The Eurozone: If only it were the 1930s
Nicholas Crafts, 13 December 2013
This column argues that the legacy of public debt resulting from the crisis in the Eurozone is a serious threat. Both the size of the problem and the options to address it make life much more difficult for policymakers than was the case in the late 1930s after the collapse of the gold standard. For some countries, a ‘subservient’ central bank might be preferable to the ECB.
The 1930s deservedly have a bad name. It is hard to imagine that a decade that included the Great Depression and a major de-globalisation of the world economy, and culminated in WWII could be other than notorious. And yet, compared with struggling Eurozone economies today, the economic situation in Europe in the later 1930s was in many ways more promising.
Topics: Economic history, Macroeconomic policy
Tags: debt monetisation, ECB, eurozone, financial repression, fiscal consolidation, gold standard, public debt
Moving closer? Changing patterns of labour mobility in Europe and the US
Mai Dao, Davide Furceri, Prakash Loungani, 1 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.
On 21 September 1992, four famous professors – Olivier Blanchard, Rudi Dornbusch, Stan Fischer, and Paul Krugman – took part in a panel discussion at MIT on the merits of the proposed European currency union.
Topics: Labour markets
Tags: currency union, euro, eurozone, labour mobility
The euro and price convergence: You wanted it … you got it!
Alberto Cavallo, Brent Neiman, Roberto Rigobon, 29 November 2013
During the recent turmoil in the Eurozone, little attention has been paid to one of the euro’s founding objectives – price convergence. This column argues that the euro has in fact been very successful in this regard. In a study of the pricing behaviour of Apple, IKEA, H&M, and Zara, the authors find that price dispersion is 30–50% lower for countries in a currency union than for those with a fixed exchange rate.
Remember some of the objectives of the creation of the euro? A single currency area within Europe would carry with it:
- Enhanced factor mobility
- Greater productivity growth
- Acceleration of financial development; and
- Improved macroeconomic policies.
Or, at least, that was the hope (Wyplosz 1997).
Topics: Exchange rates, International trade
Tags: euro, eurozone, price convergence, real exchange rates
An early-warning indicator for debt sustainability
Casper van Ewijk, Jasper Lukkezen, Hugo Rojas-Romagosa, 28 November 2013
The sustainability of government debt cannot be determined with certainty. This column presents an early warning indicator to predict sovereign debt crises using a stochastic simulation framework. What counts is the risk of a significant rise in public debt, more so than the expected evolution of the debt level. A key determinant of the indicator is the quality of budgetary policies in controlling the government budget in the event of adverse shocks.
Insight into the sustainability of public finances is critical to European policymakers and financial markets alike. It informs decisions concerning the need for reform and the determination of the appropriate risk premium on government debt. Furthermore, unsustainable public finances may cause significant spillovers, highlighting the need for international fiscal surveillance.
Topics: EU institutions, Global crisis
Tags: eurozone, sovereign debt crisis
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.
Topics: EU institutions, Exchange rates, Monetary policy
Tags: Bundesbank, Currency wars, ECB, euro, eurozone, unemployment
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).
Topics: Europe's nations and regions, International trade
Tags: civic capital, eurozone, global imbalances, trust, World Values Survey
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).
Topics: EU institutions, Financial markets
Tags: bank restructuring agency, banking crises, eurozone
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.
Topics: EU institutions, Global economy
Tags: 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.
Topics: Europe's nations and regions, Global crisis
Tags: 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.
Topics: EU institutions, Global crisis
Tags: ECB, eurozone, monetary union