European bank deleveraging and global credit conditions
Erik Feyen, Ines Gonzalez del Mazo, 12 May 2013
Before the global financial crisis, European banks had rapidly expanded their foreign-lending activities. However, this column argues that financial stress in Europe has put this process into reverse and negatively affected credit conditions in developed and emerging markets alike. As European banks repair their balance sheets and rethink their business models in a context of stricter regulatory requirements, financial fragmentation, and a deteriorating European economy, they continue to retrench to home markets.
In the run up to the global financial crisis, European banks significantly increased their lending activities both domestically and outside home markets driven by a procyclical spiral of cheap abundant funding, increasing profitability, and economic growth.
Topics: Europe's nations and regions, Global crisis
Tags: banking, credit, Eurozone crisis
A pro-growth economic plan
Richard Wood, 11 May 2013
The world economy seems to be acting in unexpected ways. This column argues that austerity and quantitative easing do not seem to be working out as advertised. There is an urgent need to review the effectiveness of alternative macroeconomic policy approaches, and prepare an internationally agreed pro-growth plan to reflate distressed economies. The outlines of one such plan are presented.
There are similarities in the nature of the economic problems facing affected economies around the world:
Topics: Global crisis
Tags: austerity, Eurozone crisis, IMF, recovery
Escaping liquidity traps: Lessons from the UK’s 1930s escape
Nicholas Crafts, 12 May 2013
The UK escaped a liquidity trap in the 1930s and enjoyed a strong economic recovery. This column argues that what drove this recovery was ‘unconventional’ monetary policy implemented not by the Bank of England but by the Treasury. Thus, Neville Chamberlain was an early proponent of ‘Abenomics’. This raises the question: is inflation targeting by an independent central bank appropriate at a time of very low nominal-interest rates?
In mid-1932, the UK had experienced a recession of a similar magnitude to that of 2008-09, was engaged in fiscal consolidation that reduced the structural budget deficit by about 4% of GDP, had short-term interest rates that were close to zero, and was in a double-dip recession (Crafts and Fearon 2013).
Topics: Europe's nations and regions
Tags: Britain, Eurozone crisis, house building, housing, UK
France’s weak economic performance: Sick of taxation?
Balázs Égert, 10 May 2013
France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.
France is often labelled these days as one of Europe’s problem children (The Daily Telegraph 2013, Handelsblatt 2013). Indeed, France is one of the OECD countries which has recorded the weakest real per capita income growth over the last two decades or so (Figure 1).
Topics: Europe's nations and regions
Tags: Eurozone crisis, France, reform, taxation
Banking crises and political survival over the long run – why Great Expectations matter
Jeffrey Chwieroth, Andrew Walter, 10 May 2013
The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.
The wave of banking and sovereign-debt crises that began in 2007 has had powerful and continuing economic consequences (IMF 2013a; 2013b). Economists have used long run historical data to investigate the economic aftermaths of financial crises, but we lack any equivalent panoramic analysis of the impact of crises on politics.
Topics: Global crisis, Politics and economics
Tags: business cycle, elections, Eurozone crisis, Finance
Self-defeating austerity shocks
Reda Cherif, Fuad Hasanov, 3 May 2013
Europe’s austerity-first approach has triggered research-based efforts to evaluate the effectiveness of debt-reduction strategies. This column, based on a US empirical study, suggests that an ‘austerity shock’ in a weak economy may be self-defeating. Public-debt reduction historically occurs gradually amid improved growth. If policymakers, firms and households respond as in the past, we should expect lower deficits amid higher growth and, eventually, decreasing debt ratios.
In many advanced countries, in the wake of the 2008 global financial crisis, deficits skyrocketed and public debt ballooned (see Figure 1). In fact, fiscal stimulus accounted for only a small fraction of the increase in debt, whereas collapsing revenues and higher unemployment and social benefits contributed the largest share (IMF 2011).
Topics: Global crisis
Tags: austerity, Eurozone crisis, fiscal policy
Political Credit Cycles: The Case of the Euro Zone
Jesús Fernández-Villaverde, Luis Garicano, Tano Santos, 24 March 2013
This paper studies the mechanisms through which the adoption of the euro delayed, rather than advanced, economic reforms in the Eurozone periphery and led to the deterioration of important institutions in these countries. The authors show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident.
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Topics: Macroeconomic policy, Politics and economics
Tags: bubbles, Eurozone crisis, financial crisis, Political Economy
Should the role of preparing budgetary projections be delegated to an independent agency?
Rossana Merola, Javier J. Pérez, 1 May 2013
Who should we trust when it comes to fiscal forecasts: governments or independent agencies? This column argues that this question is, in fact, a red herring: empirical evidence suggests that in the past, international agencies’ fiscal forecasts were partially affected by the same problems that the literature widely acknowledges for governmental forecasts. An attractive solution is independent national forecasters.
The debate about fiscal forecasts has recently been growing more intense in Europe. At its root, there is the evidence of planned government deficits significantly exceeding recurrent budgetary plans in recent years. This comes at a time of high public deficit and debt levels for EU member states.
Topics: Global crisis, Monetary policy
Tags: Eurozone crisis, fiscal policy, forecasting
Current-account surpluses in the Eurozone: Should they be reduced?
Alexandr Hobza, Stefan Zeugner, 26 April 2013
Current-account deficits have caused problems in several Eurozone countries, but surpluses are also an issue. This column argues that surpluses are detrimental to the welfare of the population to the extent they are driven by structural weaknesses affecting demand. Addressing these issues through structural reforms, while letting wages and prices respond flexibly to market signals, would be welfare-enhancing for the surplus countries.
Current-account deficits are widely acknowledged to have posed significant policy problems in several Eurozone countries.1 Since the onset of the crisis, their adjustment has been associated with sharp contractions in consumption and investment, entailing high economic and social costs. But a deficit in any country requires a surplus in another to finance it.
Topics: Europe's nations and regions
Tags: Eurozone crisis, imbalances
Job placement and displacement: Evidence from a randomised experiment
Bruno Crépon, Esther Duflo, Marc Gurgand, Roland Rathelot, Philippe Zamora, 24 April 2013
Youth unemployment in Europe seems to be sticking around. This column assesses youth unemployment policy in France using data from a controlled experiment. ‘Job counselling’ – a key French policy that prepares some job seekers for the recruitment process, and connects them with potential employers – seems to only marginally improve graduate’s chances of employment. Moreover, the evidence suggests that what’s good for one graduate may be bad for another: the beneficiaries of intensive job counselling are more likely to find employment simply at the expense of other job seekers.
Youth unemployment is a growing concern in many countries, including France where more than a quarter of recent graduates cannot find stable work. Some of these young graduates do not benefit from resources like unemployment benefits because they lack a sufficient employment history.
Topics: Labour markets
Tags: Eurozone crisis, graduates, unemployment, youth unemployment