To make the no-bailout clause credible and to enhance the effectiveness of crisis assistance, private creditors should contribute to crisis resolution in the Eurozone. This column proposes a mechanism to allow for orderly restructuring of sovereign debt as part of ESM programmes. If debt exceeds certain thresholds, the mechanism triggers an immediate maturity extension. In a second stage, a deeper debt restructuring could follow, depending on the solvency of a country. The mechanism could be easily implemented by amending ESM guidelines.
Jochen Andritzky, Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 21 July 2016
Mike Wickens, 08 June 2016
This second column in a two-part series takes a closer look at the proposals in the Five Presidents’ Report for Fiscal, Banking, and Capital Markets Unions and much closer political integration among Eurozone countries. It goes on to give evidence of the failure of financial markets to price risk correctly prior to the Eurozone Crisis. By pricing risks better, financial markets may be able to provide the discipline required to avoid future crises in the Eurozone without the need for greater political interference in national fiscal policy-making as proposed in the Report.
Mike Wickens, 07 June 2016
European Monetary Union was designed to promote economic growth, price stability, full employment, and political integration. It can be argued that so far, it has achieved none of these and has in fact made things worse. The Five Presidents' Report contained a set of proposals for making the single currency sustainable, based on giving up more national independence. This column – the first in a two-part series asking whether future crises might be avoided through market forces without the need for the sort of procrustean proposals offered in the Report – examines the causes of the Eurozone Crisis.
Denis Fougère, Erwan Gautier, Sébastien Roux, 28 May 2016
In light of the Eurozone Crisis, some countries have implemented reforms to collective wage bargaining institutions, which can be responsible for wage rigidities that are problematic in the face of rising unemployment. This column describes collective wage bargaining in France and how national minimum wage increases are transmitted to wage floors set by industry-level agreements. An increase in the national minimum wage leads to an increase in negotiated industry-level wage floors, which firms then use as references for their wage policy. This might partly explain why French base wages have continued to increase despite recent rising unemployment.
Danthine Jean-Pierre, 04 May 2016
Since the Eurozone Crisis a host of monetary and fiscal instruments have been used to try to reinvigorate growth and achieve financial stability, with mixed results. Basel III’s counter-cyclical capital buffer (CCB) is one such instrument which was met with scepticism. This column uses evidence from the Swiss economy to show that given the right circumstances and political will, the CCB can achieve financial stability.
Céline Allard, John Bluedorn, 22 April 2016
The turbulence experienced by the Eurozone in 2010-12 highlighted the shortcomings of the currency union. This column suggests that the crisis was exacerbated by a combination of a lack of market adjustment mechanisms, rapid financial integration, and underlying design issues. While substantial progress has been made to address some architectural issues, minimal elements of a fiscal union are still needed in our view to increase the union’s resilience to shocks and to prevent the re-emergence of broader economic and financial stress.
Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 23 March 2016
Economists continue to debate how to safeguard the Eurozone, with some countries exiting the Crisis and some still reeling from it. This column, by members of the German Council of Economic Experts, concludes that reforms have mostly moved the Eurozone in the direction of ‘Maastricht 2.0’, stabilising the Eurozone. But it’s clear that more needs to be done.
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 Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 22 March 2016
Hindsight is a wonderful thing. In the midst of a crisis, it is of course very hard to understand causality. This column uses the benefit of hindsight to present a nuanced view of the causes of the Eurozone Crisis as seen by members of the German Council of Economic Experts. To prevent the same crisis happening again, the Maastricht Treaty needs to be revitalised to enhance the future stability of the Eurozone and relieve the ECB of its role as crisis manager.
Steven Ongena, Alexander Popov, Neeltje van Horen, 17 March 2016
The European sovereign debt crisis has triggered speculation that part of the increase in banks’ holdings of domestic sovereign debt was driven by ‘moral suasion’ by governments. This column shows that domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of sovereign bonds in those months when the government had to issue a large amount of new debt. This suggests that governments indeed ‘morally sway’ their banks to purchase domestically issued sovereign bonds when sovereign bond markets are stressed.
Nauro Campos, Corrado Macchiarelli, 03 March 2016
There seems to be a robust consensus that the relationship between the countries in the EU that use the euro as their currency (‘euro-ins’) and those that do not (‘euro-outs’) is the most important of the four areas in the ‘new settlement’ between the UK and the EU. This column presents new econometric estimates showing that, after the introduction of the euro, the UK and Eurozone business cycles became significantly more synchronised. It is likely this upsurge in synchronisation increased the costs of a potential UK exit from the EU.
Damiano Sandri, 17 February 2016
How should the international community deal with the solvency crisis of a systemic country? This column argues that the presence of spillovers calls for reducing bail-ins, while requiring somewhat greater fiscal adjustment by the crisis country. To avoid excessive fiscal consolidation, the international community should also provide highly systemic countries with official transfers. To contain moral hazard, it is important to use transfers only when spillovers are particularly severe.
Paul De Grauwe, Yuemei Ji, 12 February 2016
The Eurozone Crisis has abated but the question about the future of the euro remains on the agenda. This column discusses some of the design failure of the Eurozone and their possible solutions. The Eurozone in its current state is not an optimal currency area and is fragile. Ideally, a stabilisation fund and a budgetary union should be set up. Since this is politically unobtainable right now, small steps should be implemented to create some fiscal space at the level of the Eurozone, and to start with a limited programme of debt consolidation.
Refet Gürkaynak, 12 February 2016
Since the beginning of the Global Crisis, the ECB has faced a sequence of problems. This column discusses some of these problems. It also highlights the successful first reaction of the ECB to the crisis and its adequate monetary policies. There are still unresolved structural problems in the Eurozone, however. Among them are the lack of a proper banking union and the need for a better fiscal policy coordination. And the job for such a change within the Eurozone cannot be delegated to the ECB.
Christopher Pissarides, 12 February 2016
There are certain conditions needed to make a common currency across diverse economies a success and the Eurozone is clearly not satisfying them. This column argues that institutions and policies in place six years after the debt crisis have mitigated the risks of another Great Recession. But they have not done enough to alleviate the need for fiscal transfers in the future. We need ever-closer fiscal cooperation, with some caveats.
Thorsten Beck, 25 April 2016
A lot has been achieved in terms of institution building to turn the Eurozone into a sustainable currency union. The Eurozone Crisis, however, has shown that the Eurozone is still not a properly functioning currency union. This column, first posted 12 February 2016, points to three areas of further reform to achieve such a goal. These include the disentanglement of sovereigns and banks, completion of a banking union, and an institutional convergence for a fully integrated financial system.
Lars Feld, Christoph 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.
Dae Woong Kang, Nick Ligthart, Ashoka Mody, 19 January 2016
Although the Great Recession was viewed as a US problem, the Eurozone was affected by it from the start. This column compares the monetary policy responses to the Crisis by the Fed and the ECB. It argues that the US approach has been much more aggressive and proactive. The ECB failed to provide stimulus when needed, and as a result the Eurozone might slip into a low-inflation trap.
Philippe Bacchetta, Ouarda Merrouche, 16 January 2016
Economists now tend to stress the role of global banks in the transmission of the Global Crisis. This column argues that the retrenchment of Eurozone banks opened regulatory arbitrage opportunities for US banks. The fact that US banks, and in particular the most risky US banks, fully exploited these opportunities had a salubrious effect on credit-constrained corporates and employment. It seems the move from Basel I to Basel II with risk-sensitive capital requirements amplifies the credit cycle.