The first century of modern Greek monetary history has striking parallels to the country’s current crisis, from repeated cycles of entry and exit from the dominant fixed exchange rate system, to government debt built-up and default, to financial supervision by West European countries. This column compares these two episodes in Greece’s monetary history and concludes that lasting monetary union membership can only be achieved if both monetary and fiscal policies are effectively delegated abroad. Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.
Matthias Morys, 10 May 2016
Barthélémy Bonadio, Andreas Fischer, Philip Sauré, 21 April 2016
According to standard estimates, exchange rate shocks affect import prices only slowly. This column presents evidence that challenges this view. Focusing on the large, unanticipated change in the Swiss franc in 2015, it shows that a change in import prices materialised very quickly. Prices started to move on the second working day after the exchange rate shock, and the medium-run pass-through of roughly 50% was reached after six additional working days.
Martin Sandbu, 26 March 2016
Was the euro a straitjacket that caused an inevitable crisis? Or would earlier action have staved off a debt catastrophe? In this Vox Talk, Martin Sandbu – author of "Europe’s Orphan: The Future of the Euro and the Politics of Debt" – argues that rather than blaming the euro for the political and economic failures in Europe since the Global Crisis, the responsibility lies firmly on the authorities of the Eurozone and its member countries.
Lars P Feld, Christoph M Schmidt, Isabel Schnabel, Volker Wieland, 12 February 2016
Not everybody agrees that the Greek crisis means the EU needs more integration. This column, from the German Council of Economic Experts, argues that for as long as EZ members are unwilling to transfer national sovereignty over economic and financial policy to the European level, all reform proposals must withstand a critical evaluation of the incentives they set for national economic and financial policy. The institutional framework of the single currency area can only ensure stability if it follows the principle of that liability and control must go hand in hand. Those who decide must bear the consequences of their decisions.
Barry Eichengreen, Charles Wyplosz, 14 March 2016
The Eurozone crisis has shown that monetary union entails more than just sharing monetary policies. This column, first published on 12 February 2016, identifies four minimal conditions for solidifying the monetary union. In the case of fiscal policy, this means a decentralised solution. In the case of financial supervision and monetary policy, centralisation is unambiguously the appropriate response. In the case of a fourth condition, debt restructuring, either approach is possible, but the authors prefer a solution that involves centrally restructuring debts while allocating costs at national level.
Philip R. Lane, 07 September 2015
In the lead up to the global financial crisis, there was a substantial credit boom in advanced economies. In the Eurozone, cross-border flows played an especially important role in the boom-bust cycle. This column examines how the common currency and linkages between member states contributed to the Eurozone crisis. A very strong relationship between pre-crisis levels of external imbalances and macroeconomic performance since 2008 is observed. The findings point to the importance of delinking banks and sovereigns, and the need for macro-financial policies that manage the risks associated with excessive international debt flows.
David Amiel, Paul-Adrien Hyppolite, 15 March 2015
As the Eurozone crisis lingers on, euro exit is now being debated in ‘core’ as well as ‘periphery’ countries. This column examines the potential costs of euro exit, using France as an example. The authors estimate that 30% of private marketable debt would be redenominated, but since only 36% of revenues would be redenominated, the aggregate currency mismatch is relatively modest. However, the immediate financial cost of exiting the euro would nevertheless be substantial if public authorities were to bail out systemic and highly exposed companies.
Vincent Bouvatier, Anne-Laure Delatte, 14 December 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.
Charles Wyplosz, 12 September 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.
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
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.
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.
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.
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.
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.
Agnès Bénassy-Quéré, Philippe Martin, 06 February 2014
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%.
Agnès Bénassy-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%.
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.
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.
Mai Dao, Davide Furceri, Prakash Loungani, 01 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.