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.
Topics: Europe's nations and regions, Politics and economics
Tags: Eurozone crisis, Italy
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.
Topics: Europe's nations and regions, Financial markets, Global crisis
Tags: Eurozone 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.
Topics: Macroeconomic policy
Tags: austerity, European Commission, Eurozone crisis
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.
Topics: Economic history, Global crisis, Global economy
Tags: Eurozone crisis
Hans-Werner Sinn, Akos Valentinyi, 9 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.
Topics: Europe's nations and regions
Tags: competitiveness, devaluation, Eurozone crisis, imbalances
Periphery economies: National governments must be prepared to provide stimulus
Richard Wood, 4 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.
Topics: Europe's nations and regions, Global crisis, Macroeconomic policy
Tags: austerity, Eurozone crisis
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
The international financial architecture needs a structured mechanism for dealing with sovereign defaults. The main problem with the status quo is that countries tend to sub-optimally delay necessary defaults, leading to substantial loss of value for debtors and creditors alike.
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