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
Deleveraging in the Eurozone
Vincent O'Sullivan, Stephen Kinsella 17 December 2011
The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority. This column examines the evolution of loan-to-deposit ratios in big European banks. It says banks have been buying back their debt securities, hoarding profits, limiting bonuses, and deleveraging. However, write-downs of sovereign debt have largely offset these efforts.
The capital shortfall at EU banks is 8% higher than originally thought, according to the latest assessment from the European Banking Authority (EBA 2011) released on 8 December. In the aggregate, European banks need to raise €114.7 billion as an exceptional, temporary capital buffer against sovereign debt exposures and to ensure their individual Core Tier 1 capital ratio reaches 9% of risk-weighted assets by the end of June 2012.
Financial markets International finance
eurozone, leverage, banks
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).
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:
Financial markets International finance
eurozone, spreads, banks