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.
Barry Eichengreen, Charles Wyplosz, 14 March 2016
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.
Daiji Kawaguchi, Ayako Kondo, 13 January 2016
Economists frequently discuss the ‘scarring effects’ the Great Recession has had on young people in Europe. This column tentatively challenges the received wisdom of permanent scarring. Young graduates mitigate some of the negative welfare effects of graduating during bad times by living with their parents for longer.
Ángel Ubide, 09 December 2015
The diversity of European economic cycles, economic structures, and political dynamics is a strength of the Eurozone. However, sustainable arrangements are required to distribute risks and ensure that all countries can use fiscal policy to cushion economic downturns. This column proposes the creation of a system of stability bonds for the Eurozone. These could be structured to minimise moral hazard, improve governance, and ensure that fiscal policy can support growth during the next recession.
Alessandro Cugnasca, Philipp Rother, 05 December 2015
The size of fiscal multipliers has been the subject of major public policy debates in the past few years. This column provides evidence that, on average, the size of the fiscal multiplier is in line with assumptions made by policymakers at the start of the crisis. The effects of fiscal consolidation, however, vary significantly depending on the state of the economy and the composition of the fiscal adjustment.
Jörg Decressin, Prakash Loungani, 02 December 2015
Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.
Jan Mohlmann, Wim Suyker, 01 December 2015
Olivier Blanchard and Daniel Leigh’s work on growth forecast errors and fiscal multipliers in 2009-2011 has been highly influential. This column extends their approach to recent years. The authors do not find convincing evidence for stronger-than-expected fiscal multipliers for EU countries during the sovereign debt crisis (2012-2013) or during the tepid recovery thereafter.
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.
Daniel Dias, Mark Wright, 13 November 2015
Measured as a percentage of its GDP, Greece’s debt is higher than that of Portugal and Ireland. This column discusses a range of new techniques for measuring the debts of Greece, Ireland, and Portugal. It argues that plausible alternative measures of indebtedness suggest that Greece is anywhere from as much as 50% more indebted than Portugal and Ireland to as little as half as indebted. The most reasonable measures imply that Greece is far less indebted than is commonly reported.
Dirk Schoenmaker, Guntram Wolff, 30 October 2015
The European Banking Union – in all likelihood – is going to involve a European deposit insurance scheme. This column clarifies the different options for organising European deposit insurance and explains what the different options can achieve.
Richard Baldwin, Francesco Giavazzi, 07 September 2015
This chapter introduces the eBook "The Eurozone Crisis: A Consensus View of the Causes" and extracts a consensus narrative of the EZ Crisis.
Paolo Pesenti, 07 September 2015
Proposed remedies for the Eurozone crisis abound. But proven, working solutions are hard to come by, especially when traditional solutions – structural adjustment and monetary policy – are seen as causing problems. This column concentrates on the policy recipes prescribed on both supply-side and demand-side to jump-start economic recovery and reduce the extent and spillovers of the crisis itself. It finds that there is no easy and straightforward strategy and that there are no obvious answers. That doesn’t mean, however, that there are absolutely no answers. The alternative option to finding a way out – that is, continuing reliance on deflationary adjustment in a currency union stuck at the zero lower bound – is probably unlikely to convince anyone that structural reforms and monetary policy are back to being part of the solution.
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.
Stefano Micossi, 07 September 2015
The sovereign debt and banking crises of 2010-12 have led to significant changes in the institutions of the Eurozone. The credibility of common policies regarding budgetary discipline and economic convergence remains weak. This chapter proposes that the way forward is to gradually bring common economic policies under the oversight of the European Parliament and to strengthen the role of the Commission. The picture must be completed with getting national parliaments more involved in the European policy process. The present state of the Eurozone could be seen as a sort of political equilibrium, likely to be economically unstable.
Daniel Gros, 07 September 2015
The Eurozone crisis started as a sudden stop to cross-border capital inflows. This chapter suggests that countries with current-account surpluses did not endure lasting financial stress. The balance of payments crisis then became a public debt crisis, where the public debt which mattered was that owed to foreigners. Overall, the crisis proved much more difficult to deal with given the predominance of bank financing, thinly capitalised banks, the absence of a common mechanism to deal with failing banks, and the absence of a common lender of last resort.
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.
Agnès Bénassy-Quéré, 07 September 2015
The problems in the Eurozone are not a side effect of the Global Crisis but rather date back to the Maastricht treaty. This chapter proposes a few possible remedies. First, it is necessary to make debt restructuring possible within the Eurozone. In particular, the risk loop between sovereigns and banks needs to be stopped through more diversified balance sheets. The second suggestion involves more shared sovereignty, not only for debtor countries, but also for creditors. At a minimum, the Eurozone needs a fiscal backstop for its banking union.
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.
Fabio Ghironi, 18 July 2015
Success of the German-inspired solution for the latest Greek crisis is far from assured. If it fails, the Eurozone may be changed forever. This column argues that the failure would lead to an outcome that has been favoured for decades by Germany’s Finance Minister, Wolfgang Schäuble. Perhaps the package the Eurozone agreed is just a backdoor way of getting to the ‘variable geometry’ and monetary unification for the core that the Maastricht criteria had failed to achieve.