The Greek revolt: Good news for Europe
Charles Wyplosz, 4 November 2011
Greek Prime Minister Papandreou made a stand this week. Even though he was backed down, this column argues that he did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
The Greek revolt, even if short lived, is good news on the European crisis front – it might provoke the long-awaited policy turnaround that is necessary to end the Eurozone crisis. It may finally awaken EZ leaders to the futility of the path they’ve chosen.
Topics: Europe's nations and regions, Financial markets, Politics and economics
Tags: debt restructuring, default, ECB, Eurozone crisis, Greece
European summits in ivory towers
Paul De Grauwe, 26 October 2011
The Eurozone crisis plays on to a familiar tune. Finance ministers meet on the weekend only for markets to dismiss their efforts the following Monday. This column argues that Europe’s leaders have lost touch, that the ECB has the firepower but is not prepared to use it, and that the outcome of all this is depressingly clear: Defeat by the financial markets.
Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army.
Topics: EU institutions, International finance, Monetary policy
Tags: ECB, EFSF, Eurozone crisis, inflation targeting
Resolving the current European mess
Charles Wyplosz, 25 October 2011
A series of policy mistakes have put Europe on the wrong path. This column says that the current plan to enlarge the EFSF and recapitalise banks through markets will fail. The twin crises linking sovereign debts and banking turmoil need to be addressed simultaneously for Europe to avoid economic disaster.
Editors' note: This column forms part of a VoxEU.org eBook 'The Future of Banking', to be published on Tuesday 25 October.
Topics: EU institutions, EU policies, International finance
Tags: ECB, EFSF, eurozone, sovereign debt
Capping interest rates to stop contagion in the Eurozone
Bernard Delbecque, 17 October 2011
It is widely recognised that without a firewall around illiquid but solvent Eurozone countries, a loss of confidence in the markets could increase interest rates to levels high enough to make any country insolvent. The aim of this column is to propose a concrete plan to build such a firewall and halt the spread of contagion of the debt crisis to Italy and Spain.
A straightforward solution to stop contagion would be to appoint the ECB as a lender of last resort in the government bond markets (Wyplosz 2011a). By making it clear that it is fully committed to exert this function, the ECB would restore confidence in the markets.
Topics: EU institutions, EU policies
Tags: contagion, ECB, EFSF, Eurozone crisis
A failsafe way to end the Eurozone crisis
Charles Wyplosz, 26 September 2011
Last weekend, Eurozone policymakers were shaken into admitting that something more needs to be done to save the Eurozone and avoid a major crisis that would reverberate around the world. This column proposes a three-step solution to finally end the crisis.
The annual gathering of finance ministers and central bank governors at the IMF/World Bank meetings in Washington seems to have been an epiphany for Eurozone leaders. Finally, there seems to be agreement that their July 2011 agreement was insufficient (Reuters 2011).
Topics: Global crisis
Tags: debt guarantee, ECB, EFSF, Eurozone crisis, moral hazard
The damaged ECB legitimacy
Anne Sibert, 15 September 2011
The European Central Bank was once known for its focus on price stability. Since the global economic crisis, however, its role has extended to saving banks and sovereign countries. This column argues that such a move has badly harmed the institution’s legitimacy – something that will damage both its policy effectiveness and confidence in the governing bodies of the EU as a whole.
The ECB’s role has evolved in its decade-long existence. In this note I describe how the choices of the ECB have damaged the institution’s legitimacy.
Topics: EU policies, Europe's nations and regions, Global crisis, Institutions and economics
Tags: ECB, Eurozone crisis, transparency
Why a slowdown in Germany could be good for Europe
Francesco Giavazzi, Alberto Alesina, 1 September 2011
One major problem with the Eurozone as a currency area is that its economies are not in sync. With growth in Germany now slowing, this column argues that this could be the blessing the ECB has been praying for.
Paradoxically, the slowing down of the German economy could be a blessing for the euro – and a boost to the probability that the euro survives the crisis.
Until a few weeks ago, the Eurozone economies seemed to be moving in different directions.
Topics: EU policies, Europe's nations and regions, Monetary policy
Tags: ECB, Eurozone crisis, Germany
The European Central Bank as a lender of last resort
Paul De Grauwe, 18 August 2011
With the Eurozone crisis casting doubt over the solvency of Spain and Italy, the ECB has once again intervened to provide liquidity in the government bond markets. This column asks the question: Is there such a role for the ECB as a lender of last resort?
In October 2008 the ECB discovered that there is more to central banking than price stability. This discovery occurred when it was forced to massively increase liquidity to save the banking system. The ECB did not hesitate to serve as lender of last resort to the banking system, despite fears of moral hazard, inflation, and the fiscal implications of its lending.
Topics: EU policies
Tags: ECB, Eurozone crisis, lender of last resort
August 2011: The euro crisis reaches the core
Daniel Gros, 11 August 2011
Investors are anticipating the unravelling of the 21 July 2011 “solution” and a breakdown of the interbank-market that would throw the economy into an “immediate recession” like the one experienced after the Lehman bankruptcy. This column argues that this will happen without quick and bold action. The EFSF can’t work as designed but if it were registered as a bank – which would give it access to unlimited ECB re-financing – governments could stop the generalised breakdown of confidence while leaving the management of public debt in the hand of the finance ministers.
Canaries were kept in coal mines because they die faster than humans when exposed to dangerous gases. When the birds stopped singing, wise miners knew that it was time to gear up the emergency procedures.
Topics: Global crisis
Tags: ECB, EFSF, Eurozone Debt Crisis
They still don’t get it
Charles Wyplosz, 25 October 2011
UPDATED: EZ leaders are working on a plan to save the euro. This column updates the column posted on 22 August 2011 by evaluating the steps EZ leaders took this weekend. Things don’t look good. By rejecting any major role for the ECB, leaders have guaranteed that any package will be too little too late. After all, imagine what the US crisis package in 2008 would have looked like if the Fed had refused to use its massive firepower to stabilise markets.
Editor's note: This column updates the column originally posted on 8 August 2011.
Topics: EU institutions
Tags: ECB, Eurozone crisis, sovereign default