The Eurozone crisis continues to take centre stage. This column discusses how deep the EZ crisis is, how long it will last, and what should be the policy priorities. A number of findings emerge. First, the difference in labour market performance between the US and the Eurozone is one of degree but not of kind. Second, the economic consequences of the sovereign debt crisis will be mostly gone by 2018, but the political crisis will continue. Third, enforcing fiscal rules via political arm twisting is a recipe for disaster. Market discipline must instead be brought back, but without financial fragmentation. Limited and conditional Eurobonds are the best way to do so.
Thomas Philippon, Monday, August 31, 2015
Nauro F. Campos, Fabrizio Coricelli, Friday, July 17, 2015
Greece’s reluctance to implement ‘the structural reforms required for debt sustainability’ is a recurrent theme in the debate on the EZ Crisis. This column qualifies this conventional wisdom by reassessing the relationship between Greece and the EU over the past four decades. Although Greece has implemented structural reforms that were substantial enough to bring about a turning point in its relationship with the EU, these reforms have been overly localised, badly sequenced and implemented by short-sighted political elites. The role that structural reforms can play in solving the current crisis should not be overestimated.
Philippe Martin, Thomas Philippon, Tuesday, November 11, 2014
Economists disagree over the origin of the Eurozone Crisis. This column uses a quantitative framework to sort through the various channels and policy impacts. It argues that fiscal and macroprudential policies are complements, not substitutes. Prudent fiscal policy is helpful but cannot by itself undo private leverage booms. Both prudent fiscal policies and macroprudential policies are required to stabilise the economy and make the Eurozone a viable monetary union.
Paul De Grauwe, Monday, July 7, 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
Selin Sayek, Fatma Taskin, Saturday, July 5, 2014
The European Monetary Union is unprecedented, but the Eurozone Crisis is not. This column draws upon the experiences of previous banking crises, and compares the Eurozone Crisis countries. Like Japan before the 1992 crisis, Spain and Ireland had property bubbles fuelled by domestic credit. The Greek crisis is very distinct from crises in other Eurozone countries, so a one-size-fits-all policy would be inappropriate. The duration and severity of past crises suggest the road ahead will continue to be very rough.
Vesa Vihriälä, Beatrice Weder di Mauro, Wednesday, April 2, 2014
The EZ debt overhang needs to be fixed. This column argues that making market discipline credible requires an orderly debt restructuring mechanism combined with a strictly regulated temporary mutualisation scheme or a well-designed debt conversion scheme. This combination could reduce the current debt overhang in an orderly fashion and cement strong incentives against over-borrowing in the future.
Michael Bordo, Harold James, Saturday, October 19, 2013
The Eurozone’s tangle of conflicting goals – a series of ‘trilemmas’ – is not without precedent. This column argues that it is reminiscent of the interwar situation. The interwar slump was so intractable not just due to financial issues, but also a crisis of democracy, of social stability, and of the international political system. The big difference in the EZ is that nations cannot go off the euro as they went off the gold standard. That is why the initial EZ crisis may not have been so acute as some of the gold standard sudden stops, but the recovery or bounce back is painfully slow and protracted.
Olivier Blanchard, Florence Jaumotte, Prakash Loungani, Friday, October 18, 2013
The state of labour markets in advanced economies remains dismal despite recent signs of growth. This column explains the IMF’s logic behind the advice it provided on labour markets during the Great Recession. It argues that flexibility is crucial both at the micro level, i.e. on worker reallocation, and at the macro level, e.g. on collective agreements. It suggests that the IMF approach is close to the consensus among labour-market researchers.
Susan Schadler, Tuesday, October 15, 2013
The IMF loans to Greece, Ireland and Portugal are considered controversial by some analysts. This column argues that these loans – granted without having agreed on convincing paths to manageable debt levels – constituted a substantial departure from IMF principles. The situation is costly for Europe and, having now permanently changed the principles guiding large IMF loans, it will be costly for crises to come. A serious rethink of the management and decision-making structure of the IMF is needed.
Thorsten Beck, Friday, March 22, 2013
Cypriot banks urgently need restructuring and downsizing, but a functioning financial system is necessary to handle Cyprus’s transformation to an economic model not based on an oversized banking sector. This column argues that splitting the Cypriot banking system into a bad ‘legacy’ part and a good forward-looking part seems the only feasible and effective solution to resolve the current crisis and restore trust. The Eurozone's resources would be most useful in this bank-resolution process.
Mitu Gulati, Lee C. Buchheit , Wednesday, March 20, 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.
Thorsten Beck, Tuesday, October 16, 2012
The Eurozone crisis has shown that the traditional approach of EU supervisory cooperation is not enough. This column argues the gaps in cross-border bank regulations have to be addressed on three levels: A short-term crisis resolution mechanism for the Eurozone, a functioning banking union, and stronger cooperation agreements across the EU and beyond. Critically, such reforms have to start from the resolution component.
Caroline Van Rijckeghem, Beatrice Weder di Mauro, Tuesday, September 25, 2012
Lessons from the past suggest democracies with strong economic fundamentals do not default on their debt. This column suggests high growth and low deficits are key but that growing discontent as the result of austerity may be the most important factor yet in influencing the probability of default. Eurozone countries, therefore, need to build a higher safety buffer of good fundamentals to ensure safety from default.
Charles Wyplosz, Monday, September 17, 2012
The European Commission presented their plan for a single EZ bank supervisor this weekend. While it is a good start, this column argues that it avoids the hard truth driving the process: the Eurozone needs a lender of last resort and the ECB is the only one that can play the role. Admitting this truth makes it clear that the Eurozone also needs an arrangement with member governments on bank-bailouts cost sharing and institutions to minimise the ultimate costs.
Charles Wyplosz, Wednesday, August 15, 2012
Some maintain that Italy and Spain risk losing market access for their sovereign bonds despite drops in yields. A recent Vox column by Francesco Giavazzi suggested that Italy could and should avoid a bailout. This column argues that in spite of all its admirable human and economic assets, Italy has moved to a bad equilibrium from which it is most unlikely to escape.
Charles Wyplosz, Monday, July 30, 2012
Financial markets once again pushed Eurozone leaders to act. European Central Bank President Draghi recently promised to “do whatever it takes”. This column argues that Draghi made an implicit commitment to act as lender of last resort to Eurozone governments. This means optimism may be justified – if only because it suggests that the Eurozone has a great central banker who is both a serious economist and an astute politician.
Bernard Delbecque, Monday, July 30, 2012
The escalation of the crisis in the Eurozone calls for new measures to reduce yields on Spanish bonds. This column succinctly lays out the options and finds them wanting. It argues that sovereign bond purchases might not be sufficient to reassure investors. A credible solution will also require a coordinated strategy to address Spain’s competitiveness problem.
Peter Bofinger, Claudia M. Buch, Lars P Feld, Wolfgang Franz, Christoph M Schmidt, Wednesday, July 25, 2012
EZ leaders have failed to tame the crisis. This column presents the English language version of the new plan by the German Council of Experts to resolve the crisis via “redemption bonds” and accompanying institutional reforms.
Charles Wyplosz, Wednesday, July 25, 2012
The EZ crisis is once again on the march; Spain and Italy are under pressure. This column argues that policymakers are likely to fall back once again on a failed approach to avoid admitting past errors. Ultimately, however, EZ leaders will come around to the only way forward – the ECB underwriting both banks and sovereigns while additional controls on bad banking and bad fiscal governance are put in place.
Urs Birchler, Monika Bütler, Tuesday, July 10, 2012
Plans for an EZ banking union have been subjected to ‘dueling open letters’ by German-speaking economists. This column, by two Swiss-based economists, views the letters as closer than one thinks. The difference rests, not on economics, but on a judgement – will the the EU Summit’s promises be fulfilled, or is this one more instance of ever-larger dollops of euros and ever-emptier buzzwords?