Incentives for avoiding delayed sovereign defaults
Ugo Panizza, 3 March 2013
Can we avoid delayed sovereign defaults? This column sketches out a flexible mechanism focused on the international lender, and competition between lenders, of last resort to ensure timeliness, transparency and larger sums than are currently available. The threat of competition should provide strong incentives for addressing imbalances in the governance of the main multilateral financial institutions
In my previous Vox column (Panizza 2013a), I argued that the international financial architecture needs a structured mechanism for dealing with sovereign defaults.
Topics: Europe's nations and regions, International finance
Tags: Eurozone crisis, lender of last resort, sovereign debt restructuring
Policy-related uncertainty: At the root of the lost resilience of Eurozone labour markets?
Alfonso Arpaia, Alessandro Turrini, 2 March 2013
Is policy-related uncertainty at the root of lacklustre Eurozone job creation? This column presents evidence that is consistent with this idea. The main implications for policy are straightforward: credible solutions to the Eurozone debt crisis will alleviate the critical unemployment situation of a number of Eurozone countries. How? Not only by helping to kick start investment and production, but also by an additional, direct boost to job creation that is linked to confidence.
The Eurozone, in contrast to the US, exhibited remarkable labour market resilience in the aftermath of the Lehman shock that lead to the Great Recession. Conversely, as the debt crisis developed, labour markets in the Eurozone weakened and unemployment started growing above what was predicted on the basis of GDP growth (Figure 1).
Topics: Europe's nations and regions, Labour markets
Tags: Eurozone crisis, jobs
Another look at Ricardian equivalence: The case of the European Union
Thomas Grennes, Andris Strazds, 28 February 2013
Can European countries share their debts? This column argues that higher government indebtedness means larger household net financial assets. Thus, any pooling of European legacy debt would be considered unacceptable by countries with less government debt unless it also involved the pooling of households’ financial assets. Yet, this would be legally and technically insurmountable. The EU must face forced Ricardian equivalence: the countries with the largest legacy-debt burdens must reduce them by increasing the tax burden or, alternatively, reduce their budget expenditure.
The so-called Ricardian equivalence suggests that a government will have the same effect on private spending whether it raises taxes or takes on additional debt to finance higher government spending. The logic behind it is that as the government gets more indebted, people would put aside more money in expectation of higher taxes in the future.
Topics: Europe's nations and regions
Tags: Eurozone crisis, Germany, Greece, Ricardian equivalence, Spain, UK
Winners of a European banking union
Dirk Schoenmaker, Arjen Siegmann, 27 February 2013
So far, discussions around Europe’s prospective banking union have focused only on the supervision of banks. This column argues that policymakers must also think about the resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority could incorporate domestic and cross-border effects. A cost-benefit analysis of a hypothetical resolution of the top 25 European banks shows that the UK, Spain, Sweden, and the Netherlands would be the main winners.
The aim of the prospective banking union is to foster financial stability in Europe. The euro sovereign debt crisis has shown that financial stability cannot be managed effectively at the national level, because of the diabolic loop between national governments and banks (Alter and Schüler 2012).
Topics: EU institutions, EU policies, Europe's nations and regions
Tags: Bailouts, banking union, Eurozone crisis, Netherlands, Spain, Sweden, UK
Investigating the effect of exchange-rate changes in Japan, China, east Asia, and Europe
Willem Thorbecke, 26 February 2013
Policymakers everywhere are concerned about currency wars. Are quantitative easing and managed exchange rates bad for the global economy? This column looks at the hard empirical evidence, arguing that, in fact, Japan is behaving rather responsibly and that other strong economies have themselves benefited from undervalued currencies. That said, it is true that politicians’ short time horizons often lead to stealthy policy and large swings in exchange rates. Economists should therefore aim to promote longer-run cosmopolitan interests rather than shorter-run nationalistic agendas where possible.
Policymakers are concerned about currency wars and competitive devaluations. Many complain that trading partners are artificially lowering their exchange rates through quantitative easing and managed exchange rates in order to gain price competitiveness for their exporters.
Topics: Exchange rates
Tags: China, Europe, Eurozone crisis, Japan, US
IMF lending and banking crises
Luca Papi, Andrea F Presbitero, Alberto Zazzaro, 25 February 2013
The IMF’s role in past systemic banking crises has been hotly debated. Indeed, prominent intellectuals have criticised the Fund for creating or exacerbating crises. This column discusses new evidence showing that IMF lending programmes are in fact associated with a lower probability of banking crises occurring in future.
During the 1990s, the IMF’s lending policy has been blamed for imposing the economic recipes of the Washington Consensus on recipient countries.
Topics: Global governance, International finance
Tags: banking crises, conditionality, Eurozone crisis, IMF
Mutualisation and constitutionalisation
Harold James, Hans-Werner Sinn, 26 February 2013
Can the euro exist without fiscal or political union? This column draws on the history of the US – especially its assumption of states’ debt after the War of Independence – to investigate which path might best serve the Eurozone. History tells us that unions require a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states.
It is often claimed – especially but not only by US economists – that the travails of the euro show that it is impossible to have a monetary union in the absence of a political union.
Topics: Economic history, Politics and economics
Tags: banking union, Eurozone crisis, mutualisation, US
Why do large movements in exchange rates have small effects on international prices?
Mary Amiti, Oleg Itskhoki, Jozef Konings, 19 February 2013
Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.
Exchange rate moves have surprisingly small effects on prices. This apparent ‘disconnect’ is one of the central puzzles in international macroeconomics. It is also a continual headache for policymakers who rely on exchange rates to accommodate the adjustment of global (current account) imbalances.
Topics: Exchange rates
Tags: competitiveness, euro, Eurozone crisis, exports, imports
Designing a federal bank
Harold James, 18 February 2013
Do economists and policymakers know how to design a federal bank for Europe? Is there a template? This column explores the history of the US Federal Reserve, gleaning lessons for the future of the European banking system. Getting to grips with the historical and empirical details shows how different the two really are. Overall, evidence suggests that the mechanism of the TARGET system might well create demand for Europe to move further towards fiscal federalism.
How centralised should the operation of a central bank be? Central banks were originally created as instruments to facilitate the financial arrangements of unified and centrally directed states, as was the case for the first central banks – in Sweden, England, and France.
Topics: Economic history, EU institutions
Tags: banking union, Eurozone crisis, US Federal Reserve
Making the European Monetary Union
Harold James, 17 February 2013
Recent policy and academic debates have begun to influence Eurozone reform. But how sound is the advice we give out? This column argues that calls for a Eurozone or full-fledged EU superstate are overstated. Yes, developing an adequate system of European banking supervision is a matter of urgency if we hope to tackle the threat posed by an overdeveloped and opaque financial system. But calling for a superstate misunderstands the reasons politicians introduced the euro in the first place.
It is often claimed – especially but not only by US economists – that the travails of the euro show that it is impossible to have a monetary union in the absence of a political union, and that Europe is necessarily embarking on a US-style experiment in federalism.
Topics: Economic history, EU institutions
Tags: Bretton Woods, Eurozone crisis, German surplus