Cyprus: The next blunder
Charles Wyplosz, 18 March 2013
The Cyprus bailout package contains a tax on bank deposits. This column argues that the tax is a deeply dangerous policy that creates a new situation, more perilous than ever. It is a radical change that potentially undermines a perfectly reasonable deposit guarantee and the euro itself. Historians will one day explore the dark political motives behind this move. Meanwhile, we can only hope that the bad equilibrium that has just been created will not be chosen by anguished depositors in Spain and Italy.
The decision to tax all Cypriot bank deposits has attracted massive attention (Spiegel 2013) – and rightly so. It is a huge blunder:
Topics: EU institutions, Macroeconomic policy
Tags: Cyprus, EU, Eurozone crisis
Avoiding an Italian bailout: Why and how
Francesco Giavazzi, 13 August 2012
Spain looks set to turn to the EFSF for a formal bailout subject to stringent conditionality. In this column, Francesco Giavazzi – one of Europe’s leading macroeconomists and an advisor to the Monti government – argues that Italy’s situation is nothing like Spain’s. To avoid submitting itself to its EFSF conditionality, Italy should reduce its borrowing needs with a determined programme of public asset sales and bridge financing from the Cassa Depositi e Prestiti.
Spain has no options, but Italy does.
Topics: EU policies
Tags: EFSF, Eurozone crisis, Italian bailout, Spanish bailout
Sovereign debt markets in turbulent times: A view of the European crisis
Fernando A Broner, Aitor Erce, Alberto Martin, Jaume Ventura, 23 July 2014
By 2010, Eurozone periphery countries had faced severe debt problems and a falling credit to the private sector. This column proposes a theory to interpret these events. Governments can discriminate in favour of domestic creditors and public debts trade in secondary markets. This leads to a shift in the debt holdings from foreign to domestic residents. Finally, private financial frictions crowd out private investment, potentially reducing growth.
Between the start of the financial crisis in 2007 and late 2009, the Eurozone’s periphery countries saw a substantial reduction in economic growth and an increase in deficits. But their economic performance was, if anything, stronger than that in the core countries.
Topics: Europe's nations and regions, Global crisis, Monetary policy
Tags: creditor discrimination, Eurozone crisis, Eurozone sovereign debt, public debt
The euro crisis: Muddling through, or on the way to a more perfect euro union?
Joshua Aizenman, 3 July 2014
After a promising first decade, the Eurozone faced a severe crisis. This column looks at the Eurozone’s short history through the lens of an evolutionary approach to forming new institutions. German dominance has allowed the euro to achieve a number of design objectives, and this may continue if Germany does not shirk its responsibilities. Germany’s resilience and dominant size within the EU may explain its ‘muddling through’ approach to the Eurozone crisis. Greater mobility of labour and lower mobility of under-regulated capital may be the costly ‘second best’ adjustment until the arrival of more mature Eurozone institutions.
The short history of the Eurozone has been remarkable and unprecedented – the euro project has moved from the planning board to a vibrant currency within less than ten years.
Topics: Institutions and economics, International finance, Monetary policy
Tags: ECB, euro, eurozone, Eurozone crisis, Germany, GIIPS, inflation targeting, institutions
Lacklustre investment in the Eurozone: Is there a puzzle?
Marco Buti, Philipp Mohl, 4 June 2014
Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.
On the importance of investment for the Eurozone economy
According to the European Commission’s most recent forecast, real economic activity in the Eurozone is expected to recover at a moderate pace until 2015, and to remain significantly weaker than in the US (European Commission 2014a).
Topics: EU policies, Macroeconomic policy
Tags: banking union, Bankruptcy, European Commission, eurozone, Eurozone crisis, financial fragmentation, growth, investment, public investment, structural reforms, uncertainty
The IMF’s preferred creditor status: Questions after the Eurozone crisis
Susan Schadler, 28 April 2014
The IMF has had a preferred creditor status throughout the history of its lending. This implies that borrowing countries are expected to give priority to meeting their obligations to the IMF over other creditors. This column reviews the onset of this preferred status, its purpose, and the way it changed after the recent Eurozone crisis. By lending €30 billion to Greece in 2010, the IMF introduced the option to permanently waive the requirement that a borrowing country is on the path to stability. This option increases the chance of moral hazard and undermines the strong framework for the preferred creditor status.
Throughout the history of IMF lending, the institution has had preferred creditor status – that is, distressed countries borrowing from the IMF are expected to give priority to meeting their obligations to the IMF over those to other creditors.
Topics: Global crisis, Global governance, International finance
Tags: Eurozone crisis, IMF, preferred creditor status
Watch the indices! Derivatives and the Eurozone sovereign debt crisis
Anne-Laure Delatte, Julien Fouquau, Richard Portes, 17 April 2014
In retrospect, it is striking that the sovereign bond spreads of peripheral Eurozone countries surged while the economic conditions were gradually deteriorating. This column provides a new explanation for this phenomenon. It suggests that the markets in credit default swap indices have exacerbated shocks to economic fundamentals. The same change in fundamentals had a higher impact on the spread during the crisis period than it had previously.
The job of government bond analysts has been tough since the Eurozone crisis started. They’ve had to tell their clients a story behind every single bond spread hike since the fall of 2009. The list includes concerns over peripheral sovereigns’ public finances, deterioration of the fundamentals, financial sector credit risk, and European institutional coordination failures.
Topics: Financial markets, Global crisis
Tags: Credit Default Swaps, Eurozone crisis
The increasing competitiveness of the southern Eurozone
Raphael Auer, 11 April 2014
Some view the improvements in current accounts for Greece, Italy, Portugal, and Spain as short-lived – the result of a temporary compression of import demand that is likely to be reversed as the recession eases. This column argues the contrary, based on the fact that their improving trade balances reflect better export performance. This development points toward a fundamental stabilisation of the competitiveness of these economies.
Current-account (CA) rebalancing is a necessary step for the Southern EZ countries to overcome their debt and external balance of payments crises.1 Figure 1 documents the impressive speed and magnitude of the southern EZ’s CA rebalancing.
Topics: Europe's nations and regions, International finance
Tags: current account rebalancing, eurozone, Eurozone crisis
Delivering the Eurozone ‘Consistent Trinity’
Marco Buti, Maria Demertzis, João Nogueira Martins, 30 March 2014
Although progress has been made on resolving the Eurozone crisis – vulnerable countries have reduced their current-account deficits and implemented some reforms – more still needs to be done. This column argues for a ‘consistent trinity’ of policies: structural reforms within countries, more symmetric macroeconomic adjustment across countries, and a banking union for the Eurozone.
As argued in an earlier commentary, the financial crisis exposed important economic inconsistencies in the way that EMU operated.1 Although progress has been made, the reality is that more needs to be done.
Topics: Europe's nations and regions, Macroeconomic policy
Tags: banking union, debt, EMU, euro, eurozone, Eurozone crisis, fiscal consolidation, fiscal policy, imbalances, internal devaluation, Stability and Growth Pact, structural reforms
The Eiffel group: A political community to rebuild the architecture of the euro
Agnès Benassy-Quéré, Shahin Vallee, 27 March 2014
The recent crisis has highlighted some problems in the current structure of the Eurozone, such as the lack of political integration. This column introduces the Eiffel group – a group of French experts – and its call for a ‘political community of the euro’. The economic and political rationales behind the proposal are discussed in detail. This proposal (also shared by experts in other countries) calls for a debate about the architecture and institutions underpinning the European Monetary Union.
The idea that the European Monetary Union can only exist with some form of political integration and a proper budget is not new. In 1977, the MacDougall report suggested that a budget of the order of 5-7% of GDP was necessary, and in the run-up of the Maastricht treaty, Jacques Delors was insistent on the needs for political integration (see, e.g., Delors 1991).
Topics: EU institutions, EU policies
Tags: Eiffel group, eurozone, Eurozone crisis