The Eurozone crisis has led some to seriously consider the prospect of a breakup of the euro. This column presents evidence from the classical gold standard era (1870-1913) suggesting that even then investors doubted the credibility of emerging market countries sticking to a hard currency peg – with higher premiums on sovereign debt as a result.
Do buyers discriminate based on race? This column describes an experiment in the US that advertised iPods online from black and white sellers. Black sellers received fewer offers at lower prices, doing better in markets with competition amongst buyers and worse in high-crime markets. The authors find evidence of both statistical and taste-based discrimination.
Economic integration transmitted the negative shocks of the crisis to workers across the world. As the global economic recovery begins, this column says that there is no cause for complacency or celebration. It warns that unemployment rates are expected to remain high in many countries and recommends designing government policies so that more may share in the gains from globalisation.
The G20 communiqué stresses the difficulty of balancing fiscal stimulus and fiscal consolidation. This column – written by one of the world’s leading macroeconomists, Olivier Blanchard, and his co-author – sums up the research-based policy analysis of the issue.
Does industrial policy – policies to encourage exports, attract foreign direct investment, promote innovation, and pick winners – work? This column recommends developing countries pursue “soft” industrial policies, which aim to develop a process whereby government, industry, and cluster-level private organisations can collaborate on interventions that can directly increase productivity.
As the debate rages over the best path for fiscal policy, this column looks at the causes of the Eurozone crisis, especially in emerging Europe. It argues that despite the debate focusing on public debt, the key issue is the development of private debt. That suggests that the key policy remedy would be private debt consolidation supported by countercyclical fiscal policy.
As G20 leaders meet to discuss financial reform, this column argues that it is not too late for an international solution. It says that the EU and US should lead the way with a tax on systemically important financial institutions. Beyond internalising the costs of systemic risk, such a levy would make an international agreement more likely and raise substantial funds.
Simon Evenett of the University of St Gallen talks to Viv Davies about the fifth Global Trade Alert (GTA) report. They discuss why the EU – in contrast to Africa, which has resisted protectionist temptations – is now in the top five ‘offending nations’ on all of the GTA criteria. Evenett also answers recent criticisms that GTA has been ‘over-alarmist’ in its analysis of protectionist measures implemented by governments since the onset of the financial crisis. The interview was recorded in June 2010.
This column summarises a wealth of literature that tries to understand what determines productivity, which is often referred to as a measure of our ignorance. It concludes with a call for more data – including currently unmeasured aspects of business’s production practices such as producer-level prices. While collecting more data is costly, this column argues that there is much to be gained in exchange.
The long-term effects of early childhood development are of increasing interest. This column outlines a recent literature review suggesting that interventions should target pregnant women as well as young children. But while events before birth can have a lasting impact, this does not mean that later efforts are doomed to fail.
As the recent austerity measures can testify, Europe’s leaders are acutely concerned about government debt. This column tracks policy announcements from the start of the Eurozone crisis in December 2009, arguing that governments may have contributed to turmoil with their public display of confusion – ultimately undermining credibility. But if Eurozone governments show unity of purpose, this credibility can be restored.
In 1994, Scott Barrett predicted that international environmental agreements had either many signatories who promise to do very little, or a few signatories who promise to do a lot. This column tests this suggestion by considering the role of other coalitions. One result is that, to solve global problems, the UN forum should hold negotiations with the largest emitters only.
The global balances are a thorn in the side of the G20. This column launches a new eBook with the aim of providing policymakers and their advisers with up-to-date, comprehensive analyses of the central facets of global economic imbalances and to identify and evaluate potential national and systemic responses to this challenge.
The current macroeconomic context, characterised by a sovereign debt crisis in the Eurozone and a growing emphasis on fiscal restraint, may influence government behaviour towards open borders. This column discusses the implications of fiscal restraint for protectionist dynamics before summarising the main findings of the sixth Global Trade Alert (GTA) report. It argues that “jumbo discriminatory measures” have affected more than 10% of world imports in 2008, casting doubt on any claims that the amount of trade potentially affected by crisis-era protectionism is de minimus.
China’s announcement of greater renminbi flexibility was welcomed by US and European leaders. This column discusses new empirical research on what happens to economies when they exit exchange rate pegs that are resisting appreciation. Data from 27 cases suggest that growth slows but only modestly, and there is no evidence of economic and financial damage as a result – certainly nothing like the fears that China's next decade could look like Japan’s lost decade.
The recent boom in primary commodity prices has once more stimulated interest in the issue of “Dutch Disease” – the changes in a country’s structure of production expected after a favourable shock such as a large natural resource discovery. This column examines the implications for welfare and some policy options for resource-rich countries.
Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.
The world is emerging from a severe global economic crisis. This column argues that maintaining an open trade regime is an important foundation for global recovery and the necessary reorientation of global supply and demand. This is especially true for developing countries as so many depend on export markets to finance growth-stimulating imports of goods, services, and technologies.
The international community responded to the global crisis with a promise not to raise protectionist measures, and there has been little trade friction in terms of WTO disputes. This column assesses the dispute settlement system's capacity to bear a larger caseload and suggests that an increase in WTO litigation could be good news for the rules-based trading system – even in the absence of progress on the Doha round.
What is holding back the Doha Round? This column argues that while there are many reasons for the difficulties the WTO has faced, the shortcomings of the mercantilist model in framing mutually acceptable multilateral agreements is undoubtedly a major factor. The WTO needs a new kind of forum where countries can think through the issues before the give and take.
The persistent failure to reach a new agreement under the WTO has sent trade scholars back to the drawing board. This column discusses two prominent ideas for restructuring the talks to get past the prolonged impasse. One is to permit agreements between some, but not all, members; the other to relax the requirement of consensus.
A key objective of the WTO Doha Round was to address the concerns of developing countries. This column argues that, despite the lack of progress on the core market access agenda, much has been achieved in terms of market access and trade facilitation since 2001.
When developing countries open up their markets, there are costs as well as benefits. This column presents findings from a collection of papers investigating adjustment to trade. It argues that unemployment is only part of the story, adding that the development community should aim to address the constraints that prevent too many households from seizing the newly available opportunities.
Howard Davies, former director of the London School of Economics, talks to Romesh Vaitilingam about his book co-authored with David Green, ‘Banking on the Future: The Fall and Rise of Central Banking’. Among other things, they discuss the cost-effectiveness of central banks, the characteristics of an ideal central bank governor, and potential reform of the voting structure at the European Central Bank. The interview was recorded in London in June 2010.
Europe has run out of policy instruments to deal with booms and busts, and to restrain unsustainable fiscal behaviour. This essay suggests a national regulatory policy that could take the form of countercyclical charges, loan-to-value limits, tighter leverage ratios, transaction taxes, or other macroprudential tools. Also, countries should have automatic access to a fund to swap their debt for the debt of other Eurozone countries – but only at the cost of a 30% haircut.
How does a university organise its hiring and promotion policy? This column presents evidence on the personnel policy of a large European university. It suggests that the university is organised as an internal labour market, and while promotion dynamics depend on research and teaching performance, persistent administrative rigidities remain.
The euro’s crisis is not over. Measures taken in May were critical but they were palliatives not a cure. The Eurozone rescue needs to be completed. This column introduces a new Vox eBook that gathers the thinking of a dozen leading economists on what more needs to be done.
Many analysts of the Eurozone crisis take members’ asymmetric competitiveness for granted and underplay the role of the global crisis. This essay argues that some of the trends which now are widely assumed to be the result of the euro are actually natural consequences of two unique events: German unification and the mid-decade global credit boom.
The crisis has revealed deep flaws in the Eurozone’s governance regime. This essay argues that EU leaders should address fundamental questions about the operational principles upon which the euro is based. Key choices for Eurozone leaders are the nature of the economic policy framework, the optimal degree of decentralisation, and the identification of reforms that will ensure the policy regime can deal with all eventualities.
Two key building principles of the Eurozone were that the ECB should be insulated from political interference and prevented from the funding of government deficits. This essay explains how the Eurozone crisis has threatened these principles and suggest ways to restore them.
Financial crises feed on uncertainty. This essay warns that the longer the Eurozone crisis is allowed to linger, the greater will be the damage. But Europe can take concrete actions to bring it to an end. It should make bank stress tests public, provide more clarity on its special purpose vehicle, move forward with restructuring Greece’s debt, and support growth through quantitative easing.
The Eurozone lacks the mechanisms needed to ensure convergence of members’ competitive positions and to resolve crises. This essay argues that the survival of the Eurozone depends on its capacity to embed itself into a political union. The latter must imply some transfer of sovereignty in macroeconomic policies and the organisation of automatic solidarity between member states.
Many analysts blame Germany’s fiscal prudence for worsening the crisis. This essay argues that the monomaniacal focus on aggregate demand is based on slightly outdated and oversimplified Keynesianism. The real constraint on European growth is not Germany’s fiscal policy. It is the supply side rigidities that plague all European nations – especially those at the heart of this crisis. The demand side matters, but is it foolish to think that German budget deficit of 5% instead of 3% of GDP would solve Europe’s problems.
Some see the Eurozone crisis as a harbinger of a more perfect union, others as the euro’s death knell. In contrast, this essay explains the current situation as something in-between; the Eurozone is levitating on the hope that an exit strategy can soon be found. The key is to establish fiscal discipline in every Eurozone member. As a real European government is politically impossible, this must be based on national institutions that can guarantee fiscal discipline.
The Eurozone crisis is forcing fiscal retrenchments across Europe. The challenge is to reassure financial markets about debt sustainability without resorting to budget cuts and tax hikes that kill the recovery. This essay argues that quick corrections may be important signals of the government’s determination on fiscal discipline, but they are not sufficient. True sustainability must be based on policies that have lasting effects; a gradual implementation of spending cuts is probably the best strategy.
The global crisis has developed into a fiscal crisis within the Eurozone. This essay argues that fiscal policy during normal times must be sufficiently sustainable and counter-cyclical to enable aggressive fiscal intervention in the event of a major negative shock. It says that the solution is to set up independent fiscal councils in Eurozone member countries.
The euro’s history has been marked by half-steps, derogations, and political expediency. This essay argues that Eurozone leaders must complete the Economic and Monetary Union that is needed to underpin the euro if they are to avoid a serious risk that the Eurozone in its current form will fail. Europe must find the courage to address its structural shortcomings in order to boost potential growth. Fiscal adjustment alone is not the solution.
While the Stability and Growth Pact had good intentions, it failed because nothing happened when governments broke the rules. This essay proposes an enhanced Pact with increased fiscal transparency, an independent committee of fiscal experts, and a 1% tax on new debt above the 60% debt-to-GDP ratio. This would redistribute the costs of running Europe from the countries that have their house in order to those that don’t.
The inability of governments to maintain fiscal discipline is not new. But this essay argues that numerical budget rules are a far from optimal solution. They cannot be enforced and can produce highly procyclical policy during downturns. Instead, it proposes constraints on fiscal discretion imposed, monitored, and enforced by an independent fiscal policy council.
Will the upcoming Financial Reform Bill in the US help prevent the next crisis or at least reduce its probability? This column argues that the answer is a firm “no”. It says this is not because the reform steps are damaging or wrong, but simply because they only provide the framework and do little to change incentives for banks and regulators.
The 19th football World Cup is underway in South Africa. This column studies the achievements of the national teams of Belgium, Brazil, England, Germany, Italy, and the Netherlands since 1960. It finds that while home advantage, skill, and luck play their part, in the dying moments of a game national identity can step forward as well.
Unlike Southeast Asia, Greece cannot devalue its currency in a bid to kick start an export-led recovery. Instead this column argues that, while it will be politically difficult, Greece needs a combination of debt reschedulement and consolidated, coordinated wage cuts – and fast.
Many commentators have compared the global crisis to the Great Depression. This column explores lessons that can be applied to help shape expectations and guide exit policy for central banks. It argues that the need for credit stimulus should end when failed intermediaries are resolved and positive net present value credits are reallocated to solvent lenders.
Did global imbalances cause the global crisis? This column summarises the variety of explanations of the relationship between imbalances and the crisis. While the debate continues, it suggests that, as a matter of prudence, policies to contain global imbalances may still be warranted even if they did not trigger the crisis.
Smoking, heavy drinking, and being overweight are known causes of disease. This column presents experimental evidence to try and understand why people ignore this advice. It compares lifestyle choices with people’s attitudes to risk and their patience, finding that while people with an unhealthy lifestyle are no more risk-loving than other people, they are more impatient.
Simon Evenett of the University of St Gallen talks to Viv Davies about his recent Vox e-book on the US-Sino currency dispute, which brings together the latest research on the behaviour of the renminbi, the role it has played in global imbalances and the potential responses of China and its trading partners to the dispute over balances and exchange rate policies. Evenett discusses the key policy messages for the US and China - and the implications for the EU. The interview was recorded in June 2010.
The global crisis ruthlessly exposed the weakness of the market for liquidity. This column suggests that banks should issue securities with a “Roll-Over Option Facility” that would allow banks to keep funds if there is turmoil in liquidity markets. It adds that these facilities would help reallocate liquidity risk outside the banking sector, thus reducing the probability and severity of a crisis.
As a consensus among academics begins to emerge over counter-cyclical financial regulation, former Bank of England Monetary Policy Committee member Charles A E Goodhart outlines why he is sceptical about “conditional convertibles” or CoCos – a form of debt that is “quasi-automatically” transformed into equity when banks get into trouble. Goodhart argues that CoCos would make the system more complex, potentially leading to problematic market dynamics.
As the G20 changes its recommendations from fiscal stimulus towards fiscal austerity, this column argues that policymakers should be careful not to leave the most vulnerable behind. It says that robust social spending and investments are needed even under tight fiscal conditions – stock markets may bounce back, but a generation growing up in poverty may not.
Is the worst of the crisis behind us, or is this just the eye of the storm? This column provides a snapshot from a new index provided jointly by the Brookings Institution and the Financial Times known as TIGER – Tracking Indices for the Global Economic Recovery. It argues that while some dark clouds remain, the economic picture looks far better now than it did a year ago.
The WTO is in a funk – unable to conclude the Doha Round even as its members liberalise unilaterally and regionally. This column introduces a Policy Insight arguing that the tactics used to conclude the last round pushed the organisation into decision-making’s “impossible trinity” (consensus, uniform rules, and strict enforcement). The Doha Round may succeed – defeating the triangle with the 'big package' tactic – but this tactic does not work fast enough to allow the WTO to confront 21st century challenges in a timely manner. At least one of the impossible triangle’s corners will have to be modified.
Income inequality in Latin America has declined steadily in recent years, after rising throughout the 1990s. This column presents one of the first attempts to understand why, exploring the forces behind a diminished earnings gap and increased government transfers. It says that that further redistribution would benefit both equality and growth.
Understanding the relationship between female employment and fertility is a vital ingredient for effective population policy. This column presents new findings from China based on well over 2000 women between 20 and 52 years old. It finds that non-agricultural jobs for women reduce the number of children per woman by 0.64 and the probability of having more than one child by 54.8%.
Large foreign-exchange reserve holdings by emerging market central banks are back on the radar of academics, policymakers, and market participants. One prediction has been that the large increases in reserve holdings should lead to more diversified portfolios. This column argues that this may not necessarily be the case – diversification depends on whether reserves are precautionary or not.
David Vines of Oxford University talks to Viv Davies about the vulnerability of Europe's monetary union and the need for a rules-based international monetary system. He argues that due to an unprecedented show of cooperation and worldwide coordination of fiscal and monetary policies, an all-out collapse has been prevented: the same level of cooperation and coordination will be needed to address the global savings-investment imbalances that continue to pose a threat to global stability. The interview was recorded in June 2010.
As a result of changes in regulation in the late 1990s, spending on direct-to-consumer advertising of pharmaceutical drugs in the US leapt from $150 million in 1993 to $4.24 billion in 2005. This column examines the effect on demand, finding that broadcast advertising was responsible for 18% of the overall increase in prescription drug expenditures in the US during the period.
Nearly one-sixth of the more than $3 trillion in fiscal stimulus spent in 2008 and 2009 was allocated to green spending. But this column argues that without correcting existing market and policy distortions, the “greening” of the world economy will be short-lived. Now more than ever, the world needs a global green New Deal – and it needs the G20 to lead the way.
Before the fall of the Soviet Union, Russia's total fertility rate was 2.01. By 1999 it was below 1.20, before rising closer to 1.5 in 2007. This column uses micro-data analysis to examine what factors have driven this change. It supports the evidence from other countries that fertility is not solely determined by short-term factors such as rising incomes, the economic climate, or government initiatives.
Regional trade agreements have spread rapidly throughout the world since the early 1990s. This column surveys the latest theoretical and empirical research on regionalism, asking whether we should celebrate or be concerned about this trend. It concludes that although countries should approach regionalism with care, such agreements have been more of a blessing than a burden.
Did increased protectionism cause the great trade collapse? This column argues that, while there has been a rise in the use of tariffs and anti-dumping duties, protectionism accounted for no more than 2% of the drop in world trade in 2009.
Why do minority shareholders continue to hold stock despite the risk of expropriation by controlling shareholders? This column provides two decades of evidence from Japan suggesting that many investors do not foresee these conflicts of interest, even when there is plenty of disclosure. Inefficient stock markets allow majority shareholders – often parent companies – to sell overpriced stock only to buy it back at a later date.