The conventional wisdom in Greece is that the nation has suffered years of excessive, Troika-imposed austerity in a short-sighted effort to extract maximum repayment. This column argues that, in fact, Greece was a net receiver of Troika funds from 2010 to mid-2014, with a modest reverse flow since Greece stalled on its reforms. Both sides have negotiated in their self interest – influenced by bargaining threat points that have had everything to do with the direct costs of default and little to do with Greece’s concern about its reputation for making repayments.
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This weekend’s dramatic events saw the ECB capping emergency assistance to Greece. This column argues that the ECB’s decision is the last of a long string of ECB mistakes in this crisis. Beyond triggering Greece’s Eurozone exit – thus revoking the euro’s irrevocability – it has shattered Eurozone governance and brought the politicisation of the ECB to new heights. Bound to follow are chaos in Greece and agitation of financial markets – both with unknown consequences.
The Greek crisis continues to take centre stage in policy debates. This column provides insight on the topic using evidence from three recent IMF studies. A suggested programme for Greece includes debt relief (debt equal to 50% of GDP and payable over 40 years), scaling down the banking system, and setting a flat 0.5% of GDP primary surplus over the next three years.
Greece seems to be on the verge of an agreement that would release much needed funds. This column argues that an agreement on completion of the second programme will not restore confidence, nor will it resolve the deep economic, financial and political uncertainties that confront Greece today. The focus should swiftly shift to the design of an efficient, realistic and truly reforming new programme.
Greece’s problem came from the bursting of a debt-financed growth bubble inflated with the help of EZ membership. This column argues that the inevitable adjustment was more painful than necessary. The fiscal consolidation was too tight and too front-loaded, and, importantly, structural reform wasn’t properly sequenced. By concentrating on labour market rather than product market reforms, the sharp wage fall could not be paralleled by a similar reduction in prices, and now soaring inequality is undermining support for needed reforms.
The Greek crisis has rumbled along since 2009. Vox columnists have been analysing the situation with uncanny foresight right from the beginning. This column reviews a few of the contributions from 2009 and 2010 that predicted many of today’s challenges using nothing more than simple economic logic and a firm grasp of the facts.
With Greece on the edge and Argentina confronting adverse legal decisions, thinking about sovereign default is a front-burner issue. This column discusses how recent experience casts light on relative merits of the two main conceptual approaches to modelling sovereign lending and default – the reputation approach and the punishment approach.
Stagnation is gripping several of the world’s largest economies and many view this as secular, not transient. This column argues that many economies need both demand-side stimulus and supply-side reform to close the output gap and restore potential-output growth. A combined monetary-fiscal stimulus – i.e. helicopter money – is needed to close the output gap, and this should be accompanied with extensive debt restructuring, policies to halt rising inequality, and additional public infrastructure investment.
The world’s trade-to-GDP ratio climbed steadily for six decades. The rise slowed even before the Global Crisis and world trade growth has been anaemic since 2010. Recent data shows it declining, leading some to wonder whether global trade has peaked. This column introduces a new eBook that examines the issue from a wide range of perspectives. No consensus emerges but it is clear that this is not just a cyclical issue – something structural changed.
High public debt ratios dominate today's fiscal policy discussions. This column argues that paying down the debt involves a trade-off that balances the gains from the insurance value of low debt against the costs of an insurance premium – higher distortionary taxation. When countries have fiscal space and no real prospect of a sovereign crisis, the cost of bringing down the debt is likely to exceed the crisis-insurance benefit. The best policy might be to simply live with higher debt.
The breakdown of negotiations between Greece and the Troika comes as a shock. It is not, however, the end of the game. This column argues that the rupture can serve as a starting point for a new relationship between Greece and its creditors – an approach that does not provide fresh cash to the Greek government and does not impose specific policy reforms from outside.
Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.
The imminence of the British referendum lays the European integration project at a crossroads. One tabled policy proposal is to offer different membership options – shallow integration (economic only) and deep integration (economic and political). This column presents new evidence comparing these two options. Focusing on Norway, a country that is economically but not politically associated with the EU, deep integration is estimated to bring a 6% productivity gain in the first five years, compared with shallow integration. These findings bring new economic arguments to debates about EU integration and membership.
If clean energy were cheaper than dirty energy, climate change would halt. Making clean energy cheaper is a problem – like putting a man on the moon – that can be cracked if the effort is properly organised and financed. This column proposes a ten-year ‘Global Apollo Programme’ to achieve the necessary price reversal.
If your surname begins with a letter at the end of the alphabet, you might have had that sneaking suspicion that it meant you were always picked last for sports teams, or always had your exam paper marked last when your teacher was tired and unforgiving. This column suggests that you might well have been right. New evidence suggests that academic papers presented at the top of a list are cited more simply because they are the first thing you see. In the digital age, many academic papers are competing for the scant attention of readers, and this column’s results indicate that details like presentation order really matter.
The Greek adjustment programme failed. This column argues that the problem lay in the programme’s design. By focusing on deficit reductions and the wrong type of reform, it failed to build up the only thing that could provide the basis for debt repayment – namely a dynamic, export-oriented productive base. A broader reform agenda that creates hope would be accepted by Greeks and it would make eventual repayment more likely. The need for some patience in reaching the final destination of this journey should no longer be an excuse for not taking the first step.
There have been intense debates on whether microfinance can lift people out of poverty. Summarising research across seven countries, this column argues that microcredit is a useful financial tool but not a powerful anti-poverty strategy. There are also no significant benefits in terms of education or female empowerment. Yet, microcredit does allow low-income households to better cope with risk and to enjoy greater flexibility in how they earn and spend money.
The high equity premium and high volatility in equity markets have long been a puzzle. This column discusses how rare, economy-wide disasters can account for this conundrum, as well as for patterns in prices, consumption, and interest rates during the Great Recession.
Iceland has just announced it is getting rid of its capital controls. This column argues that the government’s plan is a credible, efficient and fair plan to lift the costly and misguided controls.
Many fear that a Greek default would lead voters elsewhere in Europe to favour default over austerity. This column argues that it is more likely to have the opposite effect. Network interdependencies among countries affect the domestic politics of default because defaults are both rare and vivid. Foreign default increases the propensity for voters to punish their governments for failing to repay external private creditors.
Debt financing amplifies the effects of asset prices fluctuations across the financial system and this can produce bubbles. Regulation therefore increasingly focusses on restricting debt financing. Although there is no silver bullet for making the financial system failure-proof, this column argues that policymakers should adopt an integrated and consistent macroprudential approach across the financial system in order to help prevent businesses moving to less-regulated pastures.
Immigration policies can potentially attract and select high-skilled workers. This column provides a new assessment of the effectiveness of migration policies. Points-based (or supply-based) systems increase both the absolute numbers of high-skill migrants and the skill composition of international labour flows. Conversely, demand-driven systems – usually based on the principle of job contingency – are shown to have a rather small, even negative effect.
Vox columnists have posted a steady stream of research-based policy analysis and commentary on the Greek Crisis. This column provides a list of all the relevant columns posted since the beginning of 2015.
There is no consensus on the effectiveness of government spending as a measure for boosting output. This column suggests that increasing government spending is highly effective exactly when it is most needed – when the economy is experiencing a deep recession. But the finding does not imply a one-size-fits-all recommendation. There are potential dangers in increasing spending in countries whose level of debt might be perceived as unsustainable.
Reducing inequality of opportunity, rather than inequality of outcome, is often heralded as an appropriate target for policy. This column explores the challenges of identifying inequality of opportunity. Disentangling how effort and circumstance contribute to outcomes is difficult, and this leads to a tendency to underestimate inequality of opportunity. This lends support for generalised social protection measures in dimensions such as income, health and education, irrespective of whether the outcomes can be specifically attributed to circumstance or to effort.
UK long-term yields are extraordinarily low. This could be interpreted as financial markets expecting prolonged low growth or low inflation, or both. This column argues that this view is overly gloomy. Factors pulling down today’s inflation are unlikely to be permanent, and the economic headwinds should ease gradually. Additionally, a return to productivity growth should facilitate faster potential output growth over the long term. A more likely interpretation is that low yields reflect precautionary actions by public and private financial-market participants to reduce vulnerabilities to adverse outcomes.
Theory suggests that higher inflation expectations increase the likelihood that people will buy durable goods. This column presents evidence showing that this works for more educated, working-age, high-income, and urban households. A natural experiment from Germany shows us that the effect of inflation expectations on readiness to spend is causal and that monetary and fiscal policies that increase inflation expectations can therefore successfully spur aggregate consumption in the short run.
Greece’s negotiations with its creditors is at a critical point. This column, by the IMF’s Chief Economist, discusses the offer made to the Greek government. For the deal to work, the Greek government needs a credible budget plan for attaining the targeted surpluses, and European creditors need to agree to significant additional financing, and to debt relief sufficient to maintain debt sustainability. Under the existing proposal, debt relief can be achieved through a long rescheduling of debt payments at low interest rates.
In the aftermath of the Global Crisis, many central banks have engaged in unconventional purchases of risky securities. Such operations can entail possible losses on their balance sheets. This column argues that neutrality of open-market operations holds only in specific policy regimes, such as when central banks’ losses are covered by taxes levied on the public sector. In absence of such support, losses should be resolved through a prolonged increase in inflation.
Major advanced economies have made mixed progress in repairing the private sector’s balance sheets. This column explores private sector deleveraging trends and calls for a set of policies that will return debt to safer levels. Monetary policies should support private sector deleveraging and policymakers should not ignore the positive impact of debt restructuring and write-offs on non-performing loans.
International trade in services and immigration are among the fastest growing aspects of globalisation. Using UK data, this column explores the links between these phenomena. Immigrants promote exports of final services to their home countries, while also reducing imports for some intermediate services, and bringing productivity gains to the labour market. In designing immigration policies, it is important that the potential impact on exports and offshoring activities are carefully considered.
The housing market, almost everywhere, is a major source of financial instability. This column presents research suggesting that certain types of macroprudential policy may well be useful additions to the policy toolbox, but that the evidence is far from definitive. Despite promising signs, it would be unwise to rely solely on macroprudential policies for taming financial booms and busts.
As a result of the Arab Spring and conflicts in the Middle East, thousands of people have been boarding boats from North Africa and making for Europe. This columns discusses the progress the EU has made in dealing with the situation. Many important decisions and critical actions still need to be made.
The black-white wage gap persists. Year after year, data tell us that black workers in the US earn less than their white counterparts. This column presents new evidence focused on the notion of race-specific social networks and ‘knowledge spillovers’. Data suggest that a black worker may be less able than an otherwise similar white worker to enjoy knowledge spillovers that arise in predominantly white work environments, suppressing their earnings.
The Economic and Monetary Union in Europe has recently been the source of a lot of pain. Its economic benefits often seem a lot harder to measure. This column reconsiders earlier opinions on the trade effects of currency unions using the latest data and methodologies. It suggests the euro has at least a mildly stimulating effect on exports. However, the switches and reversals across methodologies do not make allowances for any bold statements.
The ‘informal’ economy presents a key challenge for developing-nation policymakers due to its labour-market and tax-revenue implications. Informality is usually defined as the complement to formality, i.e. any activity that isn’t covered by a clear set of laws. This column argues that such a definition risks obscuring more than it reveals, by failing to understand and address the varieties of informality that exist. Sensible policy should focus on tailored interventions across different categories of taxpayer, not on reducing aggregate informality.
Quantitative easing (QE) is thought to work by reducing expected future short-term policy rates and the supply of long-term bonds. This column argues that a third channel may be at work, namely a reserve-induced portfolio balance channel. It operates through the increase in central bank reserves on commercial banks’ balance sheets and is independent of which assets the central bank purchases. Central banks can implement QE programmes through purchases of other assets than long-term bonds and still reduce long-term yields.
Only a few decades ago many talked about the ‘death of cities’. Today, many cities have emerged as hubs of economic activity. This column argues such a phenomenon is due to spill-overs and agglomeration of human capital. The popularity of certain cities is explained by their attractiveness for innovative enterprises and high-educated top talent. But since locations where top talent clusters are scarce, land rents on these locations are high.
There is a broad consensus that financial supervision ought to include a macroprudential perspective that focuses on the stability of the entire financial system. This column presents and critically evaluates the newly-created macroprudential framework in the Eurozone, with a particular focus on Germany. It argues that, while based on the right principles, the EU framework grants supervisors a high degree of discretion that entails the risk of limited commitment and excessive fine-tuning. Further, monetary policy should not ignore financial stability considerations and expect macroprudential policy to do the job alone.
Cultural transmission occurs both vertically – from one generation to the next – and, increasingly in modern times, horizontally – within generations and across populations. Using novel data for 74 countries, this column explores how genetic relatedness between populations affects the transmission of cultural traits. A pattern of positive and significant relationships is found between genetic distance and various measures of cultural distance, including language, religion, values, and norms. This implies that populations that are ancestrally closer face lower barriers to learning new ideas and behaviours from each other.
There is a lot of discussion of the right course of monetary policy for India. In this column, India’s Chief Economic Adviser argues that the country’s real policy interest rates have diverged significantly for consumers and producers, and are unusually high for the latter. The real rate is 2.4% based on the consumer price index, but 7.5% based on the GDP deflator. There is a clear need for more consideration of the appropriate measure of restrictiveness in these unusual times.
Income inequality in Japan has been growing over the past few decades. This column discusses the macroeconomic significance of inclusive growth and its role in the ultimate success of Abenomics. The findings suggest that full implementation of structural reforms – including launching the third arrow of Abenomics – would be necessary to foster growth and increase equality.
Tax avoidance by multinational firms is a complex challenge for national governments and the global tax system. Increasingly, high-income countries have been moving from foreign tax credit systems, to exempting foreign source income from domestic taxation. This column investigates how foreign profits should be taxed, taking into account the economic role of capital ownership. Domestic tax rates should ensure optimal allocation between domestic and foreign assets, while the tax base should be set to ensure asset purchases are undistorted. Countries may be forced to change their tax systems in more fundamental ways, however, as the mobility and flexibility of multinational corporations continues to grow.
The Trans-Pacific Partnership – a trade deal involving the US and 11 partners – has been imperilled by parliamentarian manoeuvres in the US Congress. This column explains the complex links between the trade deal and the Congressional vote and discusses the next steps.
Football leagues around the world tend to be dominated by a tiny number of teams. This column applies Sutton’s theory of endogenous sunk costs to show that it’s all down to success begetting success, and success attracting more fans. Like big companies who dominate markets and still spend billions on advertising to maintain their market position, dominant teams remain dominant because they consistently win.
The Trans-Pacific Partnership agreement would be the largest single trade agreement concluded worldwide for more than a decade. It would transform world trade governance in ways that are hard to predict. This column discusses the machinations inside the US Congress that gave US negotiators the green light to wrap up the TPP talks. If all goes well, the deal may happen just prior to the APEC Summit in the Philippines in November 2015.
A popular explanation for the sovereign debt crisis in Europe is self-fulfilling sentiments. What can central banks do to avoid self-fulfilling debt crises? This column argues that while in theory there are policies to make the public debt sustainable, central banks cannot credibly commit to them. The ability of a central bank to avert a self-fulfilling debt crisis is thus limited.
Policymakers have used a variety of measures to promote firm innovation but their exact impact remains unclear. This column argues that regional context, proxied by investment in R&D and education levels, is fundamental in shaping the innovative performance of firms. The local socioeconomic environment either favours or limits the innovative capacity of firms, depending on their level of interaction both with neighbouring and distant economic actors.
Japanese business groups, or keiretsu – cartels of companies with interlocking interests – have contributed much to the success of Japanese manufacturing in the 20th century. This column explores the future of this form of corporate governance, amid increasing calls for their dissolution. An examination of trade networks in the automotive industry shows that automakers no longer exhibit a preference for dealing with keiretsu partners. Globalisation, procurement scandals, and advances in modularisation have helped to erode the benefits of these long-term relationships.
The WTO has so far failed to deliver any significant multilateral trade liberalisation. However, this column argues that concluding from this that the WTO is a failure would clearly be premature. Its punchline is that the WTO’s success at preventing trade wars far outweighs its failure to promote trade talks. Overall, the WTO is therefore much more successful than the ailing Doha Round suggests.