The global crisis has exposed the frailty of financial sectors the world over and highlighted the need for regulatory reform. This column argues that taxing banks is no panacea. The only way to achieve financial stability and financial integration in Europe is to move towards a European-level bank resolution framework that has both funding and intervention authority.
It is commonly acknowledged that heavy alcohol consumers are more likely to be having sex. This column examines carefully the causal link from drinking to sex on US college campuses. After accounting for other potential co-determinants, the evidence suggests that binge drinking is unlikely to be the trigger for sexual activity, but might lead to more promiscuous sex than would otherwise take place, putting students at risk of unsafe sex.
Europe’s highly indebted countries – Portugal, Italy, Ireland, Greece, and Spain – also face the problem of tax evasion. This column analyses how governments can tackle their fiscal deficits while reducing the possibility of forcing activity underground. It suggests that fewer, better paid public workers could complement tax cuts in fighting tax evasion.
In this column, Federal Reserve Bank of Boston economist Daniel Cooper presents new evidence suggesting that the spending impact of equity extraction during the recent US housing boom was relatively small compared with the household balance sheet changes and residential investment. This finding contrasts with recent findings claiming that households consumed the vast majority of the money they extracted.
The market turmoil in recent weeks pose a key question: can European governments credibly commit to cutting their deficits? This column presents evidence that fiscal adjustments do not increase the likelihood of electoral defeat for incumbent governments. Europe’s fiscal problems can be solved – it is now up to today’s leaders to step up.
Is pop music leading to cultural globalisation with the US at the helm? This column examines data from over a million chart entries in 22 countries covering 98% of the world music market. It finds no evidence that the rise of music trade has eroded interest in local music production or consumption. In fact some smaller countries actually benefit disproportionately.
Despite the return of economic growth, the threat of protectionism still lingers. This column presents the fifth report from the Global Trade Alert with a focus on sub-Saharan Africa. The report is the busiest yet – the number of identified protectionist measures has risen by 40%. No four-digit product line, no economic sector, and no jurisdiction have emerged unscathed by crisis-era protectionism.
What motivates workers in their job? This column presents evidence from a recent field experiment suggesting that women are motivated by concern about the social cause pursued by their employer, while men are not. This may provide new insight into the gender earnings gap.
Pranab Bardhan of the University of California, Berkeley, talks to Romesh Vaitilingam about his new book ‘Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India’. He argues that significant poverty reduction in both countries is mainly due to domestic factors – not global integration, as most would believe. The interview was recorded at the London School of Economics in May 2010.
What factors determined the performance of bank credit during the global crisis? This column presents evidence from 83 countries suggesting that credit booms prior to the crisis led to a sharper contraction in bank credit after the crisis. Meanwhile, the growth performance of a country’s main trading partners had a positive impact on bank credit – as did monetary policy.
Does it pay to speak English? This column presents evidence from India that being fluent in English increases the hourly wages of men by 34% and of women by 22%. But the effects vary. Returns are higher for older and more educated workers and lower for less educated, younger workers, suggesting that English is becoming a complement to education.
Improvisation in handling the crisis in Greece has given the impression that governments and European institutions are not capable of facing the toughest challenges. This column reminds us that in times like these, the credibility of institutions is essential and rests on consistency. The ECB decision to "sterilise" the purchase of bonds with inverse operations to drain liquidity puts this credibility at risk.
Many policymakers stress that the global crisis was caused by a series of unforeseen events and “suicidal” behaviour by market players. This column argues that this is a self-serving narrative. Policymakers designed, implemented, and maintained policies that destabilised the financial system in the decade leading up to 2006 – and were fully aware they were doing so. It is a case of “negligent homicide”.
In contrast to much of the emerging world, capital inflows to emerging Europe continue to be weak and mixed. How should the region ensure a healthy level of foreign investment while preventing excessive capital inflows and improving the stability of the financial sector? This column argues a comprehensive policy response is needed and recommendations should be tailored to country-specific circumstances.
This week, the European Commission will release more details of its plans to tighten the greenhouse gas emissions targets in the EU’s Emissions Trading System. A key concern will be the potentially negative impact on the competitiveness of affected businesses. This column argues that industry is successfully exploiting such concerns to obtain free emission permits according to criteria that are too lax. Most of the exempt sectors would not close or relocate if they had to pay for permits, and removing these exemptions would raise €7 billion annually.
Many commentators have called for regulation to prevent banks from becoming “too big to fail”. This column adds a cautionary note. A world with only small and domestic banks is no safer. The key benefit of multinational banks – being able to mobilise funds across countries – could still be extremely useful for maintaining stability in times of distress.
The countries of the Gulf Cooperation Council were hit hard by declining oil prices during the global crisis. This column argues that East Asia has shown how viable local bond markets are essential to weather future crises when bank lending collapses. While it will be a long process requiring strong political will, the time for the “plumbing” work is now.
American women leave science and engineering at a higher frequency than men. This column suggests that the gender gap is explained by women’s relative dissatisfaction with pay and promotion opportunities. This gap is correlated with a high share of men in the industry. Remedies should therefore focus on such fields with a high share of male workers.
The price of oil plummeted during the global crisis, but has since started to climb back. Which way will the oil price go next? This column presents a new risk-adjusted method for forecasting oil prices using the futures market. It suggests that oil prices may climb back to $100 by early next year – a level that may dampen consumption spending.
Are policymakers on track to prevent a repeat global crisis? This column says the answer is probably “no”. It argues that the current financial reform efforts are mostly aimed at the symptoms rather than the underlying illness. The fundamental problem in the current global macroeconomic and financial equilibrium is one of a shortage of safe assets.
Richard Grossman of Wesleyan University talks to Romesh Vaitilingam about the role of gold standard in propagating the Great Depression – and what we might learn for the crisis in the world’s most important fixed exchange rate system of today, the eurozone. The interview was recorded at a conference on ‘Lessons from the Great Depression for the Making of Economic Policy’ in London in April 2010.
Financial interconnectedness across countries has reached unprecedented levels – but what has driven this change? This column finds that financial deregulation is responsible for 16 percentage points of the increase in financial development, but openness to trade and the size of government off-set one another. This is because the structural association between trade openness and financial development is mildly negative.
What would a Chinese currency revaluation mean for Latin America? This column argues that a revaluation is no silver bullet. It will not solve Latin America’s problems with excessive capital inflows, exchange-rate appreciation, and loss of competitiveness. In fact it poses serious risks. A 10% revaluation of the renminbi could reduce growth in Latin America by 0.3%.
Current developments in Greece have raised doubts over the efficacy of the European Stability and Growth Pact. This column proposes a new framework for fiscal policy consolidation in Europe to deal with the ongoing fiscal exit and its related phenomena of crisis. On centre stage should be a European Consolidation Pact.
How should households be encouraged to reduce electricity consumption? This column presents evidence from the US of a randomised “nudging” strategy – providing energy saving tips as well as information on electricity usage relative to neighbours. It finds that while energy conservation nudges work with liberals, they backfire with conservatives. Certain pockets of Republican registered voters actually increased their electricity consumption in reaction to the nudge.
A government debt crisis is ravaging the Eurozone. This column argues that its cause is misunderstood. The culprit is a profligate private banking sector that has put strain on otherwise manageable government finances. The increase in debt has reached crisis point because the Eurozone is a monetary union without being a political union – it has no fire brigade to put out the fire.
Credit rating agencies have recently downgraded Greek, Portuguese, and Spanish sovereign debt, causing unrest among Europe’s leaders. This column argues that unless sovereign ratings can be turned into proper early warning systems, they will continue to increase instability and volatility and to undermine the benefits of capital markets. One option is to drop the use of sovereign ratings in prudential regulation altogether.
Over-the-counter markets for derivatives have been a subject of blame for the global crisis. This column argues that the rising opacity and barriers to entry in these markets have been sorely overlooked leading to dark pools, flash trading, and front-running. These unfair practises can – at any time – cripple markets. They undermine the premise of free markets and should be stopped.
Empirical investigations of the role of human capital require accurate measures across countries and over time. This column describes a new dataset on educational attainment for 146 countries at 5-year intervals from 1950 to 2010. The new data, freely available online, use more information and better methodology than existing datasets. Among the many new results is that the rate of return to an additional year of schooling on output is quite high – ranging from 5% to 12%.
Investigation of Iceland's meltdown has revealed dodgy behaviours ranging from neglect to criminal fraud. This column describes how Icelandic banks issued “love letters” to each other – swapping their debt securities and using the other bank’s debt as collateral. This ruse ensnared not just the Icelandic Central Bank, but also the ECB – a fact that has only recently come to light. The ECB's lack of transparency on this is a serious problem.
The Eurozone crisis is not over. This column argues that solving it requires a voluntary debt swap. Creditors should be invited to swap old Greek bonds for new bonds backed by the European and IMF package. Par values would be the same but the coupons would be lower and the maturities doubled. The exact parameters should be set so the value of the greater certainty of payout was offset by the lower coupons. This would strengthen the euro, facilitate recovery of the $145 billion pledged, and yet force private creditors to realise that Eurozone support is not a one-way bet.
Since the end of the Second World War, the US has been the world leader in promoting the reduction of trade barriers and establishing international trading rules. This column argues that by remaining on the sidelines of the Doha Round negotiations, the US risks losing influence over how important international economic matters are decided. This loss of economic influence will be followed by a loss of political influence.
The Celtic Tiger faces severe challenges. This column argues that the Irish government’s commitment to absorb the losses of its banking system may well lead to a Greek-style debt ratio by 2012. It is a test-in-waiting for the EU, but one that could be solved by a debt for equity swap to cover the losses of Irish banks.
Will the global crisis lead to a rise in political extremism just as during the Great Depression? This column examines the vote share for extreme parties in a sample of 16 OECD countries over three decades. A one-percentage-point decline in growth leads to a one-percentage-point increase in the vote share for right-wing or nationalist parties.
Policies to improve management practices – such as competitive markets, business training and professional, rather than hereditary family, management – improve productivity and economic growth. Could this be at the cost of higher energy usage? This column, using extensive survey and experimental data, suggests that, quite to the contrary, well-managed firms are substantially more energy-efficient.
The monetary policy framework in the Eurozone emphasises the role of monetary aggregates, but less so their differences across member countries. This column argues that the surveillance of national monetary developments may prove useful, as they may have been masking diverging trends at the country level which had systemic financial stability implications for the Eurozone.
The Eurozone has been swept up in turmoil that has ranged from stock and bond markets to exchange rates, government spending, and tax rates. Marco Pagano, Professor at the University of Naples Federico II and CEPR Research Fellow, explains events, how they hang together, and what needs to be done. This challenge facing Europe could be a historical turning point.
The observation that economies can recover from a crisis without the need for credit growth is known as a “Phoenix Miracle”. This column argues that this theory is based on an inappropriate comparison between GDP – a flow variable – and the stock of credit. If GDP is instead compared with the flow of credit, it is evident that GDP and credit recover simultaneously.
Thorsten Beck of Tilburg University talks to Viv Davies about his current research in the areas of finance, growth and development - and the policy lessons for developing countries. The interview was recorded at Tilburg University in April 2010.
As early as 2008, Vox columnists provided research-based warnings that the global crisis could lead to a Eurozone crisis. This column provides a recap of the contributions on this site where leading economists used economic logic and a firm grasp of the facts to think ahead about Europe. The main outline of today’s crisis was plain months ago; EU leaders’ dilatory response made things worse.
How has globalisation affected output growth volatility? This column presents findings from 22 OECD countries suggesting that while volatility reached a low in the mid-1990s, it has crept back up due the spillovers from otherwise domestic shocks. This increased sensitivity has been caused by the increased vertical specialisation in global trade. While beneficial for output, vertical specialisation is a double-edged sword.
Markets liked the European Stabilisation Mechanism but a closer look shows that the money is announced but not available. When markets realise this, they may do to Portugal and Spain what they did to Greece. Worse still, crucial principles have been sacrificed for the sake of unconvincing announcements. The debt crisis is unlikely to go away and the monetary union will have to be reconstructed to re-establish the principle of collective fiscal discipline.
This column, first published 15 December 2009, shows the main outlines of the crisis were clear months ago and suggests actions that – had they been taken early – would have mitigated problems facing the Eurozone today. The column concludes: "All this leads to the conclusion that the Eurozone governments should make clear where they stand on this issue. Not doing so implies that each time one member country gets into financial problems the future of the system is put into doubt." If only those words had been heeded months ago.
Over-the-counter derivatives were heavily involved in the spread of the global crisis. This column analyses the regulatory framework for such derivatives in India. It argues that moves to tighten the regulatory rope are unnecessary and that a shift to exchange-traded markets may not bring the desired results. Instead, policymakers should strive towards increased disclosure, more transparency, and more standardisation.
The European Stabilisation Mechanism is a major initiative, but is it enough? This column argues that more is needed. All EU bank supervisors should conduct stress tests to gauge their banks’ exposure to risky sovereign debt; those who fail should be re-capitalised or closed to ring-fence the problem. The ‘Mechanism’ should also be transformed into an institution that manages the Eurozone’s rescue contributions, supervises conditionality, and sets up mechanisms for orderly debt rescheduling should austerity programmes fail.
This weekend’s plan has been received positively by the markets, but it is too early to call it a success. Future monetary historians may judge it either a brilliant move or the first step on a slippery slope to ruin. The EU needs to set up an independent institution to vet fiscal plans of Eurozone governments and apply a sliding scale of sanctions. If the euro is to survive the current decade, Greece cannot happen again.
The large foreign-exchange reserves held by emerging markets continue to stoke debate. This column suggests that reserve hoarding leads to a lower exchange rate and encourages the learning-by-doing externalities of export-led growth without the need for direct subsidies. But while this strategy can be welfare increasing, the chances of this are reduced the more countries embrace it.
First posted 17 November 2008, this column's analysis is more relevant than ever. It asks why investors rush to government securities when the US was at the epicentre of the financial crisis? This column attributes the paradox to key emerging market economies’ exchange practices, which require reserves most often invested in US government securities. America’s exorbitant privilege comes with a cost and a responsibility that US policy makers should bear in mind as they address financial reform.
Did education play a role in economic development during the Industrial Revolution? This column discusses new evidence from Prussia showing that formal education was critical to technology adoption in the first and second phase of the Industrial Revolution during the 19th century.
The recent IMF report to the G20 states that fiscal reforms are essential to recover the costs of the crisis, as well as to contain future risk creation. This column argues that progress on controlling future risk requires a direct tax on systemic risk. This would restore confidence in the ability of policymakers to act preventively in future.
Eurozone membership seemed to shield economies with structural problems from the “original sin” – the obligation to borrow in foreign currency while the ability to pay is in domestic currency. This column argues that the sin is still with Greece and other Eurozone nations with weak institutions. Reforms that boost the nation’s competitiveness or the government’s fiscal positions reduce short-term government revenue directly or via a recession. Solving the problem will require coordinated Eurozone intervention to correct internal imbalances
First published on 24 March 2009, this column is more relevant than ever. In it Willem Buiter argues that the ECB’s lack of fiscal backing is both unusual among major central banks and a severe handicap – it is a factor in why the ECB is “fiddling while the Eurozone burns” by hesitating to undertake quantitative easing started by the Fed, Bank of England, and others.
Markets are increasingly concerned that the Greek debt crisis could spread to other Eurozone countries including Portugal, Ireland, and Spain. This column notes that much of these countries' debt is held by non-residents meaning that the governments do not receive tax revenue on the interest paid, nor does the interest payment itself remain in the country. The solution lies with debt restructuring and rescheduling.
This column, first posted 17 May 2008, reviews Willem Buiter's analysis of why the ECB is so hesitant to buy debt. Central banks can go broke – and some in developing countries have done so recently. The ECB is now lending against dubious collateral. An ECB recapitalisation seems unthinkable at the moment, but that’s why it is a good time to think the unthinkable. Willem Buiter considers the question at length in CEPR Policy Insight No. 24 and argues that Eurozone fiscal authorities should, ASAP, agree on a formula for fiscal burden-sharing should an ECB recapitalisation ever be necessary.
Greek debt woes could spark contagion within and beyond Europe. Argentina’s former finance minister and co-author draw four lessons from Argentina’s crisis: devaluation/exit is not the answer; orderly debt restructuring involving a ‘Brady Plan’ now is better than a disorderly one later; fiscal consolidation that improves external competitiveness is a must; all these must be done simultaneously
Claudio Borio of the Bank for International Settlements (BIS) talks to Romesh Vaitilingam about where the pre-crisis consensus on monetary policy-making went wrong; the implementation, effectiveness and costs of ‘unconventional monetary policy-making’ in response to the crisis; the idea that it is no longer ‘better to clean than to lean’; and the research agenda for macroeconomics. The interview, which was recorded in April 2010, represents Claudio Borio’s personal views and does not necessarily reflect those of the BIS.
Do political protests make a difference? This column examines a new dataset focusing on political protests before the fall of communism. Countries that had a strong civil society, and a lenient communist government, have embarked on a path towards sound political institutions, economic reforms and democratisation. Those that had a weak civil society and repressive governments have not.
EU and IMF efforts to rescue Greece have failed to stabilise Europe's financial markets. Now there are significant concerns about Spain and Portugal's financial circumstances. This column says Europe needs to wake up, face the facts, and take action. It outlines what the IMF, ECB, and Eurozone members need to do to prevent the crisis from spreading. It may be too late for Greece, but it is not too late for Europe.
The EU and US are huge, quite open markets, but many barriers to doing business across the Atlantic remain. This column argues for creating a transatlantic marketplace by reducing regulatory barriers. The EU and US are already regulatory standard setters. Creating a transatlantic market with harmonised regulation would strongly reinforce this global regulatory leadership role.
Will unilateral emissions cap-and-trade schemes result in carbon leakage and provide a cover for protectionist policies? This column argues that these risks are overstated. Moreover, large open economies such as the EU or the US cannot substantially reduce pollution costs through competing on emission-prices and a simple rule of uniform pricing is close to optimal.
For the last 50 years sovereign defaults only concerned developing countries. The recent predicaments of Greece have raised the spectre of a default in a high-income country. This column argues exchange-rate depreciation has helped shrink the costs of default and spur economic recovery in past episodes. As part of the Eurozone, Greece may pay a steep cost if it were to default.
This column, first posted 19 April 2008, argues that sovereign debt crises have historically followed financial crises. Although data covering only the last thirty years might have given few hints about Greece's current problems, the Reinhart-Rogoff database spanning eight centuries reveals that today's event are very much in line with historical experience.
As world markets continue to raise concerns about Eurozone countries, this column argues that the euro has been a failure. Why should money be poured into Greece to "save the euro"? Besides the moral hazard effects of the intervention, it makes little sense to prolong a monetary regime which is actually one of the reasons why these Eurozone countries are in trouble.
As oil continues to spew from the wreck of BP’s Deepwater Horizon rig in the Gulf of Mexico, this column analyses the possible effect on the company’s share price. Similar industrial accidents are associated with a loss in market capitalisation of roughly 12% six months after the accident. But does this provide enough of an incentive for managers to invest in improved safety?
Should cartels be regulated? This column outlines a new economic toolkit that models the creation of cartels and compares these predictions with real-life observations. Focusing on forty years of postwar data from Finland, this column finds that once cartels are formed, they are long-lasting. If unregulated the amount of cartels will only increase.
How can financial regulation be fixed to avoid another global crisis? This column argues that the “heads, I win; tails, society loses” moral hazard in the financial sector has to stop. To do this, policymakers must make bankruptcy credible. If a company has too much debt and becomes insolvent, it should suspend payments and its shareholders and creditors should lose their money.
Originally posted 17 November 2007, this Vox column is more relevant than ever arguing that adopting the euro is effectively irreversible. Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises. National households and firms would shift deposits to other Eurozone banks producing a system-wide bank run. Investors, trying to escape, would create a bond-market crisis. Here is what the train wreck would look like.
Eurozone members, the IMF, and the ECB have announced significant commitments to assist debt-laden Greece. This column outlines a dark scenario in which the plan fails and contagion spreads, necessitating further assistance to other indebted Eurozone governments. That could risk high inflation or debt problems for the entire Eurozone.
The global crisis has sharpened the media spotlight and political debate on bankers’ bonuses. Focusing on evidence from the UK, this column argues that to avoid excessive risk-taking in the financial sector and exploitation of moral hazard, bankers’ bonuses should be based on risk-adjusted long-run performance or be subject to “clawback” if future performance declines.
How should the Eurozone deal with the Greek fiscal crisis? This column introduces a Policy Insight that attributes the Greek-linked difficulty largely to the claim by the ECB and government officials that the Eurozone is founded on fiscal discipline and the Stability and Growth Pact. To guarantee a long-run future for the Eurozone, a change of doctrine is critical.
China has amassed $2.4 trillion of foreign reserves over the last two decades. This column argues that it is wrong, and even dangerous, to blame this on a manipulation of the exchange rate. Instead it proposes a structural theory emphasising that credit market imperfections require private firms to build up internal savings which have been channelled into foreign bonds.
How do labour market reforms in one country affect its trading partners? Politicians often appear to assume detrimental spillover effects from labour market reforms abroad. This column argues that recent models of trade and unemployment highlight beneficial linkages, and this is confirmed by empirical work.
Why have emerging economies weathered the crisis better than advanced countries? This column summarises a session given by Alan Winters, Saul Estrin, Thorsten Beck, and organised by Nauro Campos at the Royal Economic Society annual conference in March 2010. The contributions argue that the crisis may have long-lasting effects on migration, foreign direct investment, and financial development in Africa.
Why would countries share a single currency? This column introduces a new CEPR Policy Insight and argues that some aspects are missing in the current debate on the merits of the EMU. Benefiting from monetary union is a matter of time, perseverance, and seizing opportunities.