Alexander Schäfer, Isabel Schnabel, Beatrice Weder di Mauro 02 August 2013
Lax financial-sector regulation was the fulcrum of the Global Crisis and policymakers reacted by introducing sweeping reforms. But has it had any impact? This column reviews evidence from bank stock returns showing that four major reforms in the US and Europe have reduced bailout expectations – especially for systemic banks. The strongest effects were found for the Dodd-Frank Act (especially the Volcker rule); the German restructuring law had little effect.
After the near-collapse of large parts of the financial system and unprecedented support measures from the public sector and central banks, the leaders of the G20 agreed on the need for a radical overhaul of the financial system. In parallel, several countries embarked on ambitious reforms at the national level, which have produced a set of structural measures, ranging from the prohibitions of activities and a ringfencing of retail banking to special resolution or capital regimes for systemically important institutions.
regulation, global crisis, Eurozone crisis, CDS, credit default swap
Unity in diversity: Protecting the common market with divergent macroprudential policies
Aerdt Houben, Jan Kakes 30 July 2013
Financial cycles have increasingly diverged across members of the Eurozone. National macroprudential tools are thus key to managing financial imbalances and protecting Europe’s economic integration. This column discusses research suggesting that reasonable macroprudential policies by the GIIPS countries in the euro’s first decade would have helped avoid much pain in Italy, Portugal and Spain. Greece’s public debt problems were far too large and its banks could not have been shielded with macroprudential policies.
The credit crisis and ensuing sovereign crisis powerfully illustrate the limitations of traditional macroeconomic policies to contain financial imbalances. Despite debate on the desirability to dampen credit cycles and asset-price fluctuations, countries have long been reluctant to include this in policy objectives.
Global crisis International finance
Italy, Spain, Ireland, Greece, Eurozone crisis, Portugal, macroprudential tools, GIIPS
Why economics needs economic history
Kevin Hjortshøj O’Rourke 24 July 2013
The current economic and financial crisis has given rise to a vigorous debate about what training graduate and undergraduate economics students are receiving. This column argues that we don't teach enough economic and financial history, even though it is crucial in thinking about the economy. It also offers a wealth of opportunities for teachers who wish to motivate their students.
The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector. Employers are increasingly complaining that young economists don’t understand how the financial system actually works, and are ill-prepared to think about appropriate policies at a time of crisis.
global crisis, Eurozone crisis
How to limit the ECB’s OMT?
Harald Benink, Harry Huizinga 12 July 2013
How well has OMT done? This column attempts to temper Mario Draghi’s recent plaudits that “it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times”. Yes, OMT should provide unlimited liquidity to troubled countries, but not at the expense of necessary structural reforms. The ECB should cover Eurozone countries’ current expenditures, but should not pay off all long-term debt holders. That way, capital markets will be disciplined and incentives for implementing economic reforms will be maintained.
Speaking about the Outright Monetary Transactions (OMT) facility during a recent press conference Mario Draghi, ECB President, said that “frankly, when you look at the data, it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times” (Draghi 2013). It is true that the launch of the OMT facility caused yields on the long-term sovereign debts of Italy and Spain to decline from their previous highs above 7% to around 4.5% now. And, until now at least, the euro has been preserved.
Europe's nations and regions
Eurozone crisis, banking union, OMT
Short-time work: Does it save jobs?
Almut Balleer, Britta Gehrke, Wolfgang Lechthaler, Christian Merkl 12 July 2013
During the Great Recession, 25 of 33 OECD countries have used some version of short-time work, a form of publicly subsidised working-time reductions. This column argues that despite its popularity, knowledge of the macroeconomic effects of this measure is limited. Using Germany as a case study, it’s clear that the existence of a short-time work system stabilises the economy and reduces job losses by roughly 20% during a recession. However, short-time work is a lot less effective for Anglo-Saxon labour markets.
Short-time work means that the government subsidises the reduction of the working time of an employee to prevent firing. Many countries allow a firm to use this instrument when the demand for its products is lower than its production potential. Since more firms face a shortfall of demand in recessions, there is a rule-based component of short-time work. This is similar to the income-tax system where the tax bill drops automatically with lower income (without modifying the tax code). In addition, policymakers facilitate the access to short-time work in recessions.
Europe's nations and regions Labour markets
Germany, jobs, Eurozone crisis, short-time work
The impact on the financial sector of long-term low nominal interest rates
Viral Acharya, Richard Portes, Richard Reid 03 July 2013
Many central banks have recently employed unprecedented expansionary monetary policy, keeping interest rates at near-zero levels for an extended period of time. Quantitative easing interventions have been employed to affect asset prices directly, most notably in government-bond and mortgage markets, in order to keep sovereign and mortgage borrowing costs low. CEPR recently organised a conference to discuss existing theory and empirical evidence on the implications of an extended phase of unconventional monetary policy. This short column outlines the key issues and also includes a Vox Views video summary of the event.
The Centre for Economic Policy Research (CEPR) recently organised a conference at the Brewers’ Hall, London, on 10 June 2013 titled ‘A long-term environment of low nominal interest rates: what are the consequences for the financial sector’?
liquidity trap, quantitative easing, Eurozone crisis, zero lower bound, Vox Views
Redistribution policies at the root of the Eurozone Crisis
Giuseppe Bertola 28 June 2013
How can we make the Eurozone work, and work for everyone? This column suggests that a lack of productivity convergence and the Eurozone’s inability to deal with asymmetric shocks are both rooted in the incompleteness and incoherence of the current Eurozone policy framework. A robust and coherent European market and policy-integration process would require implementation of the behavioural constraints and redistribution schemes that operate, not without difficulties, within established national socioeconomic systems.
Not only the founding fathers of the EU, but also financial market participants appear to have believed that participation in common markets and adoption of common institutions should lead to cultural and economic convergence.
Europe's nations and regions
Financial imbalances and cycles: Do they matter for the general public?
Livio Stracca 25 June 2013
Should the public care about financial imbalances? This column suggests that financial imbalances are, in fact, not a main and direct concern for citizens. Of course, this does not exonerate policymakers from trying to prevent booms and busts (because they have substantial costs in terms of macroeconomic stability). Policymakers should focus on preventing the fallout of booms and busts for macroeconomic stability rather than trying to stabilise the ‘financial cycle’ as an end in itself.
Boom and busts in asset prices and credit and, more generally, ‘financial imbalances’ have been the subject of a lot of public attention in the wake of the global financial crisis and the Eurozone crisis. All major jurisdictions have been establishing macroprudential authorities and there is a lively discussion on whether financial stability should be an objective for central banks alongside price stability. However, nobody seems to have asked the person in the street whether they care about financial imbalances at all.
Global crisis International finance
Spillovers: Why macro-fiscal policy should be coordinated in economic unions
Gerald A. Carlino, Robert P Inman 24 June 2013
How should macro-fiscal policy be coordinated in economic unions? This column argues that the received wisdom has it right, and presents new empirical evidence suggesting that there are important positive spillovers between an economic union’s lower-tier governments in the management of macro-stabilisation policies. We should pursue coordinated policies. Finding programmes and institutions that can best facilitate this coordination is the important next step, both for new and established economic unions.
The recent Great Recession in the US and Europe has generated renewed interest in the management of macro-stabilisation fiscal policy in economic unions. The received wisdom among economists is that such fiscal policies can only be managed efficiently by an overarching central government. Oates, in his classic treatise on fiscal federalism, concludes:
Europe's nations and regions Macroeconomic policy
fiscal policy, Eurozone crisis