Eurozone mired in recession pause
CEPR Business Cycle Dating Committee 17 June 2014
The simplest business cycle dating algorithm declares recessions over after two consecutive quarters of positive GDP growth. By that metric, the Eurozone recession has been over since 2013Q1. This column argues that growth and improvements in the labour market have been so anaemic that it is too early to call the end of the Eurozone recession. Indeed, if this is what an expansion looks like, then the state of the Eurozone economy might be even worse than economists feared.
The CEPR Business Cycle Dating Committee met on 11 June 2014 to determine whether the Eurozone is out of the recession that started after 2011Q3. The duty of the Committee – comprised of Philippe Weil (Chair), Domenico Giannone, Refet Gürkaynak, Monika Merz, Richard Portes, Lucrezia Reichlin, Albrecht Ritschl, Barbara Rossi, and Karl Whelan – is to date peaks and troughs of the Eurozone business cycle, marking recessions and expansions – a role similar to that of the NBER Business Cycle Dating Committee in the US.
Europe's nations and regions Global crisis
eurozone, growth, GDP, recession, business cycles, CEPR, trough, business cycle dating, expansion, peak
Lacklustre investment in the Eurozone: Is there a puzzle?
Marco Buti, Philipp Mohl 04 June 2014
Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.
On the importance of investment for the Eurozone economy
According to the European Commission’s most recent forecast, real economic activity in the Eurozone is expected to recover at a moderate pace until 2015, and to remain significantly weaker than in the US (European Commission 2014a).
EU policies Macroeconomic policy
eurozone, growth, European Commission, investment, uncertainty, structural reforms, Bankruptcy, Eurozone crisis, public investment, banking union, financial fragmentation
Eurozone external adjustment and real exchange rate movements: The role of firm productivity distribution
Filippo di Mauro, Francesco Pappadà 02 June 2014
Trade imbalances in the Eurozone require relative price adjustments. This column argues that the traditional ‘elasticity’ approach is lacking when thinking about the adjustment magnitude. Exports adjust when exporting firms sell more (intensive margin) and new firms start exporting (extensive margin). The extensive-margin reaction depends upon the fatness of firm-level productivity distributions. Surplus-country distributions have fatter tails than deficit countries, suggesting that the price adjustment magnitude may be larger than traditional calculations suggest.
A corollary of the Eurozone crisis has been an unusually large current-account surplus for the Eurozone as a whole, resulting from a combination of strong external demand and rapid readjustment of external accounts in the Eurozone countries that had previously accumulated large imbalances.
Europe's nations and regions Exchange rates
eurozone, exchange rates, productivity, imbalances, exports, rebalancing
Italy and the euro: Myths and realities
Paolo Manasse, Tommaso Nannicini, Alessandro Saia 24 May 2014
The euro’s impact on southern EZ members is a key topic in national and European debates. This column argues that the economic evidence is twisted to fit preconceptions. It presents evidence based on the ‘synthetic control’ approach, finding that the euro raised trade, lowered interest rates and inflation, but had a small negative impact on per capita incomes.
A spectre is haunting Europe – the spectre of the euro. In the wake of the European elections of 25 May, the debate on the pros and cons of the euro – in Italy and throughout the Eurozone – are dominated by partisan politics. The empirical evidence is often distorted to suit one’s need.
ECB: An appropriate monetary policy
Mickey Levy 16 May 2014
As banks repay their loans from the Long-Term Refinancing Operation, the ECB’s balance sheet is shrinking. This column argues that, given the slow recovery and sustained low inflation, the ECB should replace its bank lending programme with quantitative easing. Buying short-term government debt would be consistent with the ECB’s inflation target, would keep the ECB’s monetary policy separate from its role in bank supervision, and would create a built-in exit strategy from unconventional policy.
Europe’s modest economic recovery and uncomfortably low inflation put the ECB in a bind. Although economic conditions are improving gradually (European Commission 2014), concerns about the potentially negative impacts of deflation persist (Armstrong et al. 2014). The ECB’s top near-term priorities are to avoid deflation (and apparently even sustained low inflation) and extend the economic recovery.
ECB, eurozone, monetary policy, quantitative easing, bank lending
How the euro changed the pattern of international debt flows
Galina Hale, Maurice Obstfeld 15 May 2014
Large flows of bank lending from core countries in the Eurozone to the periphery lead to large financial imbalances. This column explains what motivated such financial flows. With the advent of the Eurozone, banks in core countries gained relative advantage in lending to the periphery, making such lending very attractive. They also served as intermediaries for financial flows from outside the Eurozone to the periphery. Now – five years since the start of the euro crisis – Eurozone financial markets remain segmented.
Internal financial imbalances within the Eurozone were central to the development of the European debt crisis. They resulted in a concentration of European periphery risks on the balance sheets of banks located in core Eurozone countries (Lane 2012, Rey 2012, Shin 2012). They also promoted larger intra-Eurozone current-account deficits and a sharp fall in peripheral bond yields, accompanied by a loss of competitiveness of the peripheral economies, most strikingly relative to Germany (Chen et al. 2013, Shambaugh 2012).
EU institutions Financial markets
eurozone, Debt crisis
The increasing competitiveness of the southern Eurozone
Raphael Auer 11 April 2014
Some view the improvements in current accounts for Greece, Italy, Portugal, and Spain as short-lived – the result of a temporary compression of import demand that is likely to be reversed as the recession eases. This column argues the contrary, based on the fact that their improving trade balances reflect better export performance. This development points toward a fundamental stabilisation of the competitiveness of these economies.
Current-account (CA) rebalancing is a necessary step for the Southern EZ countries to overcome their debt and external balance of payments crises.1 Figure 1 documents the impressive speed and magnitude of the southern EZ’s CA rebalancing.
Europe's nations and regions International finance
eurozone, Eurozone crisis, current account rebalancing
Delivering the Eurozone ‘Consistent Trinity’
Marco Buti, Maria Demertzis, João Nogueira Martins 30 March 2014
Although progress has been made on resolving the Eurozone crisis – vulnerable countries have reduced their current-account deficits and implemented some reforms – more still needs to be done. This column argues for a ‘consistent trinity’ of policies: structural reforms within countries, more symmetric macroeconomic adjustment across countries, and a banking union for the Eurozone.
As argued in an earlier commentary, the financial crisis exposed important economic inconsistencies in the way that EMU operated.1 Although progress has been made, the reality is that more needs to be done. A number of countries still need to consolidate their public finances further, and also implement structural reforms to promote growth and sustain satisfactory welfare systems. At the same time, there is a need for vulnerable countries to ensure consistency between regaining competitiveness and the sustainability of private and public debts.
Europe's nations and regions Macroeconomic policy
eurozone, euro, EMU, imbalances, fiscal policy, structural reforms, fiscal consolidation, debt, Eurozone crisis, Stability and Growth Pact, banking union, internal devaluation
The Eiffel group: A political community to rebuild the architecture of the euro
Agnès Benassy-Quéré, Shahin Vallee 27 March 2014
The recent crisis has highlighted some problems in the current structure of the Eurozone, such as the lack of political integration. This column introduces the Eiffel group – a group of French experts – and its call for a ‘political community of the euro’. The economic and political rationales behind the proposal are discussed in detail. This proposal (also shared by experts in other countries) calls for a debate about the architecture and institutions underpinning the European Monetary Union.
The idea that the European Monetary Union can only exist with some form of political integration and a proper budget is not new. In 1977, the MacDougall report suggested that a budget of the order of 5-7% of GDP was necessary, and in the run-up of the Maastricht treaty, Jacques Delors was insistent on the needs for political integration (see, e.g., Delors 1991). Yet, for lack of political consensus, it was decided to proceed with monetary union alone in the hope that monetary and financial integration would eventually precipitate both fiscal and political integration over time.
EU institutions EU policies
eurozone, Eurozone crisis, Eiffel group
TARGET balances, Bretton Woods, and the Great Depression
Michael Bordo 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.
Economic history International finance
ECB, eurozone, euro, global imbalances, Central Banks, financial crisis, Great Depression, Eurosystem, Eurozone crisis, Bretton Woods, TARGET