To make the no-bailout clause credible and to enhance the effectiveness of crisis assistance, private creditors should contribute to crisis resolution in the Eurozone. This column proposes a mechanism to allow for orderly restructuring of sovereign debt as part of ESM programmes. If debt exceeds certain thresholds, the mechanism triggers an immediate maturity extension. In a second stage, a deeper debt restructuring could follow, depending on the solvency of a country. The mechanism could be easily implemented by amending ESM guidelines.
Jochen Andritzky, Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 21 July 2016
Resiliency Authors, 25 June 2016
Britain voted to leave the EU. This is terrible news for the UK, but it is also bad news for the Eurozone. Brexit opens the door to all sorts of shocks, and dangerous political snowball effects. Now is the time to shore up the Eurozone’s resiliency. The situation is not yet dire, but prompt action is needed. This VoxEU column – which is signed by a wide range of leading economists – identifies what needs to be done soon, and what should also be done but can probably wait if markets are patient.
Dirk Schoenmaker, Nicolas Véron, 25 June 2016
The new European banking supervision system, the Single Supervisory Mechanism, has been operating since 2014. Based on data analysis, interviews with officials and market participants, and nine country-specific studies, this column argues that the mechanism is broadly effective and, in line with the claim often made by its leading officials, tough and fair. However, there are significant areas for future improvement.
Paul De Grauwe, Yuemei Ji, 07 June 2016
There is a high degree of correlation between the business cycles of different countries. This is particularly the case in the Eurozone, but also among industrialised countries outside of the Eurozone. Using a two-country behavioural macroeconomic model, this column shows that the main channel for the synchronisation of business cycles is the propagation of ‘animal spirits’ – waves of optimism and pessimism that become correlated internationally.
Stefano Micossi, Ginevra Bruzzone, Miriam Cassella, 06 June 2016
Following the financial crisis, the EU banking system is still plagued by widespread fragilities. This column considers the tools and legal provisions available to EU policymakers to address moral hazard and incentives encouraging excessive risk-taking by bankers. It argues that the new discipline of state aid and the restructuring of banks provide a solid framework towards these ends. However, the application of new rules should not lose sight of the aggregate policy needs of the banking system.
Matthias Morys, 10 May 2016
The first century of modern Greek monetary history has striking parallels to the country’s current crisis, from repeated cycles of entry and exit from the dominant fixed exchange rate system, to government debt built-up and default, to financial supervision by West European countries. This column compares these two episodes in Greece’s monetary history and concludes that lasting monetary union membership can only be achieved if both monetary and fiscal policies are effectively delegated abroad. Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.
Nicola Borri, Pietro Reichlin, 04 May 2016
Most commentators agree that a European banking union would end the ‘deadly embrace’ between creditors and governments. This column argues that a banking union would be welcome, but that current proposals are dogged with problems. To resolve these, we should stop discussing debt restructuring and instead enhance the borrowing capacity of the European Stability Mechanism. A programme to buy capital in financial institutions unable to raise it directly on the market should also be set up.
Alex Cukierman, 16 April 2016
Both the US and the Eurozone reacted to the Global Crisis by injecting liquidity and loosening monetary policy. This column argues that despite the similarities in the behaviour of bank credit, the behaviour of bank reserves has been quite different. In particular, while US bank reserves have been on an uninterrupted upward trend since Lehman’s collapse, EZ bank reserves have fluctuated markedly in both directions. At the source, this is due to differences in the liquidity injections procedures between the Eurozone and the Fed.
Matthias Busse, Daniel Gros, 04 April 2016
Through the Eurozone rescue mechanisms, Germany provided the periphery with hundreds of billions in debt at very low rates. There is a widely held notion that these savings would have been better used at home. This column challenges this notion, presenting evidence that Germany’s net asset position held up well, remaining much higher than domestic returns. The main reason is that Germany’s part in the rescue operations was actually much smaller than its claims towards the periphery.
Diego Valiante, 13 March 2016
Financial market integration could help the Eurozone’s functioning by facilitating the absorption of asymmetric shocks via private risk sharing. This column shows that Europe’s capital markets are poorly functioning and are underdeveloped. Governments' and financial institutions' bond issuance are an exception, but their activism is mostly a result of the financial difficulties of recent years. To fix this, a Capital Markets Union should be implemented.
Alberto Caruso, Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin, 22 February 2016
Recent data releases related to the Eurozone have been disappointing. This column argues that momentum from the long-delayed 2014-15 recovery is faltering because the Eurozone economy is affected, with a lag, by the US slowdown. The traditional, lagged relationship between the EZ and US business cycles – which disappeared in the aftermath of the Global Crisis – is now reasserting itself.
Damiano Sandri, 17 February 2016
How should the international community deal with the solvency crisis of a systemic country? This column argues that the presence of spillovers calls for reducing bail-ins, while requiring somewhat greater fiscal adjustment by the crisis country. To avoid excessive fiscal consolidation, the international community should also provide highly systemic countries with official transfers. To contain moral hazard, it is important to use transfers only when spillovers are particularly severe.
Elias Papaioannou, 12 February 2016
Institutional redesign and reform are currently being debated and implemented at the EU and EZ levels. However, there is a growing institutional gap across member countries – especially between the core and periphery. This column illustrates the extent of this gap. Weak institutions have already stifled reform efforts, such as the Economic Adjustment Programs undertaken by Greece and Portugal. The success of pan-European reforms and the future of the Eurozone will require coordinated action to close this institutional gap.
Stefano Micossi, 12 February 2016
As a monetary union based on a single currency, the Eurozone is supposed to be immune from problems characteristic to fixed-exchange rate regimes. This column argues that this is not the case. The Eurozone still faces some adjustment problems. It seems unable to generate sufficient growth and inflation to place excessive public debt on a credible reduction path. It does not have a functioning adjustment mechanism to reabsorb existing competitive imbalances. In the long run, the Eurozone should aim to achieve a full integration of labour and capital markets. This is only feasible with budgetary and structural reforms in its member states.
Tommaso Monacelli, 12 February 2016
The boom-bust cycle in the Eurozone between 2000 and 2008 is essentially a story of cyclical asymmetries between the Core and the Periphery. While stressing the importance of addressing these asymmetries – especially via fiscal policy – the ECB has failed to take them explicitly into account in its own policy-setting. This essay argues that these asymmetries may persist precisely because they are not a central target of stabilisation policy – both fiscal and monetary.
Giancarlo Corsetti, Matthew Higgins, Paolo Pesenti, 12 February 2016
James Tobin’s classic ‘funnel’ theory questioned how best to calibrate the overall stance of macroeconomic policy in an economic region. This column revisits key questions that emerged out of the EZ crisis through the lens of Tobin’s theory. A key insight is that monetary policy cannot achieve stabilisation objectives without stronger mechanisms for fiscal burden-sharing and risk-pooling. Although short-run solutions are possible under the existing circumstances, long-run stability will require a policy mix that convincingly deals with the issue of fiscal risk-sharing.
André Sapir, 12 February 2016
Misalignments of real exchange rates continue to be the most visible and painful symptom of asymmetric shocks within the Eurozone. An important factor behind such misalignment is the difference in national wage formation and bargaining systems, especially between core and periphery members. This column argues that all members need to have institutions that ensure wage developments are in line with productivity developments. This would eliminate an important source of asymmetric behaviour and reduce resistance to EZ-wide fiscal mechanisms capable of absorbing asymmetric shocks.
Christopher Pissarides, 12 February 2016
There are certain conditions needed to make a common currency across diverse economies a success and the Eurozone is clearly not satisfying them. This column argues that institutions and policies in place six years after the debt crisis have mitigated the risks of another Great Recession. But they have not done enough to alleviate the need for fiscal transfers in the future. We need ever-closer fiscal cooperation, with some caveats.
Daniel Gros, 12 February 2016
The Eurozone’s ‘Banking Union’ created a system of banking supervision and a common institution to restructure troubled banks. There remain two issues, however, that need to be addressed: banks are holding too much debt of their own sovereign, and deposit insurance is only backstopped at the national level. This column argues that these issues need to be addressed simultaneously for economic and political reasons. Specifically, periphery and core countries hold opposing positions on remedies to the respective problems. A combination of the two makes economic sense and could represent an acceptable political compromise.
Agnès Bénassy-Quéré, 08 April 2016
The euro is unique in that it is a currency without a sovereign. Since the crisis, there have been major developments towards making the Eurozone more resilient, including the banking union and the European Stability Mechanism (ESM). This column, originally published 12 February 2016, explores whether further normalisation is required to make the Eurozone function properly. It argues that the Eurozone, unlike existing federations, lacks the ability to deliver counter-cyclical fiscal policies while complying with fiscal discipline. Macroeconomic coordination will thus require rules, a strong and independent European Fiscal Board, and the strengthening of the ESM.