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:
EU institutions Macroeconomic policy
EU, Eurozone crisis, Cyprus
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.
- Spain will have to accept EFSF conditionality in order to persuade the ECB to buy its bonds.
- Italy is different; Italy should not bow to the EFSF and submit itself to its conditionality in order to persuade the ECB to buy its bonds.
Spain may have no other option than to turn to the EFSF and the ECB for assistance: Italy has, and should pursue them. By going to the EFSF together with Spain – as many in the markets are advising – the two countries would be put in the same basket, one in which Italy does not belong.
Eurozone crisis, EFSF, Italian bailout, Spanish bailout
Linking banking crises and sovereign defaults in emerging markets
Irina Balteanu, Aitor Erce 12 November 2014
The feedback loop between banking crises and sovereign debt crises has been at the heart of recent problems in the Eurozone. This column presents stylised facts on the mechanisms through which banking and sovereign crises combine and become ‘twin’ crises. The results point to systematic differences not only between ‘single’ and ‘twin’ crises, but also between different types of ‘twin’ episodes. The timing of ‘twin’ crises – which crisis comes first – is important for understanding their drivers, transmission channels, and economic consequences.
The feedback loop between fiscal and financial instability has been at the core of the recent turmoil in Europe (Acharya et al. 2014). In some countries, systemic banking crises triggered fiscal distress due to the magnitude of bank rescue operations (for example, in Ireland). In others, substantial sovereign debt tensions, leading to successive sovereign downgrades, severely weakened domestic financial systems (for example, in Greece).
Financial markets International finance Macroeconomic policy
twin crises, debt, sovereign debt, sovereign default, banking crises, financial crisis, doom loop, Eurozone crisis, emerging markets
EU bank deleveraging
Pierluigi Bologna, Arianna Miglietta, Marianna Caccavaio 14 October 2014
Following the financial crisis, European banks have taken steps to revise unsustainable business models by deleveraging. By this metric they have made substantial progress – but this column argues that improper management of the deleveraging process may threaten the recovery. The authors find that equity increases played a much larger role than asset decreases, and recommend increasing the disposal of bad assets.
Ever since the global financial crisis made it apparent that financial institutions had increased their leverage substantially (Figure 1), bank leverage has faced intense scrutiny. In the run-up to the crisis, the ballooning of banks’ balance sheets was primarily driven by both a significant increase in lending activities and an abundance of cheap funding. Many banks expanded dramatically, becoming too highly leveraged and ‘too-big-to-fail’, while at the same time accumulating substantial risks.
EU policies Financial markets Global crisis
deleveraging, leverage ratios, bank-sovereign link, EU banks, banking, credit, Eurozone crisis
No miracles in southern Eurozone without resource reallocation
Ramon Xifré 12 September 2014
As the most acute phase of the Eurozone crisis is over, the current-account balances of France, Italy, and Spain have improved. This column warns against complacency about this improvement, pointing at some structural factors that impede growth and damage competitiveness. Resources should be relocated towards the tradeable sectors and to those firms most prepared to grow and compete. If not, these three countries are likely to aggravate the dysfunctional duality of their economies.
The most acute phase of the Global Crisis appears to be over in the Eurozone. Prospects for growth are still moderate but no recession is foreseen in the short-run and sovereign debt markets seem to be getting out of the turbulences. The prevailing view is that the countries that have been under the Economic Adjustment Programmes (EAP) have drastically improved their conditions with the recovery extending to large, non-EAP but ‘vulnerable’ member states like Spain, Italy, and France.
Europe's nations and regions Global crisis Productivity and Innovation
Eurozone crisis, firm size, current account rebalancing, structural reforms, industrial policy
Smaller is better: Disintegrated nations in an integrated Europe
Edoardo Campanella 12 August 2014
Separatism is on the rise in Europe. This column argues that, while the Eurozone Crisis is certainly reinforcing regional tensions, the underlying causes are globalisation and the deepening of the European project. Independence campaigners want access to the larger European market, while unfettering their regions from the centralised control of national governments. Renegotiating the terms of the relationship between national and regional governments is preferable to resorting to political threats or the use of force.
Throughout the course of history, there are few regions in the world whose map has changed as frequently and abruptly as that of Europe. Nowadays, political forces – less violent and bloody than in the past, but equally destructive – are slowly and imperceptibly eroding the borders of several countries. Tensions within states – not enmities among competing powers – are remodelling the political geography of Europe.
Europe's nations and regions Global governance Politics and economics
EU, regionalism, independence, Eurozone crisis, Catalonia, Scotland, separatism, secessionism, Flanders
Sovereign debt markets in turbulent times: A view of the European crisis
Fernando A Broner, Aitor Erce, Alberto Martin, Jaume Ventura 23 July 2014
Since 2010, Eurozone periphery countries have faced severe debt problems and falling credit to the private sector. This column interprets these events with a theory that has three main ingredients. First governments can favour domestic creditors. Second, public debt trades in secondary markets so debt holdings shift from foreign to domestic residents. Third, due to private financial frictions, this shift crowds out private investment and 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. The recessions in the periphery were no deeper than in the core, and financial markets absorbed their increasing public debt as they had done in the past, with non-resident creditors absorbing large portions of the increase.
Europe's nations and regions Global crisis Monetary policy
public debt, Eurozone crisis, Eurozone sovereign debt, creditor discrimination
The euro crisis: Muddling through, or on the way to a more perfect euro union?
Joshua Aizenman 03 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. Otmar Issing’s optimistic speech in 2006 reflects well the buoyant assessment of the first decade of the euro – an unprecedented formation of a new currency without a state.1 Observers viewed the rapid acceptance of the euro as a viable currency and the deeper financial integration of the Eurozone and the EU countries as stepping stones toward a stable and prosperous Europe.
Institutions and economics International finance Monetary policy
Germany, ECB, eurozone, inflation targeting, euro, institutions, Eurozone crisis, GIIPS
Lacklustre investment in the Eurozone: Is there a puzzle?
Marco Buti, Philipp Mohl 04 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).
EU policies Macroeconomic policy
eurozone, growth, European Commission, investment, uncertainty, structural reforms, Bankruptcy, Eurozone crisis, public investment, banking union, financial fragmentation
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. This status is a defining characteristic of the IMF’s role in financial crises – it provides a high degree of confidence that IMF resources are safe when other creditors face substantial uncertainty about full repayment.
Global crisis Global governance International finance
IMF, Eurozone crisis, preferred creditor status