Is the euro rescue succeeding? An update
Uri Dadush, Zaahira Wyne 20 April 2012
The current gyrations of sentiment over government-bond spreads in the Eurozone are generating much commentary. Yet this column argues they are diverting attention from the real issue – the Eurozone periphery needs a big realignment towards the tradable sector to reignite growth sustainably. It adds that EU policies have made little progress, casting doubt on whether the adjustment can succeed.
The current gyrations of sentiment over government-bond spreads are diverting attention from the real issue – the Eurozone periphery needs a big realignment towards the tradable sector to reignite growth sustainably.
EU policies Exchange rates Macroeconomic policy
eurozone, Eurozone crisis, real exchange rates
Too early to sound the alarm
Manfred J M Neumann 17 April 2012
Debt finance of public consumption has clearly gone too far in several countries, reaching the borderline of sustainability. Have austerity measures now gone too far as well? This column argues it seems too early to sound the alarm. First, the global economy is likely to grow by 3.3 % this year, and second, reversing the fiscal stance or exiting the euro are worse options than austerity.
Debt finance of public consumption has clearly gone too far in several countries. Too far in the sense that it has reached if not exceeded the borderline of sustainability. Have austerity measures meanwhile gone too far, too?
EU policies Macroeconomic policy
eurozone, fiscal policy, austerity
The EZ breakup contest: Take ignorance seriously
Richard Baldwin 10 April 2012
The five finalists of the £250,000 EZ breakup contest were announced last week; only one has a graduate degree in economics. This column argues that three are amateurish efforts full of economic and factual errors. European economists should take such ignorance seriously. Failure to do so in the US allowed odious ideas to gain respectability.
The Eurozone might not survive in its current form. Buiter and Rahbari (2012) put a likelihood of 50% on Greek exit – an event that would be something between an historic event and a global economic catastrophe (depending on how it was handled).
Europe needs planning to reduce the disruption arising from possible EZ exits. To do the job right, the planners will need to be experts on:
eurozone, EZ breakup contest, Greek exit
The problems of European monetary union – asymmetric shocks or asymmetric behaviour?
Andrea Boltho, Wendy Carlin 31 March 2012
Divergent behaviour from Eurozone countries that have very different economic, social, and political structures is threatening the existence of the single currency. This column argues that the Eurozone is a fragile bureaucratic creation that has hardly ever raised much popular enthusiasm anywhere. If behaviour across the area remains as asymmetric as it has been over the last decade or so, the project could run into even stronger headwinds in the long run.
Much of the literature that was sceptical of the prospective success of the euro feared the effects of Mundellian asymmetric shocks on an area which (unlike the US) had little inter-country labour mobility and no common fiscal policy. Early research, for instance, pointed out that Europe’s periphery, in particular, had suffered from large idiosyncratic shocks in comparison to Europe’s core, let alone to US regions (Bayoumi and Eichengreen 1992). This, many felt, could create difficulties for the operation of a monetary union.
Europe's nations and regions
eurozone, growth, governance
From a vicious to a virtuous circle in the Eurozone - the time is ripe
Marco Buti, Pier Carlo Padoan 27 March 2012
The economic and financial crisis in the Eurozone is in its fourth year. This column argues that, by providing a confidence bridge, decisive and credible policy action can turn the economy around and bring it towards a good equilibrium of debt sustainability and sustainable growth.
The economic and financial crisis in the Eurozone is in its fourth year. In late 2011, it had evolved dangerously into a vicious circle of sluggish growth, tensions in sovereign debt markets and banking sector fragility. Investor confidence in the Eurozone seemed on the verge of collapse, many sovereigns and banks struggled to access market funding and the future of the Eurozone was widely questioned in financial markets and the policy debate.
eurozone, growth, fiscal consolidation
Fiscal consolidations for debt-to-GDP ratio containment? Maybe … but with much care
Gianluca Cafiso, Roberto Cellini 20 March 2012
As fiscal-consolidation policies are being implemented across the EU, a debate has been developing concerning the effects of such policies on the dynamics of the debt-to-GDP ratio. This column examines past episodes and finds that following fiscal adjustment may have favourable effects in the short term but that the two-year cumulated changes have been mainly adverse.
In recent time a wide debate has been developing concerning the effects of restrictive fiscal policies on the dynamics of the debt-to-GDP ratio (eg Corsetti and Müller 2012). The debate is nourished by the current experience of EU countries, where fiscal-consolidation policies are implemented.
eurozone, debt, austerity
Fed versus ECB: How Target debts can be repaid
Hans-Werner Sinn 10 March 2012
In February 2012, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem. This column proposes a US-like system of marketable covered treasury bills that could be applied to a yearly settlement of TARGET liabilities.
Now that Bundesbank President Jens Weidman has expressed his concern about the rising TARGET balances within the Eurozone in an official letter to Mario Draghi, the issue can no longer be swept under the carpet. In February, the Bundesbank had a TARGET claim of €547 billion on the Eurosystem, while the Dutch central bank had one of €171 billion in January. These claims constitute more than half of both countries’ net foreign wealth.
ECB, eurozone, TARGET2
Brinkmanship in Brussels, Sturm and Drachma for Greece and Europe
Jacob Funk Kirkegaard 01 March 2012
Brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. This column takes a detailed look at the EU deal, the ongoing brinkmanship between the Eurozone and the IMF, and the general focus on austerity.
Just as it did when Congress recently extended the payroll tax cut, brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. Both pieces of the agreement – the privately held Greek debt write-down of more than €100 billion and the terms of the new bailout extension – have produced widespread doubts in markets and among many analysts.
eurozone, IMF, Greece
Apart from the fiscal compact – on competitiveness, nominal wages and labour productivity
Marga Peeters, Ard den Reijer 03 January 2012
While EU leaders are drafting a fiscal compact, the problem of intra-European real exchange-rate misalignments remains. This column argues that reducing imbalances implies a focus on competitiveness, and hence on the alignment of nominal-wage growth with labour-productivity growth.
Eurozone members that face the consequences of severe asymmetric shocks can, in the absence of labour mobility, accommodate by means of fiscal transfers. In order to avoid becoming a one-way transfer union from the core to the periphery, the EU needs to address structural imbalances and persistent current-account deficits and surpluses that are due to real exchange-rate misalignment.
EU policies Productivity and Innovation
eurozone, productivity, wages