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).
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.
Should the role of preparing budgetary projections be delegated to an independent agency?
Rossana Merola, Javier J. Pérez01 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. Explanatory factors for these misalignments include large GDP shocks and fiscal-stimulus packages adopted on the run. Beyond these explanations, there is also a distinct lack of both transparency and realistic accounts of the facts.
Current-account surpluses in the Eurozone: Should they be reduced?
Alexandr Hobza, Stefan Zeugner26 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. The high deficits in the Eurozone periphery prior to the crisis were matched by high surpluses in 'core' countries, most notably Germany.
Job placement and displacement: Evidence from a randomised experiment
Bruno Crépon, Esther Duflo, Marc Gurgand, Roland Rathelot, Philippe Zamora24 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.
International banking is under threat in the aftermath of the Global Crisis Supervisors across the world are pushing for a split of international banks into national subsidiaries. This column discusses ‘financial protectionism’, offering some governance solutions that may help to international banks. These solutions boil down to burden sharing. In Europe, the first step is banking union.
Ariel Binder, Paolo Mauro, Rafael Romeu, Asad Zaman
International cooperation between national supervisors broke down during the Global Financial Crisis. The collapse of Lehman and Fortis provide vivid illustrations that national supervisors ultimately choose for their national interest in crisis management. Reform of global governance, guided by the G20 and executed by the Financial Stability Board, has so far focused on soft law solutions (Arner and Taylor 2009). Regulators adopt a consensual approach towards the setting of international standards.
Augmented inflation targeting: Le roi est mort, vive le roi
Richard Baldwin, Daniel Gros17 April 2013
The Bank of Japan has now joined the club of central banks practising a new, post-Crisis form of inflation targeting. This column discusses the new goals, new tools and new challenges of ‘augmented inflation targeting’. Despite economists’ worries and the many unknowns ahead, there really is no alternative in a post-Crisis world. Augmented inflation targeting is here to stay.
The Bank of Japan recently embraced inflation targeting – a decade and a half after academics recommended it (Krugman 2013). But this is not inflation targeting as conceived before the Global Crisis. Inflation targeting didn’t die, it evolved (as shown by the recent Vox eBook, Is inflation targeting dead? Central Banking After the Crisis.
Mega-regional trade arrangements are being negotiated in Asia. This column asks how Europe should respond and assesses which Asian trade deals would provide the biggest boost and the best insurance against discriminatory effects. The evidence tentatively suggests Europe’s best bets are Japan and Taiwan.
The EU is facing formidable challenges. The economic crisis is far from over in many Eurozone and non-Eurozone member states. The EU’s current macroeconomic and budgetary policies are not politically sustainable at the EU’s current anaemic growth rate. Less visible, but much more pernicious and damaging, is the lessening of competition in many sectors due to the past several years of crisis, a trend that is evident to varying degrees across all EU member states.
Are Germans really poorer than Spaniards, Italians and Greeks?
Paul De Grauwe, Yuemei Ji16 April 2013
A recent ECB household-wealth survey was interpreted by the media as evidence that poor Germans shouldn’t have to pay for southern Europe. This column takes a look at the numbers. Whilst it’s true that median German households are poor compared to their southern European counterparts, Germany itself is wealthy. Importantly, this wealth is very unequally distributed, but the issue of unequal distribution doesn’t feature much in the press. The debate in Germany creates an inaccurate perception among less wealthy Germans that transfers are unfair.
Rarely have statistics been misused so much for political purposes as when recently the ECB published the results of a survey of household wealth in the Eurozone countries (2013a).1 From this survey it appeared that the median German household had the lowest wealth of all Eurozone countries. Figure 1 summarises the main results for the most significant Eurozone countries.
CEPR Policy Insight no. 65 analyses the changes and shifts of power among the EU’s institutions, arguing that further reforms are needed in order to safely and accountably underpin new executive power.