Measuring the credit crunch
Michiel Bijlsma, Andrei Dubovik, Bas Straathof 15 April 2013
The Global Crisis hit firms hard, making the terms of getting credit worse and thus amplifying the recession. This column discusses new research that isolates the ‘credit crunch’ element from other outcomes of recession. Crisis-linked credit drops caused a 5.5 percentage-point reduction in industrial growth in 2008, with a stronger effect in countries with more highly leveraged banks. The evidence clearly suggests that more attention should be paid to credit supplies to firms at the onset of financial crises.
How do we estimate the impact of a credit crunch during a crisis? Comparing the value of production before and after the crisis may be misleading. A firm might have produced less because it could not obtain credit, but it might also have produced less because the demand for its products dropped or was expected to do so in the near future. This means that we have to disentangle the effects on production of the reduction in credit supply from the effects that are due to a decline in credit demand.
Global crisis International finance
The Eurozone crisis and EU institutional change: A new CEPR Policy Insight
Stefano Micossi 15 April 2013
The Eurozone crisis has produced rapid institutional change with executive powers over national economic policies shifting to the EU. This column introduces a new CEPR Policy Insight that analyses the changes and shifts of power among the EU’s institutions. What is clear is that further reforms are needed in order to safely and accountably underpin new executive power.
Since the Eurozone crisis blew up in 2010, a series of decisions taken at crisis summits have massively centralised at EU level executive powers over national economic policies.
EU institutions Europe's nations and regions
Balance-sheet repairs in European banks
Nadege Jassaud, Heiko Hesse 13 April 2013
The recent IMF assessment of Europe’s financial sector found that much has been achieved to address the recent financial crisis in Europe, but vulnerabilities remain, and intensified efforts are needed across a wide front, one of which being bank balance sheet repair. This column looks at progress with bank restructuring in Europe.
Much has been achieved to address the EU financial crisis.1 Since 2011, EU banks have boosted their capital adequacy ratios, partly due to the second EU-wide stress-testing and recapitalisation exercise led by the European Banking Authority. Over two years, the tier 1 ratio of European banks (sample of 57 EU banks) increased by 1.2%, from 9% in December 2010 to 10.2% in June 2012.
Europe's nations and regions Global governance
Banking crisis, Eurozone crisis, balance sheets
Time for the Eurozone to shift gear: Issuing euros to finance new spending
Biagio Bossone 08 April 2013
The crisis in peripheral Europe is deepening and spreading to the core of Europe. This column argues that it’s time for the Eurozone to shift gear. Eurozone members should use the Emergency Liquidity Assistance facility provided for under the statute of the European System of Central Banks to undertake ‘overt money financing’ of government debt. Greater cooperation – for a time – between central banks and fiscal authorities is, despite arguments to the contrary, in no way inconsistent with the independence of the central banks.
The crisis in peripheral Europe is deepening and spreading to core Europe, affecting France and now threatening Germany (Wood 2013). Political concerns in a number of Eurozone countries undermine confidence within the region. The Cyprus blunder has added to overall nervousness (see Wyplosz 2013). In Italy, falling productivity and falling real incomes, as well as prospects for yet more austerity to come, are further depressing the economy. Financial markets are giving the country the benefit of the doubt, in the expectation that a new government will soon be in charge.
Eurozone crisis, Cyprus
Budget balance, structural unemployment and fiscal adjustments: The Spanish case
Javier Andrés, Rafael Doménech 05 April 2013
Fiscal adjustment and structural reform are key parts of Eurozone bailout packages (or key features of government policy that aims to avoid such bailouts). This column argues that patience is the most prized virtue of policymakers implementing fiscal adjustment and structural reform. Reducing unemployment and fiscal consolidation are mutually reinforcing, but they move at different speeds.
One of the most important questions in the current process of fiscal consolidation in many developed economies concerns the size and the pace of the adjustment. An excessive and/or too-fast fiscal retrenchment can have dramatic effects on unemployment and growth, while if it is too slow, it can prove to be ineffective and lack credibility in the eyes of the financial markets. Thus, when the debt-to-GDP ratio is high and there is limited fiscal space, the challenge is to find the proper balance between growth, efficiency and credibility of the fiscal adjustment.
Europe's nations and regions
unemployment, Spain, fiscal policy, Eurozone crisis, structural adjustment
A banking union for the Eurozone
Giovanni Dell'Ariccia, Rishi Goyal, Petya Koeva-Brooks, Thierry Tressel 05 April 2013
The crisis has highlighted the need for, and difficulties with, a Eurozone banking union. This column argues that, to make a union, you need three crucial ingredients: common supervision, a single resolution mechanism, and common safety nets. The power to control and the resources to rescue must work in parallel. Eurozone leaders have taken the first critical steps, but further progress is needed to strengthen the financial architecture of the single currency.
Before the crisis, the common currency and single market promoted financial integration. Banks and financial institutions operated with ease across countries; credit went where it was in demand; and portfolios became increasingly more diversified. The interbank market functioned smoothly, and monetary conditions were relatively uniform across the Eurozone. There were side effects, such as large capital flows within the Eurozone and the associated buildup of sovereign and private-sector imbalances.
EU institutions EU policies
regulation, Eurozone crisis, banking union
The decoupling of the US and European economies: Evidence from nowcasting
Lucrezia Reichlin, Domenico Giannone, Jasper McMahon, Saverio Simonelli 29 March 2013
The Eurozone and US business cycles seems to have decoupled, but is Germany on the US or Eurozone side of the divide? This column presents recent results from the Now-Casting model on whether this US-Eurozone decoupling also applies to Germany. If this is right, the German stock market – which seems to predict Germany’s convergence to the US path – is due for a correction.
One of the most interesting features of recent business-cycle history is the decoupling of US real economic activity from that of the Eurozone (CEPR 2012, ECB 2013). CEPR's Euro Area Business Cycle Dating Committee estimates that the Eurozone entered a new recession in the third quarter of 2011, something the US has so far avoided. The decoupling is at odds with historical regularities which show a high level of synchronisation between business cycles in the US and the Eurozone1.
But the overall decoupling raises two questions:
Europe's nations and regions Frontiers of economic research
Germany, decoupling, Eurozone crisis, nowcasting
The capital controls in Cyprus and the Icelandic experience
Jon Danielsson 28 March 2013
Cyprus has imposed temporary capital controls. This column sheds light on how temporary and how damaging they are likely to be, based on Iceland’s experience. The longer controls exist, the harder they are to abolish. Icelandic capital controls, which have been ‘temporary’ for half a decade, deeply damage the economy by discouraging investment. We can only hope the authorities that created the chaos in the first place realise that temporary really needs to mean temporary.
The Cypriot government, European authorities and the IMF have concluded that capital controls are the best way to prevent a total collapse of the Cypriot financial system. Motivated by the obvious fear that anybody with money left over in Cyprus will seek to take their money out as soon as possible, temporary capital controls are to be put in place to prevent this. We are told that they will be limited in scope and temporary. Hopefully, for the Cypriots’ sake, that is correct.
EU institutions Macroeconomic policy
Iceland, capital controls, Eurozone crisis, Cyprus
International capital flows during crises: Gross matters
Fernando A Broner, Tatiana Didier, Aitor Erce, Sergio Schmukler 28 March 2013
How much do we really know about net capital flows? Presenting new research, this column lays out a number of new stylised facts on the dynamics of gross capital flows and their implications for policymaking. Interestingly, if we’re to learn from relatively crisis-resilient middle-income countries, policymakers may well need to monitor and perhaps regulate the separate behaviour of domestic and foreign investors to weather future crises.
The financial crises of the last three decades have spurred interest in the dynamics of international capital flows. Most of the work on the topic has focused on the behaviour of net capital flows, namely the difference between the foreign purchases of domestic assets (or capital inflows by foreigners) and the domestic purchases of foreign assets (or capital outflows by domestic agents). However, much less is known about the individual behaviour of these two components on net capital flows, which we denote as gross capital flows.
financial crisis, Eurozone crisis, gross capital flows
A modern history of fiscal prudence and profligacy
Ariel Binder, Paolo Mauro, Rafael Romeu, Asad Zaman 27 March 2013
How confident are we that major developed countries remain fiscally prudent? Having developed a new dataset, this column gauges the degree of fiscal prudence or profligacy for major economies over the past several decades. From the evidence, it’s clear that the global financial crisis has posed the biggest policy challenge in living memory, with varying responses. How these responses turn out very much depends on whether the slowdown in growth is long-lasting or not.
Considering the major impact of the global economic and financial crisis on the fiscal accounts of the main advanced economies, and their widely differing policy responses, how confident should we be that each of these countries remains fiscally prudent? And, more generally, should we think of a country's degree of fiscal prudence as constant throughout its history, or are there identifiable times of fiscal profligacy even for countries that eventually rectified their behaviour and never defaulted?
Global crisis Macroeconomic policy