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
Europe’s Cyprus blunder and its consequences
Nicolas Véron 25 March 2013
The Monday morning Eurozone Cyprus bailout is now public, although details are scant. This column argues that this package cancels out some of the mistakes in last week’s package. Last week, the Troika should have vetoed the small-deposit tax and prepared a plan B for the Cypriot parliament’s rejection. Avoiding the risky scenario of a Cyprus exit will require further fiscal commitments from Eurozone partners. One possibility is a temporary, but EZ-wide, 'deposit reinsurance', or backing of national deposit-guarantee schemes by the ESM.
The late Mike Mussa1 noted that “there are three types of financial crises:
- crises of liquidity;
- crises of solvency; and
- crises of stupidity.”
This quip comes to mind when considering the developments of the past ten days around Cyprus.
EU institutions Macroeconomic policy
Eurozone crisis, banking union, Cyprus, deposit guarantees
Eurozone: Looking for growth
Laurence Boone, Céline Renucci, Ruben Segura-Cayuela 25 March 2013
What happens after the crisis ends? This column estimates the long-term effects of the current cyclical downturn on Eurozone economies. In the absence of any real impetus for bold reform, estimates show that the damage will indeed be long lasting, permanently impairing growth for an ageing population that requires higher growth capacity more than ever before.
The financial crisis that erupted in 2008, prolonged by a sovereign crisis in the Eurozone, led to a massive contraction in trade, as well as in investment in physical and human capital; thus undermining the foundations of future growth. This may well continue as growth will not rapidly rebound while deleveraging slowly proceeds across Eurozone economies. Empirical evidence suggests deleveraging episodes accompanied by a housing crisis will take on average five and a half years across high-income OECD countries (or seven years when accompanied by a banking crisis (Aspachs-Bracon et al.
Europe's nations and regions Productivity and Innovation
growth, productivity, Ageing, Eurozone crisis, Solow
Cyprus is different
Marco Annunziata 20 March 2013
The Cyprus rescue package has elicited sharp reactions. This column argues that a tax on deposits is logical given the limited options, but guaranteed deposits should be spared on fairness and systematic grounds; a 15% tax on big deposits would be enough. Contagion is unlikely since Cyprus is different. Italian and Spanish savers are already alert to surprises such as the 1992 Italian bank deposit tax.
The Cyprus rescue package under discussion, with its tax on bank deposits, has raised strong emotions and triggered fiery and controversial reactions. Some economists and commentators warn that it might spark bank runs in the larger Southern European countries and ultimately result in the disintegration of the Eurozone. Wyplosz (2013) has eloquently made these points in his recent Vox column.
EU institutions Macroeconomic policy
EU, Eurozone crisis, Cyprus