From trade to domestic collapse? On the complementarity between exports and domestic sales
Nicolas Berman, Antoine Berthou, Jérôme Héricourt, 16 December 2011
The synchronised poor growth in European countries can be explained by many factors, including trade and financial linkages. This column argues that firms’ domestic sales are directly affected by the fall in their exports. Using French firm-level data and the Asian Crisis as a foreign-demand shock, it finds that domestic sales were 5% lower for firms exposed to the crisis. It suggests that this is because the cash flow generated by exports may be used by firms to finance domestic operations in the short term.
The Eurozone is close to slipping into a recession. The most recent OECD forecasts point to an average growth of 0.2% of GDP in volume within the EZ151 in 2012, ranging from -3% (Greece and Portugal) and -0.5% (Italy), to +0.6% (Germany) and +1% (Ireland).
Topics: International trade
Tags: eurozone, exports, French firms
The interplay of sovereign spreads and banks’ fragility in the Eurozone
Damiano Sandri, Ashoka Mody, 23 November 2011
European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities. This column argues that the payoffs from strengthening banks’ balance-sheets can still be large and, therefore, fiscal support is merited. But a more resolute strategy for winding down banks is also needed.
European policymakers are confronting a heightened crisis characterised by a perverse and seemingly intractable interplay between sovereign debt pressures and financial-sector fragilities (Wolff 2011). Three questions arise:
Topics: Financial markets, International finance
Tags: banks, eurozone, spreads
How much capital do European banks need? Some estimates
Viral Acharya, Dirk Schoenmaker, Sascha Steffen, 22 November 2011
The lack of market confidence in European banks is fed by the uncertainty about Eurozone sovereign debt. This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.
The European banking system is freezing up. Several banks are not able to fund themselves in the market. The lack of market confidence in European banks is fed by the ongoing uncertainty about Eurozone sovereign debt (as well as real estate) to which these banks are exposed.
Topics: Financial markets, International finance
Tags: banks, eurozone, recapitalisation, sovereign debt
The Eurozone needs exit rules
Cezary Wójcik, Christian Fahrholz , 31 October 2011
With the sovereign debt crisis spreading across Europe, there is no shortage of suggestions on how to save the Eurozone. This column says exit rules are the silver bullet. It argues that exit rules would decrease the probability of a breakup of the Eurozone by enhancing market discipline, increasing the political bargaining power of EZ members vis-à-vis the profligate countries, enhancing internal discipline in the profligate countries, and reducing market uncertainty.
With the sovereign debt crisis spreading across Europe and in the run-up to the next EU Summit there is no shortage of suggestions on how to save the Eurozone. Unfortunately, the majority of these suggestions have one of the following flaws.
Topics: EU institutions, EU policies
Tags: EU, eurozone, exit rules
Is the recent bank stress really driven by the sovereign debt crisis?
Guntram Wolff, 30 October 2011
Stress in the interbank market has increased dramatically since July 2011, and bank stock market valuations have fallen by 22% on average for 60 of the most important banks subject to stress tests. This column argues that bank stock valuation has been affected by the banks’ exposure to Greek debt and that Greek banks were particularly affected. Holdings of debt of the other four periphery countries does not, however, appear to be a strong determinant of stock price movements.
Stress in the interbank market has increased significantly since July (Figure 1). There is now a significant debate on why this is the case and what would be the best way to address it (Financial Times 2011).1 Many have argued that the sovereign debt crisis isthe most important driver of banking stress in the Eurozone.
Topics: EU policies, Financial markets, International finance
Tags: eurozone, Eurozone crisis, sovereign bonds, stock markets
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
ESBies: A realistic reform of Europe's financial architecture
The Undersigned, 25 October 2011
How can Europe fix its sovereign-debt crisis? Many favour euro bonds, but those seem politically impractical because they would require supranational fiscal policies. This column proposes creating safe European assets without requiring additional funding by having a European debt agency repackage members’ debts into `euro-safe-bonds’.
The current European crisis has exposed several flaws in the design of the Eurozone financial system. It was internally inconsistent. On the one hand, it imposed a ‘no-bail out clause’ ruling out any bailout to ensure that interest rate differentials provide a clear signal about the buildup of imbalances.
Topics: EU institutions, International finance
Tags: euro bonds, eurozone, Eurozone crisis, sovereign debt
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.
Topics: EU institutions
Tags: Debt crisis, ECB, eurozone
Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone
Barry Eichengreen, 3 December 2010
Irish interest spreads did not fall and contagion continues. Here one of the world’s leading international economists explains why. Short-sighted, wishful thinking by EU and German leadership designed a package that is not economically feasible in the long run (it would trigger a vicious debt deflation spiral) and it is not politically sustainable in the short run. The Eurozone had better have a Plan B for when the new Irish government rejects the package next year and imposes a haircut on Irish bank bondholders.
The Irish “rescue package” finalised over the weekend is a disaster. You can say one thing for the European Commission, the ECB, and the German government – they never miss an opportunity to make things worse.
Topics: EU policies, Global crisis
Tags: contagion, eurozone, Irish bailout