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
We may have avoided the cliffs, but we still face high mountains
Olivier Blanchard, 13 February 2013
The new year has provided cheer for macroeconomic optimists. This column by Olivier Blanchard, one of the world’s leading economists, argues that important progress has been made in putting the crisis behind us, but that recovery continues to be hampered by the need for fiscal consolidation and a weak financial system.
Optimism is in the air, particularly in financial markets. And some cautious optimism may indeed be justified.
Compared to where we were at the same time last year, acute risks have decreased. The US has avoided the fiscal cliff, and the euro explosion in Europe did not occur. And uncertainty is lower.
Topics: Global economy
Tags: Eurozone crisis, fiscal cliff, recovery
Monetary policy and firing costs
Ester Faia, Wolfgang Lechthaler, Christian Merkl, 9 February 2013
Eurozone labour markets are under stress. This column explores the connections between labour-market reform and macroeconomic policy, arguing that with its large differences in firing costs, normal Eurozone monetary policy is inappropriate for several Eurozone countries. If the efficacy of the ECB’s policy is impaired because there is no harmonisation of firing costs, tensions will continue to rise within the Eurozone.
Recession has put many Eurozone labour markets under stress, particularly those in Mediterranean countries that have inflexible markets. As part of ongoing reforms, many have tackled the labour market – under the explicit encouragement of the EU and the ECB.
Topics: Labour markets, Monetary policy
Tags: Eurozone crisis, firing costs
Current-account rebalancing and international transfers (immaculate or not)
Giancarlo Corsetti, Philippe Martin, Paolo Pesenti, 31 January 2013
Current-account imbalances in Europe are at the heart of the crisis .This column argues that relative price adjustment need not be as dramatic as some observers claim. In order to foster rebalancing, policy should target obstacles to firms' entry, startup costs, and the incentives for product differentiation, letting relative prices and wages adjust in equilibrium. Setting up firms and new production lines is costly and in the current circumstances, policy should also address tight credit constraints on investment and firms’ activity.
Current-account imbalances in Europe are at the heart of the crisis, and rebalancing must therefore be part of the crisis resolution. How will this rebalancing take place? The view of many observers is that, given that it is difficult to envisage large changes in real exchange rates in the Eurozone, the outlook looks bleak.
Topics: Europe's nations and regions
Tags: current-account imbalances, Eurozone crisis, rebalancing
Reducing the frequency of electoral cycles in the EU: A proposal for synchronising national and European elections
Giorgio Basevi, 23 January 2013
Is European economic recovery being delayed by political procrastination? Are electoral cycles hindering a return to growth? This column argues that by synchronising European nations’ electoral cycles (along with those of the European Parliament), Europe can avoid its current slow and jittery approach. Creating a synchronised Europe-wide voting period would do away with overlapping national electoral cycles. A common national and European voting period would reduce political uncertainty, ensuring quicker policymaking response times for a smoother, quicker route to recovery.
One of the immediate causes of the Greek crisis was the interplay between the electoral cycle in Greece and the discovery that the publication of statistical data on the Greek government financial accounts had been manipulated for political reasons.
Topics: Europe's nations and regions, Politics and economics
Tags: EU, Eurozone crisis
Eurozone crisis: It ain’t over yet
Paolo Manasse, 17 January 2013
All G7 economies are struggling in the post-crisis climate, but US GDP has recovered to pre-crisis levels, while the Eurozone simply hasn’t. This column portrays the global crisis as a transitory shock for the US, but as a quasi-permanent shock for Europe. The policies that are needed get the Eurozone back on track do not seem to be politically feasible. As tension rises with every quarter of stagnation, prospects for the survival of the euro are not only not improving, they are actually getting worse.
Despite apparent calm on the financial markets, no illusions that the storm is ending soon should be entertained. Indeed, we may well be in the eye of the hurricane.
Topics: Europe's nations and regions, Global crisis
Tags: euro, Eurozone crisis, US
Charles Wyplosz, 4 January 2013
Financial market quiescence has removed pressure for immediate policy action on the Eurozone crisis. This column argues that while important repairs were made in 2012, the most difficult ones still lie ahead. Much remains to be done by unwilling politicians. Things will have to get worse before they get better. The best hope is that this happens in 2013 rather than in 2014.
The situation of the Eurozone is now becoming clearer. This article lists ten observations and draws five consequences. The bottom line is that, even though some important steps were taken in 2012, the most difficult ones still lie ahead. Much remains to be done by unwilling politicians. So, regrettably, things will have to get worse before they get better.
Topics: Macroeconomic policy
Tags: Eurozone crisis