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
Walking back from Cyprus
Mitu Gulati, Lee C. Buchheit 20 March 2013
Eurozone leaders’ radical step of putting insured depositors in Cypriot banks in harm’s way was not their only option. This column argues that none of the alternatives were pleasant but some were less ominous.
On Friday 15 March 2013, European leaders trespassed on consecrated ground. They insisted that Cyprus impose losses – euphemistically dubbed a 'solidarity levy' – on insured depositors with Cypriot banks as a condition to receiving EZ/IMF bailout assistance. Entering Friday’s meeting, the leaders had four options on the table:
bailout, Eurozone crisis, EZ crisis, Cyprus
Realism, austerity or demagogy? Evidence from Italy
Maurizio Bovi 20 March 2013
How do everyday Italians feel about their economic prospects? How are political reactions related to economic events? This column presents evidence suggesting that Italians are becoming disillusioned. Comparing Berlusconi's and Monti’s resignation, sentiment was more positive after Belusconi's. Rather than a test on Italian citizens’ realism or on their views on austerity, recent political elections should instead be read as a test of voters’ utter disaffection with political institutions.
Before it was contested, there were two interesting – but different – views about the recent political election in Italy. The Economist (2012) had defined the elections as a test of the maturity and realism of Italian voters. The advice was that Italians should vote for Monti. On the other hand, the Paul Krugman in The New York Times (2013) had suggested that the Italian elections could be seen as a test for the impact of failed austerity policies: should Italians not vote for Monti, then failure would be guaranteed.
Europe's nations and regions Politics and economics
Italy, Eurozone crisis
Professor Monti and the bubble
Paolo Manasse, Giulio Trigilia, Luca Zavalloni 19 March 2013
Who saved Italy? This column argues that the crisis began with Silvio Berlusconi and ended with Mario Monti. Evidence suggests that restoring a sense of credibility to Italian policymaking was difficult to earn but may be very easy to lose (as the recent run on Italian debt suggests). New and old Italian politicians cannot afford to underestimate the formidable challenge ahead: getting Italy out of this depression without jeopardising its credibility.
The recent Italian elections yielded a hung parliament. Votes were shared almost equally between the centre-left coalition of Bersani, the centre-right coalition of Berlusconi, and the new Five Star Movement of Grillo. Monti's Civic Choice party appealed to only one in ten voters.
Europe's nations and regions Politics and economics
Italy, Eurozone crisis
The case for policy change: Democratic legitimacy of EMU cannot be an afterthought in solving the crisis
Geoffrey R D Underhill, Jasper Blom 19 March 2013
David Cameron’s promise of a referendum on British participation in the EU has re-ignited the debate about the EU’s democratic legitimacy, just as the struggle to overcome the crisis continues. This column argues that in order to both successfully resolve the crisis and maintain states’ ability to sustain liberal finance, a substantial shift in policy is required. Enhancing the democratic legitimacy of crisis resolution measures and wider financial reforms is essential. Without diffuse support for reforms, crisis resolution is likely to collapse under centrifugal populist pressures.
The fallout of the original market crash has generated continuing public and private debt problems, while global and intra-regional payments imbalances remain unresolved. Serious and persistent policy mistakes dressed up as reform have compounded the difficulties while economic growth remains subdued in the major western economies. It is time for policy change drawing on a better historical understanding of the lessons to be drawn from previous episodes of financial instability.
Europe's nations and regions Financial markets Global crisis
Fiscal policy in Europe: Searching for the right balance
Marco Buti, Nicolas Carnot 14 March 2013
As the Eurozone growth continues to be negative, debates over the correct degree of austerity continue. This column presents the Commission’s view on how and why austerity continues to be necessary.
The debate on the fiscal strategy in Europe seems at times like a war of religions. This is unfortunate because the objective disagreements in substance (e.g. see VoxEU debate: Has austerity gone too far? ) are in our view less pronounced than is sometimes depicted.
In this column we lay out the main tenets of the EU approach to current fiscal adjustments. It is not a dogmatic call for austerity at all costs. Rather, it is a delicate balancing act between implementing credible adjustments, keeping flexibility against shocks, and factoring in institutional constraints.
European Commission, Eurozone crisis, austerity
The leaderless global economy: Can economic history suggest lessons?
Peter Temin, David Vines 13 March 2013
Although policymakers want to help foster a global recovery, they are not sure how. Presenting lessons from the last two centuries, this column argues that we need to reduce unemployment first and deal with debt second if we are to see the back of this recession. Ultimately, the problems we face necessitate international cooperation. History shows us that international leadership is possible, and our current circumstances also show us that it is urgently necessary.
We all want to sustain the global recovery — and are not sure how (Kose and Terrones 2012). The closing years of the last two centuries present two examples of international cooperation that may give us hope.
Economic history Global crisis Global economy
Hans-Werner Sinn, Akos Valentinyi 09 March 2013
Will addressing large internal imbalances lead us out of the Eurozone crisis? This column argues that it might. Periphery countries should devalue in order to regain competitiveness and reduce imbalances. As to whether they should pursue internal or external devaluation, the answer remains unclear. Overall, given that policymakers have excluded the option of exit, economic policymaking must focus on the possibilities for internal devaluations, despite some of the difficulties it may bring.
Europe is in the grip of three interrelated crises: a balance-of-payments crisis, a sovereign-debt crisis and a banking crisis. Policymakers have primarily focused on the sovereign-debt and banking crises. However, a credible strategy for getting the Eurozone back on track needs to address the problem of its large internal imbalances. Rebalancing will require countries with current-account deficits to devalue. The crucial question is how: internally without exiting the euro or externally after exiting the euro.
Imbalances in the euro area
Europe's nations and regions
competitiveness, imbalances, devaluation, Eurozone crisis
Periphery economies: National governments must be prepared to provide stimulus
Richard Wood 04 March 2013
Despite recent calm in the markets, the Eurozone crisis seems far from over. So far, responses have worked little magic. This column argues that at some point soon, Eurozone governments will be forced by voters to reverse austerity and stimulate growth. A number of policy options are available, but it is clear that pro-growth fiscal stimulus policies should take their place. Longer-term fiscal consolidation will nonetheless also be required to reduce excessive levels of public spending relative to GDP.
Periphery countries are continuing to face deepening impoverishment for no good reason. With real incomes falling and unemployment already approaching 20 or 30%, further austerity is unnecessary and unconscionable. The crisis is spreading. France, a country near the centre, is increasingly in difficulty, and now even Germany’s growth is faltering.
Europe's nations and regions Global crisis Macroeconomic policy
Eurozone crisis, austerity