The troika should target the trade and the income balance deficits
Ricardo Cabral 15 May 2011
Greece, Ireland, and more recently Portugal have applied for EU and IMF financial aid. This column argues the accompanying adjustment programmes should be modified to reflect the balance of payments and external debt crises these countries face. It suggests that these countries’ public and private debt should be restructured and their tax structure should be rebalanced to replicate the effect of currency devaluation and so improve these countries’ external competitiveness.
Greece, then Ireland, and more recently Portugal have applied for EU and IMF financial aid. A troika of European Commission, ECB, and IMF officials have negotiated accords for ambitious adjustment programmes with either two or three main components, as mandated by the Eurogroup and the Ecofin Ministers (2010a; 2010b; 2011):
EU policies Europe's nations and regions
ECB, IMF, Eurozone crisis, financial aid
Vox’s annual break and some holiday reading tips
Richard Baldwin 25 December 2010
Vox takes its annual break between 25 December 2010 and 2 January 2011. This column documents the coevolution of VoxEU and the global economic crisis since June 2007. It also highlights a few columns that readers should read (or re-read) in preparation for the Eurozone’s next crisis.
After months of preparatory work, Vox was launched in June 2007. The first weeks were going well – and then the subprime crisis struck.
The subprime crisis establishes Vox’s niche
On the 9th, 10th, and 13th of August 2007, the US Fed injected a total of $38 billion into the US banking system; simultaneously, the ECB injected ten times that much into Europe’s banking system.
This action – which made headlines around the world – seemed inexplicable.
Frontiers of economic research
ECB, subprime crisis, global crisis, Eurozone crisis
The European debt crisis: Worrisome delusions
Charles Wyplosz 19 December 2010
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities. This column argues that instead of ruling out highly plausible outcomes, the ECB should explain how it will react if defaults happen. By not making adequate preparations, it may be raising the odds of a very bad scenario.
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities (Financial Times 2010).
His arguments are straightforward.
ECB, eurozone, Debt crisis
All together now? Arguments for a big-bang solution to Eurozone problems
Daniel Gros 05 December 2010
Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.
I hope that everything I write in this column turns out to be irrelevant; I very much hope that it will not be necessary to resort to such drastic actions. Economic logic, however, suggests that it might soon represent the least bad solution to a crisis which keeps getting worse. That said…
ECB, Eurozone crisis, sovereign restructuring
The seniority conundrum: Bail out countries but bail in private, short-term creditors?
Daniel Gros 05 December 2010
Despite its large size relative to the small Irish economy, last weekend’s bailout is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.
European policy-makers might come to regret the statement of the Eurogroup (Eurogroup 2010) that announced the outline of the new European Stability Mechanism that will replace the temporary EFSF from 2013.
The stated purpose of the announcement was to stabilise financial markets, to provide assurances that funding for a crisis resolution mechanism would be available even after the EFSF ends in 2013.
ECB, Eurozone crisis, debt seniority, ESM, EFSF
Reforming the Stability Pact: Focus on financial supervision
Guido Tabellini 05 October 2010
The current European economic governance needs reform. This column argues that rather than trying to invade national governments’ autonomy in economic policy, the European authorities should focus on the transfer of sovereignty in the field of financial supervision.
The economic governance of the Eurozone is under repair. After months of work and deep thinking involving several institutions, including the ECB and the governments of France and Germany, the Commission has proposed a reform plan.
The reform is aimed at the two problems that the financial crisis of Greece highlighted:
- First, the Stability Pact and the European surveillance mechanisms have failed.
Indeed, they could not counter the accumulation of imbalances in the public finances and foreign accounts of southern European countries.
ECB, EU, Economic governance
ECB interest rate policy and the “zero lower bound”
Stefan Gerlach, John Lewis 27 July 2010
Monetary policy during the global crisis entered unchartered territory. This column suggests that fear of a global recession may have led policymakers to cut rates more aggressively in order to prevent the need for negative interest rates.
Since the start of the financial crisis, central banks across the world have cut interest rates substantially. In Japan, the US, the Eurozone and elsewhere, short-term interest rates controlled by the central bank are at or close to zero.
There are two reasons why this may have happened.
ECB, monetary policy, global crisis, zero lower bound
The ECB: Gestures and credibility
Guido Tabellini 26 May 2010
Improvisation in handling the crisis in Greece has given the impression that governments and European institutions are not capable of facing the toughest challenges. This column reminds us that in times like these, the credibility of institutions is essential and rests on consistency. The ECB decision to "sterilise" the purchase of bonds with inverse operations to drain liquidity puts this credibility at risk.
The currency crisis that is affecting Europe is fuelled by several economic factors such as the fear of insolvency by Greece, low growth and deficits in southern Europe,
Europe's nations and regions
ECB, Fiscal crisis, Eurozone crisis
Monetary policy in exceptional times and the economic implications of phasing out in the Eurozone
Michele Lenza, Lucrezia Reichlin 16 February 2010
What effects have the recent exceptional monetary policy interventions had on loans and unemployment, and what are the possible effects of phasing them out? This column provides quantitative estimates for the Eurozone, arguing that that the exceptional policies affect the economic via the spread between the policy rate and the market rate on overnight deposits rather than through their effect on the monetary base.
In response to the global financial crisis, central banks have reacted in a number of novel and innovative ways. Recently, some economists have started to assess the effects of these measures (e.g. Taylor and Williams 2008 for the effects of Fed policies on money market spreads) while others have suggested a framework to analyze the non standard policies in the new Keynesian monetary model (see Cardia and Woodford, 2010).
ECB, monetary policy, market spreads
Eurozone monetary policy in uncharted waters
Emil Stavrev, Martin Cihák, Thomas Harjes 15 January 2010
The global crisis forced central banks to take unconventional measures. This column says that the ECB’s “enhanced credit support” helped support the transmission of monetary policy by reducing money market term spreads. The substantial increase in the ECB’s balance sheet also likely contributed to a reduction in government bond term spreads and a somewhat flatter yield curve.
In response to the financial crisis and its fallout on economic activity, inflation, and inflation expectations, central banks around the globe flooded markets with liquidity and slashed interest rates to unprecedented low levels. The ECB led the way in actively providing financial markets with massive amounts of liquidity. After the real impact of the crisis had become apparent, the ECB cut its policy rate, reducing it to an all time low of 1% by early 2009.
ECB, eurozone, monetary policy