Some economists are approaching a consensus that the Eurozone’s financial architecture is now resilient enough to withstand another shock similar to that of 2010-11. This column argues that such a view may be overly optimistic. Economic and financial instability persists in member states and the banking sector, and institutions to tackle a shock remain incomplete. While the Eurozone remains vulnerable to a bad shock, the blanket application of burden sharing without consideration of current economic and financial conditions is unwise.
Stefano Micossi, 20 August 2016
Pierre-Olivier Gourinchas, Thomas Philippon, Dimitri Vayanos, 05 August 2016
The Greek crisis is one of the worst in history, even in the context of recorded ‘trifecta’ crises – the combination of a sudden stop with output collapse, a sovereign debt crisis, and a lending boom/bust. This column quantifies the role of each of these factors to better understand the crisis and formulate appropriate policy responses. While fiscal consolidation was important in driving the drop in output, it accounted for only for half of that drop. Much of the remainder can be explained by the higher funding costs of the government and private sectors due to the sudden stop.
Lubos Pastor, 04 July 2016
Britain voted for Brexit, but many seek ways to avoid it. This draws comparison with the events of almost exactly a year ago when the Greek government ignored the outcome of the Greek bailout referendum. This column argues that the Greek government hoped the result would crash the EU’s stock markets and thus strengthen its bargaining power. When this failed to materialise, the government ignored the plebiscite and signed the bailout extension. In the Brexit case, the observed market drops do not qualify as a collapse and so the referendum’s outcome is likely to be implemented.
Paul De Grauwe, 13 May 2016
Greece may be about to get some debt relief, although there is still resistance to the idea. This column argues that the ECB has been providing other Eurozone countries with debt relief since early 2015 through its programme of quantitative easing. The reason given for excluding Greece from the QE programme – the ‘quality’ of its government bonds – can easily be overcome if the political will exists to do so. It is time to start treating a country struggling under the burden of immense debt in the same way as the other Eurozone countries are treated.
Matthias Morys, 10 May 2016
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.
Elias Papaioannou, 12 February 2016
Institutional redesign and reform are currently being debated and implemented at the EU and EZ levels. However, there is a growing institutional gap across member countries – especially between the core and periphery. This column illustrates the extent of this gap. Weak institutions have already stifled reform efforts, such as the Economic Adjustment Programs undertaken by Greece and Portugal. The success of pan-European reforms and the future of the Eurozone will require coordinated action to close this institutional gap.
Jacob Kirkegaard, 25 January 2016
The migrant crisis will continue to top headlines in 2016. This column takes a detailed look at the EU’s response to dealing with migration, concluding that everything points towards failure as the likely outcome. Unlike the most critical aspects of the Eurozone Crisis, the main drivers of the current migration emergency are external factors such as war. These circumstances are highly unlikely to change in the medium term. The hardball politics and threats that proved extraordinarily effective in coercing member states into accepting domestic political conditionality in return for financial aid during the Eurozone Crisis are doomed to fail when it comes to migration.
Costas Arkolakis, Manolis Galenianos, 22 November 2015
Greece’s trade deficit declined by 10% of GDP between 2007 and 2012, removing one of the great imbalances of the pre-Crisis years. Exports actually fell over the period, however, worsening the country’s economic crisis. This column compares Greece’s actual export performance with a benchmark for the expected trade response to the reduction in net capital. Greece’s exports should have increased by 25%, and export underperformance was responsible for a third of the country’s GDP decline. While labour markets have adjusted to the new economic environment, product markets seem to be hindering the recovery of competitiveness.
Martin Götz, Rainer Haselmann, Jan Pieter Krahnen, Sascha Steffen, 25 September 2015
Discussions continue in some circles as to whether the ECB’s emergency liquidity assistance for Greek banks is legitimate. This column assesses the underlying economics of the emergency liquidity assistance programme and the complex interrelationship between the EU, the ECB and the Greek banks. Economists must focus on the political economy of a monetary union with incomplete fiscal union if they are to understand what’s going on with emergency liquidity.
Paolo Mauro, Jan Zilinsky, 18 September 2015
The public narrative on austerity is shaped by simple scatter plots purporting to portray the large negative impact of fiscal ‘austerity’ on economic growth. This column argues that, while recognising concerns about causality, economists should systematically explore correlations and multiple regressions, and test their robustness. The results reveal a mixed picture, lending partial support to the notion that fiscal choices and output growth are empirically associated.
Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 07 September 2015
The Eurozone is weak. This column presents an analysis of its two prime weaknesses – the lack of economic and fiscal policy discipline leading to the build-up of huge public and private debt levels and a loss of competitiveness, and the lack of credible mechanisms for crisis response that would reign in moral hazard problems and establish market discipline. Completing the currency union’s architecture and achieving credibility for its rules are key, given the heterogeneity and rigidity of its member countries' economies.
Guido Tabellini, 07 September 2015
What are the main lessons to be drawn from the European financial crisis? This column argues that the Eurozone really is at a major cross-roads. Without a common fiscal policy, and without adequate institutions for aggregate demand management, European leaders have to constantly alter the rules. Currency risk will be the major concern of financial markets, much more than in the past, due to how Europe has dealt with the Greek crisis.
Jeffrey Frankel Frankel, 07 September 2015
No-one is optimistic about the Eurozone’s prospects. This column highlights the major causes of the Eurozone crisis, highlighting that many US economists thought the euro a bad idea from the outset. Previous emerging market crises have important lessons for Europe – if Alexis Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.
William Cline, 24 August 2015
Economists continue to debate whether – and to what extent – Greek debts should be relieved. This column takes through the details of Greek debt, what relief options are open to Greece, and what the likely consequences of relief might be for all parties. Yet again, there are no easy choices – but that doesn’t mean economists and policymakers shouldn’t try.
Jon Danielsson, 13 August 2015
The Greek and the Icelandic crisis have much in common, not the least the heavy pressure from foreign countries and the hectoring from their public officials. In Iceland and in Greece this was counterproductive, hardening the opposition to any settlement. The will to reform needs to come from within, and the sooner the Troika realizes this, the easier it will be to deal with the Greek situation.
Timothy Guinnane, 13 August 2015
Greece’s crisis has invited comparisons to the 1953 London Debt Agreement, which ended a long period of German default on external debt. This column suggests that looking back, the 1953 agreement was unnecessarily generous given that Germany’s rapid growth lightened the debt repayment burden. Unfortunately for Greece, the motivations driving the 1953 agreement are nearly entirely absent today.
Matthias Schlegl, Christoph Trebesch, Mark Wright, 11 August 2015
Greece is the first developed country to default on the IMF. But it continues to service its debt owed to private bondholders. How does this compare to historical experience? This column presents new evidence on seniority in sovereign debt markets. Despite the lack of a sovereign insolvency procedure, there is a clear-cut pecking order of sovereign debt repayments, which holds across countries and over time. Greece is an outlier case, and the Eurozone rescue loans face an elevated risk of arrears and haircuts in the future.
Anil Ari, Giancarlo Corsetti, Andria Lysiotou, 10 August 2015
Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.
Sebastian Edwards, 06 August 2015
Many commentators continue to think that Greece’s best bet is Grexit and the drachma, but few are talking about what will happen to contracts. This column uses Franklin D Roosevelt’s devaluation of the US dollar to give an historical perspective on currency devaluations and contract litigation. Roosevelt got away with it because the Supreme Court ruled that prices in old contracts were void and, importantly, because everyone trusted the Supreme Court’s rulings. Grexit would mean litigation in international courts – courts that are likely to side with the plaintiffs.
Christos Koulovatianos, John Tsoukalas, 20 July 2015
As numerous Greek MEPs opposed the Eurozone summit deal, implementation will require a broad coalition of political parties. This column argues that corruption in Greek politics will prevent the formation of such a coalition. The heavy debt service leads parties to invent extreme ways of responding to super-austerity and to strongly oppose direct reforms that challenge existing clientelism. The way out is to sign a new agreement that combines debt restructuring and radical transparency reforms, including naming-and-shaming practices, to block clientelism in the medium and long run.