When the ECB buys a Eurozone member’s bonds, the government pays interest to the ECB but the ECB rebates it to the government. If Greece repays its ECB-held bonds, it loses this ‘free borrowing’. This column argues that repayment is like ‘reverse QE’. To maintain its QE targets, more bonds from other EZ members must be bought – thus shifting the free borrowing from Greece to other EZ members. To avoid this perverse outcome, the ECB could extend the maturity of the Greek bonds.
Paul De Grauwe, Yuemei Ji, 16 July 2015
Jeffrey N. Gordon, Georg Ringe, 17 July 2015
The Greek Crisis is a crisis rather than a problem due to the vulnerability of Greek banks. While the banks have deep problems, this column argues that these would have been mitigated if a fully operational banking union were in place. A full banking union requires joint banking supervision, joint bank resolution, and joint deposit insurance. The EZ only has the first so far. Completing the banking union must be part of any long-term solution.
Thorsten Beck, 15 July 2015
Monday’s deal was a political compromise consistent with the political constraints of Greece and its creditors. It is doubtful, however, that it will provide a long-term solution to Greece’s economic crisis. At a minimum, the momentum should be used to eliminate the option of Grexit once and for all. The bank-sovereign ties should be cut to turn Greek banks from a source of crises into a growth-supporting sector.
Charles Wyplosz, 14 July 2015
The new bailout deal for Greece was not easy. This column argues that it was also a failure. It will not be enough to recapitalise banks, it asks for structural reform that exceeds Greek capacities, and it raises the Greek debt-to-GDP ratio to unsustainable levels. In a few months or quarters, the programme will fail and the Grexit question will flare up again.
Julian Schumacher, Beatrice Weder di Mauro, 12 July 2015
The sustainability of Greek debt is central to the negotiations. To date the sustainability calculations have been based on the IMF’s standard models for calculating sustainability for countries with market access. This column argues that these are not appropriate for Greece – a middle-income country with highly concessionary financing. The ESM should develop a new, appropriate analytic tool to reflect Greece’s special situation.
Olivier Blanchard, 10 July 2015
The Greek crisis is in a critical phase. This column, by the IMF’s Chief Economist, reflects on the various critiques of the handling to date of Greece’s problems.
Francesco Caselli, Camille Landais, Christopher Pissarides, Silvana Tenreyro, Wouter den Haan, 09 July 2015
Greek exit from the Eurozone has uncertain and potentially dangerous implications for all involved. This column, signed by 25 LSE economists, urges the Greek government and its creditors to act more responsibly. The first priority is to get Greece on a path of sustainable growth by relaxing austerity in the near term and linking debt restructuring to essential structural improvements.
Carmen M Reinhart, 09 July 2015
Contrary to the intent of the designers of what was to be an irreversible currency union, Greece may well exit the Eurozone. This column argues that default does not inevitably trigger the introduction of a new currency (or the re-activation of an old one). However, if ‘de-euroisation’ is the end game, then a forcible (or compulsory) currency conversion is likely to be a central part of that process, along with more broad-based capital controls.
Paul De Grauwe, 03 July 2015
Greece’s debt is 180% of GDP, which seems to make it insolvent without large primary surpluses. This column argues that since restructuring lowered the interest burden to just 2% of GDP, Greece is solvent – or would be with nominal GDP growth of just 2%. The ECB’s misdiagnosis has caused an unnecessary banking crisis. The solution is to accept that Greek debt is sustainable, so the austerity programme can be relaxed and liquidity support provided to the Greek banking sector.
Barry Eichengreen, 01 July 2015
Barry Eichengreen’s VoxEU column arguing that the euro was irreversible has been viewed over 230,000 times. Now it appears to be wrong. In this column, originally posted on the website ‘The Conversation’, he looks to see where his predictions went wrong. Basically the economic analysis – which focused on bank runs – was right. He went wrong in overestimating the political competence of Greece and its creditors.
Domingo Cavallo, 30 June 2015
Grexit and the reintroduction of the drachma would have severe consequences for the Greek people. This column argues, based on Argentina's experience, that this would produce a sharp devaluation of the drachma, inflation, and a severe reduction in real wages and pensions. The effects would be far worse than the reductions that could have occurred as a consequence of the policies proposed by the Troika. By resuming negotiations, continuing with measures to achieve fiscal consolidation and carrying out adequate structural reforms, Greece could reverse the current situation in a sustainable way. It has the great advantage that the ECB, most European governments and the IMF are willing to resume negotiations.
Charles Wyplosz, 29 June 2015
This weekend’s dramatic events saw the ECB capping emergency assistance to Greece. This column argues that the ECB’s decision is the last of a long string of ECB mistakes in this crisis. Beyond triggering Greece’s Eurozone exit – thus revoking the euro’s irrevocability – it has shattered Eurozone governance and brought the politicisation of the ECB to new heights. Bound to follow are chaos in Greece and agitation of financial markets – both with unknown consequences.
Harald Benink, Harry Huizinga, 16 May 2015
QE in the Eurozone is unusual in that the risks of sovereign debt defaults are shared between the ECB and the national central banks. This column argues that if such risk sharing were applied to the Outright Monetary Transactions programme, it could potentially create insolvency problems for countries with large public debts, especially in a low-growth scenario.
Ana-Maria Fuertes, Elena Kalotychou, Orkun Saka, 26 March 2015
Recent debt crises have brought the fragility of the Eurozone into focus. It has been argued that members are vulnerable to sudden changes in market sentiment. This column examines how debt markets reacted to an ECB announcement that it would serve as a lender of last resort, finding that recent debt crises have strong self-fulfilling dynamics.
Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Benjamin Weigert, Volker Wieland, 20 February 2015
Claims that ‘austerity has failed’ are popular, especially in the Anglo-Saxon world. This column argues that this narrative is factually wrong and ignores the reasons underlying the Greek crisis. The worst move for Greece would be to return to its old ways. Greece needs to realise that things could actually become much worse than they are now, particularly if membership in the Eurozone cannot be assured. Instead of looking back, Greece needs to continue building a functioning state and a functioning market economy.
Thorsten Beck, 02 February 2015
The Greek-Troika conflict is roiling markets, boardrooms and cabinet offices around the world. Crises are best solved by recognising losses, allocating them and moving on, so the biggest risk, this column argues, is that a compromise kicks the can further down the road. As the can rolls on, the scenery becomes politically and socially less attractive – fuelling the rise of political animosities, nationalism, and fringe parties. Greece is a special case but indicative of the core problem – deficient EZ governance structures that mean societies are stuck with increasing socioeconomic exclusion and political despair. The crisis will continue until the necessary further deepening of EZ institutional structures is completed.
Marco Annunziata, 23 January 2015
The European Central Bank has just launched full-fledged quantitative easing. This column argues that the ECB’s watershed decision highlights both the strengths and the persistent vulnerabilities of the Eurozone. The limited-risk-sharing provision flags the need for greater fiscal union; and governments should use the respite that QE provides to launch much-needed structural reforms.
Francesco Giavazzi, Guido Tabellini, 17 January 2015
The ECB may soon launch QE. Two of Europe’s leading macroeconomists argue that QE is the ECB’s last anti-deflation tool – it must not be sacrificed to political expediency. The risk-sharing debate is secondary to the programme’s size and duration – one example would be €60 billion per month for one year, or until inflation expectations rose to near 2%. The ECB should also explain that no matter how well the monetary part of the programme is designed, an accompanying fiscal expansion is critical to QE’s effectiveness.
Athanasios Orphanides, 05 December 2014
In the face of the zero lower bound, the ECB’s reduced its balance sheet by a third. This column introduces a new CEPR Policy Insight by former central-bank governor Athanasios Orphanides, which argues that the outcome has been economic stagnation and harmful disinflation. It explores alternative explanations for this policy, including the role of politics in managing the Eurozone crisis and proposes balance-sheet policy to help fulfil the ECB’s mandate in the face of the Fed’s tightening.
Jean-Pierre Landau, 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.