Revisiting the pain in Spain
Paul De Grauwe 07 July 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Europe's nations and regions Global crisis Macroeconomic policy
ECB, monetary policy, euro, EMU, Spain, monetary union, fiscal policy, UK, government debt, austerity, EZ crisis, Outright Monetary Transactions, currency depreciation
The euro crisis: Muddling through, or on the way to a more perfect euro union?
Joshua Aizenman 03 July 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.
The short history of the Eurozone has been remarkable and unprecedented – the euro project has moved from the planning board to a vibrant currency within less than ten years. Otmar Issing’s optimistic speech in 2006 reflects well the buoyant assessment of the first decade of the euro – an unprecedented formation of a new currency without a state.1 Observers viewed the rapid acceptance of the euro as a viable currency and the deeper financial integration of the Eurozone and the EU countries as stepping stones toward a stable and prosperous Europe.
Institutions and economics International finance Monetary policy
Germany, ECB, eurozone, inflation targeting, euro, institutions, Eurozone crisis, GIIPS
Delivering the Eurozone ‘Consistent Trinity’
Marco Buti, Maria Demertzis, João Nogueira Martins 30 March 2014
Although progress has been made on resolving the Eurozone crisis – vulnerable countries have reduced their current-account deficits and implemented some reforms – more still needs to be done. This column argues for a ‘consistent trinity’ of policies: structural reforms within countries, more symmetric macroeconomic adjustment across countries, and a banking union for the Eurozone.
As argued in an earlier commentary, the financial crisis exposed important economic inconsistencies in the way that EMU operated.1 Although progress has been made, the reality is that more needs to be done. A number of countries still need to consolidate their public finances further, and also implement structural reforms to promote growth and sustain satisfactory welfare systems. At the same time, there is a need for vulnerable countries to ensure consistency between regaining competitiveness and the sustainability of private and public debts.
Europe's nations and regions Macroeconomic policy
eurozone, euro, EMU, imbalances, fiscal policy, structural reforms, fiscal consolidation, debt, Eurozone crisis, Stability and Growth Pact, banking union, internal devaluation
Considering QE, Mario? Buy US bonds, not Eurobonds
Jeffrey Frankel 24 March 2014
The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% Eurozone-wide, then the periphery countries have to suffer painful deflation.
Macroeconomic policy Monetary policy
ECB, euro, quantitative easing
TARGET balances, Bretton Woods, and the Great Depression
Michael Bordo 21 March 2014
Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.
Economic history International finance
ECB, eurozone, euro, global imbalances, Central Banks, financial crisis, Great Depression, Eurosystem, Eurozone crisis, Bretton Woods, TARGET
A fiscal shock absorber for the Eurozone? Lessons from the economics of insurance
Daniel Gros 19 March 2014
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.
Even before the euro crisis started, it had been widely argued that the Eurozone needed a mechanism to help countries overcome idiosyncratic shocks. The experience of the crisis itself seemed to make this case overwhelming, and throughout the EU institutions it is now taken for granted that the Eurozone needs a system of fiscal shock absorbers. For example, The Report of the President of the European Council calls for:
EU institutions Macroeconomic policy Welfare state and social Europe
eurozone, euro, insurance, fiscal policy, Eurozone crisis, fiscal union, fiscal shocks, fiscal shock absorbers
The euro in the 'currency war'
Agnès Benassy-Quéré, Philippe Martin,
The euro has appreciated sharply since July 2012. CEPR Policy Insight 70 argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated Euro, which will support aggregate economic activity and help inflation stay close to 2%.
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CEPR Policy Insight No.69 is available to download free of charge here.
, Currency wars
, ECB monetary policy
A looser monetary policy will favour a weaker euro and a stronger economy
Agnès Benassy-Quéré, Pierre-Olivier Gourinchas, Philippe Martin, Guillaume Plantin 06 February 2014
The euro has appreciated sharply since July 2012. This column introduces a CEPR Policy Insight which argues that the strong euro is not the result of a ‘currency war’. The Eurozone suffers from an overly restrictive monetary policy. The sooner the ECB adopts a more aggressive monetary stance, the sooner the recovery will take hold. Easier Eurozone monetary conditions will lead to a temporarily depreciated euro, which will support aggregate economic activity and help inflation stay close to 2%.
Since July 2012, the euro appreciated more than 10% against the dollar, 6% against the pound sterling, and almost 50% against the yen (IMF 2014). Does this mean that the euro a casualty of a ‘currency war’? We believe the answer is ‘no’. The strength of the euro is the result of an overly restrictive monetary policy by the ECB.
euro, Currency wars, ECB monetary policy
How the euro synchronised EZ cycles
Ayako Saiki, Sunghyun Henry Kim 02 February 2014
Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.
Prior to the introduction of the euro, the topic of whether the Eurozone fulfils the conditions for an optimum currency area was highly debated (e.g. Bayoumi and Eichengreen 1992).
EU institutions International finance International trade
eurozone, euro, trade, business cycles, East Asia, supply chains, optimum currency area
The latest on the dollar’s international currency status
Jeffrey Frankel 06 December 2013
Except for the period 1992-2000, the dollar’s role as an international currency has been slowly declining since 1976. Since 2010, there has been another pause in this decline – somewhat surprising, given that the financial crisis began in the US, and given Congress’ recent flirtations with default. The dollar’s resilience as the world’s reserve currency is due to a lack of good alternatives – the euro has its own problems, and the yuan only accounts for 2.2% of forex transactions.
As most people know, the general trend in the dollar’s role as an international currency has been slowly downward since 1976. International use of the dollar as a currency in which to hold foreign-exchange reserves, to denominate financial transactions, to invoice trade, and to serve as a vehicle for foreign-exchange transactions is below where it was during the heyday of the Bretton Woods era (1945-1971). However, few are aware of what the most recent numbers show.
It is not hard to think of explanations for the downward trend:
euro, reserve currency, dollar, foreign exchange, yuan