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.
Barry Eichengreen, 01 July 2015
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.
Luis Garicano, Lucrezia Reichlin, 14 November 2014
The ECB seems to be edging towards QE, but faces a quandary on what to buy. This proposal suggests that the ECB buy ‘Safe Market Bonds’. These would be synthetic bonds formed by the senior tranches of EZ national bonds combined in GDP-weighted proportions. The ECB would merely announce the features of the synthetic bonds it will purchase. The market would create the bonds in response to this announcement, thus avoiding new EZ-level institutions or funds.
Thorsten Beck, 10 November 2014
The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.
Charles Wyplosz, 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Marcus Miller, Lei Zhang, 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
Francesco Giavazzi, Guido Tabellini, 21 August 2014
The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.
Paul De Grauwe, 07 July 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
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.
Marcus Miller, Lei Zhang, 26 June 2014
Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.
Stephen Hansen, Michael McMahon, Andrea Prat, 20 June 2014
Central bank transparency is essential to democratic accountability. Central bankers often limit it – fearing its stifling effect on frank debate. Yet transparency may induce monetary policy committee members to be better prepared. This column discusses evidence showing that the ‘better prepared’ effect is important empirically. Exploiting a natural experiment in the Fed Open Market Committee in 1993 – and using computational linguistics tools to measure the impact of transparency on deliberation – the research shows that the net effect is a more informative deliberation process.