Currency wars and the euro
Jens Nordvig 25 November 2013
Having promised to do ‘whatever it takes’ to ensure the survival of the euro, the ECB now faces the problem of record high unemployment combined with a strong currency. There is accumulating evidence that the ECB is more willing to fight currency appreciation than the Bundesbank would have been. Capital inflows have been a key source of recent upward pressure on the euro. Should this continue, the ECB may need to intervene more aggressively in order to promote economic recovery in the Eurozone.
A new battle for the ECB to fight
Last year, the ECB entered an existential battle for the euro. By promising to do ‘whatever it takes’ to safeguard the euro, the ECB managed to calm sovereign debt markets and engineer a much-needed easing of overall credit conditions in the Eurozone.
EU institutions Exchange rates Monetary policy
ECB, eurozone, euro, unemployment, Bundesbank, Currency wars
Global and Eurozone imbalances: A question of civic capital?
Sascha Bützer, Christina Jordan, Livio Stracca 23 November 2013
Since the advent of the Eurozone sovereign-debt crisis, economic commentators have drawn attention to macroeconomic imbalances within the Eurozone. This column presents evidence on the link between macroeconomic imbalances and differences in culture – or more specifically, interpersonal trust. A conservative estimatation suggests that a one standard-deviation increase in trust reduces macroeconomic imbalances by about a quarter of a standard deviation. Moreover, differences in interpersonal trust can explain a fifth of the variation in intra-Eurozone imbalances.
Macroeconomic imbalances have been the subject of much debate in recent years, and are still in the spotlight. Before and during the financial crisis, a lot of attention was devoted to global imbalances – in particular to the persistent current-account deficits of some countries (such as the US) and the persistent surpluses of others (such as China). With the advent of the Eurozone sovereign-debt crisis, the attention has shifted to imbalances within the Eurozone.
Europe's nations and regions International trade
eurozone, global imbalances, trust, World Values Survey, civic capital
A bank restructuring agency for the Eurozone – cleaning up the legacy losses
Thorsten Beck, Christoph Trebesch 18 November 2013
Many Eurozone banks are still in a fragile state following the Global Crisis. This vulnerability will be highlighted as the ECB takes charge of bank supervision, and the EZ moves towards a banking union. This column proposes a Eurozone bank restructuring agency as a way to speed up the crisis resolution. This temporary, centralised agency would be in charge of restructuring viable and non-viable banks throughout the Eurozone. Solving the problem of legacy assets is a necessary step towards a banking union.
At the core of the Eurozone crisis is the deadly embrace between banks and governments. Sovereign fragility has led to pressure on banks’ balance sheets. The weak fiscal position of governments in many periphery countries, on the other hand, has led to delays in recognising bank problems and addressing them (Acharya et al., 2012). The situation, however, also has a political dimension, as regulators in many European countries have become too close to the regulated entities.
EU institutions Financial markets
eurozone, banking crises, bank restructuring agency
Revisiting sovereign bankruptcy
Lee C. Buchheit , Beatrice Weder di Mauro, Anna Gelpern, Mitu Gulati, Ugo Panizza, Jeromin Zettelmeyer 12 November 2013
Sovereign bankruptcies occur regularly and violently. The nature of sovereign-debt problems has changed in comparison to ten years ago. This column discusses policy proposals to better resolve debt crises and prevent them from happening in the future. Such proposals are given both for the Eurozone, and at a global level.
Sovereign-debt crises occur regularly and often violently. The recent debt crisis in Greece almost led to the collapse of the euro. Yet, there is no legally and politically recognised procedure for restructuring the debt of bankrupt sovereigns.
Procedures of this type have been periodically debated – most recently, about a decade ago – when IMF management proposed a global sovereign debt restructuring mechanism (Krueger, 2002). Yet, they have so far been rejected.
EU institutions Global economy
eurozone, IMF, sovereign debt crisis
Massacre memories: German car sales and the EZ Crisis in Greece
Vasiliki Fouka, Hans-Joachim Voth 23 October 2013
The EZ crisis increased north-south conflicts between bailout providers and recipients – especially between Germany and Greece. This column shows evidence that political conflict directly translated into losses of market share for German car producers in Greece – especially in areas where German armed forces committed massacres during World War II. Six decades later, memories of conflict are never far from the surface in Europe.
When Angela Merkel visited Athens earlier this year, local protesters upset about austerity measures and alleged German dominance depicted her on placards wearing a Nazi uniform. Cypriots demonstrating against the terms of their country's bailout showed the stars of the EU surrounding a swastika. As the European debt crisis spreads, protests against austerity have become more frequent and often violent (Lynn, 2010 ).
Europe's nations and regions Global crisis
eurozone, Greek debt
Banking union for Europe – where do we stand?
Thorsten Beck 23 October 2013
Much has happened since VoxEU published an eBook on the banking union in Europe one year ago. In this column, the editor of the eBook reviews the developments and plans of the past year. Many of the issues flagged by eBook contributors are still relevant and have not yet been addressed. While immediate pressures seemed to have receded, the crisis is still very much with us and is still awaiting resolution.
In a few days, pending some last-minute diplomatic conflict between the UK and the European Commission, the ECB will begin an asset-quality review of European banks. This is supposed to be the entry point to the supervisory role of the ECB in the context of the Single Supervisory Mechanism (SSM), the first of three pillars of the planned banking union. Little political progress has been made on the other two pillars, bank resolution and deposit insurance, in spite of proposals by the EU Commission.
EU institutions Global crisis
ECB, eurozone, monetary union
The impact of sovereign-debt exposure on bank lending: Evidence from the European debt crisis
Alexander Popov, Neeltje van Horen 06 July 2013
The European sovereign-debt crisis has raised many questions regarding the link between sovereigns and banks. This column goes to the heart of one and shows that tensions in Eurozone government-bond markets were transmitted internationally through the bank lending channel. Lending by European banks with sizeable exposures to sovereign debt from the troubled Eurozone countries became impaired after the start of the crisis, resulting in a reallocation away from foreign (especially US) markets.
The sovereign-debt crisis which erupted in the Eurozone in 2010 has sent ripples through the global banking system and prompted interventions by governments and central banks on a scale comparable to the programs implemented during the financial crisis of 2008-09. Its impact has reached far beyond Europe’s borders, with the IMF calling it “the most immediate threat to global growth” (IMF 2012). The consequences of the crisis, however, are not yet well understood and many questions have been raised regarding the link between sovereigns and banks.
Financial markets International finance
eurozone, sovereign debt, bank exposure
Putting the ‘system’ in the international monetary system
Michael Bordo, Angela Redish 20 June 2013
The Eurozone has been going through an existential crisis since 2010. The column discusses research that draws an analogy between the careful planning in the 1980s leading to the creation of the euro and the planning that led to the Bretton Woods system. The outcome for the Eurozone, as in the earlier creation of a man-made international system, may be similar – collapse or at least major reworking.
The Eurozone and Bretton Woods are prime examples of planned international monetary arrangements designed in each case to deal with the perceived flaws of earlier more ‘spontaneous order systems ‘based on domestic monetary institutions (Gallarotti 1995).
Economic history Macroeconomic policy
eurozone, monetary policy, Bretton Woods
EZ banking union with a sovereign virus
Daniel Gros 14 June 2013
The doom-loop between banks and the national governments played a dominant role in the Eurozone crisis for Ireland and Cyprus. A Eurozone banking union is usually viewed as the solution. This column argues that the doom-loop cannot be undone as long as banks hold oversized amounts of their government’s debt. A simple solution would be to apply the general rule that banks are prohibited from holding more than a quarter of their capital in government bonds of any single sovereign.
The purpose of the proposed banking union is to de-link banks from their sovereigns.
- Putting the ECB in charge of supervision and creating a common resolution mechanism should help.
But this is not enough.
- European banks hold too much government debt of their own governments to really sever the sovereign-bank link.
Until the link is broken, the Eurozone will continue to be vulnerable to disruptive, self-reinforcing feedbacks of the type that brought the Eurozone to the brink of collapse in 2011-12.
EU institutions Europe's nations and regions
eurozone, EZ banking union
Panic-driven austerity in the Eurozone and its implications
Paul De Grauwe, Yuemei Ji 21 February 2013
Eurozone policy seems driven by market sentiment. This column argues that fear and panic led to excessive, and possibly self-defeating, austerity in the south while failing to induce offsetting stimulus in the north. The resulting deflation bias produced the double-dip recession and perhaps more dire consequences. As it becomes obvious that austerity produces unnecessary suffering, millions may seek liberation from ‘euro shackles’.
Southern Eurozone countries have been forced to introduce severe austerity programs since 2011. Where did the forces that led these countries into austerity come from? Are these forces the result of deteriorating economic fundamentals that made austerity inevitable? Or could it be that the austerity dynamics were forced by fear and panic that erupted in the financial markets and then gripped policymakers. Furthermore, what are the implications of these severe austerity programs for the countries involved?
Financial markets Macroeconomic policy
eurozone, financial panic, austerity