This column discusses and evaluates the new guidelines issued by the European Commission regarding the Stability and Growth Pact. These do not change the existing rules, but work to improve transparency, encourage fiscal discipline, and underline that fiscal adjustments should vary based on the circumstances a country finds itself to be in. But by operating within to the existing rules, the new guidelines conform to austerity bias and complexity of implementation.
Paolo Manasse, Tuesday, January 27, 2015
Francesco Giavazzi, Guido Tabellini, Saturday, January 17, 2015
The ECB may soon launch QE. Two of Europe’s leading macroeconomists argue that QE is the ECB’s last anti-deflation tool – it must not be sacrificed to political expediency. The risk-sharing debate is secondary to the programme’s size and duration – one example would be €60 billion per month for one year, or until inflation expectations rose to near 2%. The ECB should also explain that no matter how well the monetary part of the programme is designed, an accompanying fiscal expansion is critical to QE’s effectiveness.
Marco Buti, Monday, December 22, 2014
Weak investment is a key macroeconomic problem in the Eurozone, and the new European Commission has proposed an ‘Investment Plan’ to complement existing policy initiatives. In this column, the Commission’s Chief Economist explains the key rationale behind the Investment Plan.
Vincent Bouvatier, Anne-Laure Delatte, Sunday, December 14, 2014
Eurozone financial integration is reversing, with 2013 cross-border capital flows at 40% of their 2007 level. This column discusses research showing that banking integration has in fact strengthened in the rest of the world.
Jean-Pierre Landau, Tuesday, December 2, 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Paolo Manasse, Monday, December 1, 2014
Today’s Eurozone fiscal discipline is the amalgamation of reforms implemented over ten years, with the latest and largest changes agreed in crisis settings. This column argues that the result fosters neither growth nor stability since actual fiscal policy has been powerfully procyclical. The focus on intermediate targets has distracted attention from the final objectives – debt sustainability and economic convergence. A drastic simplification of the current rules is proposed.
Thorsten Beck, Monday, November 10, 2014
The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.
Jean Pisani-Ferry, Friday, November 7, 2014
A triple-dip recession in the Eurozone is now a distinct possibility. This column argues that additional monetary stimulus is unlikely to be effective, that the scope for further fiscal stimulus is limited, and that some structural reforms may actually hurt growth in the short run by adding to disinflationary pressures in a liquidity trap. The author advocates using tax incentives and tighter regulations to encourage firms to replace environmentally inefficient capital.
Moreno Bertoldi, Philip R. Lane, Valérie Rouxel-Laxton, Paolo Pesenti, Friday, October 24, 2014
The reason for the divergent macroeconomic policies on the two sides of the Atlantic after the Crisis remains a hotly debated subject. The topic was also discussed at the recent “Macroeconomic Policy Mix in the Transatlantic Economy” workshop. This column summarises the main discussions at the workshop. Other covered topics included secular stagnation, the output effects of fiscal consolidation, cross-border banking (as a source and propagator of shocks), and the asset-market effects of unconventional monetary policies.
Francesco Giavazzi, Guido Tabellini, Thursday, September 25, 2014
In a recent column, the authors suggested coordinating monetary and fiscal expansions in the Eurozone through a money-financed temporary tax cut. The effectiveness of their proposal, however, has been questioned. In this column, the authors address some of the criticisms. They argue that the counter-cyclical fiscal policies adopted by the US and the UK, together with monetary easing, had a stabilising effect on output. Moral hazard due to the more lax monetary and fiscal policies is avoidable, increasing the credibility of the future spending cuts.
Roberto Perotti, Saturday, September 13, 2014
There is a growing consensus that austerity is contributing to the Eurozone’s macroeconomic malaise, but also that spending cuts are needed in the long run to achieve fiscal sustainability. Some commentators have advocated a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts. This column argues that such commitments are simply not credible – especially given the moral hazard problem created by central bank monetisation of debts.
Charles Wyplosz, Friday, September 12, 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
Marcus Miller, Lei Zhang, Wednesday, September 10, 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
Alberto Cavallo, Brent Neiman, Roberto Rigobon, Friday, August 22, 2014
What happens to prices when a country joins a currency union, and do prices behave differently in a pegged exchange rate regime? This column sheds lights on these questions by using evidence from Latvia, whose currency was pegged to the euro before the country became a Eurozone member on 1 January 2014. The authors find that clothing retail prices in Latvia completely converged to those in other Eurozone countries.
Selin Sayek, Fatma Taskin, Saturday, July 5, 2014
The European Monetary Union is unprecedented, but the Eurozone Crisis is not. This column draws upon the experiences of previous banking crises, and compares the Eurozone Crisis countries. Like Japan before the 1992 crisis, Spain and Ireland had property bubbles fuelled by domestic credit. The Greek crisis is very distinct from crises in other Eurozone countries, so a one-size-fits-all policy would be inappropriate. The duration and severity of past crises suggest the road ahead will continue to be very rough.
Joshua Aizenman, Thursday, July 3, 2014
After a promising first decade, the Eurozone faced a severe crisis. This column looks at the Eurozone’s short history through the lens of an evolutionary approach to forming new institutions. German dominance has allowed the euro to achieve a number of design objectives, and this may continue if Germany does not shirk its responsibilities. Germany’s resilience and dominant size within the EU may explain its ‘muddling through’ approach to the Eurozone crisis. Greater mobility of labour and lower mobility of under-regulated capital may be the costly ‘second best’ adjustment until the arrival of more mature Eurozone institutions.
Jacques Melitz, Wednesday, July 2, 2014
As the Eurozone cautiously implements stabilising reforms, Germany is forced to go further with concessions than it would prefer. This column suggests that it would be beneficial for discontented members to consider the formation of a second monetary union. The second euro can be constructed better than the first, bringing the discontented members exchange-rate adjustments relative to Germany, and avoiding competitive devaluations.
Marcus Miller, Lei Zhang, Thursday, June 26, 2014
Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.
Philippe Weil, Friday, June 20, 2014
The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.
CEPR Business Cycle Dating Committee, Tuesday, June 17, 2014
The simplest business cycle dating algorithm declares recessions over after two consecutive quarters of positive GDP growth. By that metric, the Eurozone recession has been over since 2013Q1. This column argues that growth and improvements in the labour market have been so anaemic that it is too early to call the end of the Eurozone recession. Indeed, if this is what an expansion looks like, then the state of the Eurozone economy might be even worse than economists feared.