On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.
Ashoka Mody, 07 January 2014
Kaushik Basu, Joseph Stiglitz, 02 January 2014
The Eurozone crisis exposed weaknesses in the Eurozone’s design. This column – by Nobelist Joe Stiglitz and World Bank Chief Economist Kaushik Basu – argues that the Eurozone’s financial architecture can be improved by amending the Treaty of Lisbon to permit appropriately structured cross-country liability for sovereign debt incurred by EZ members.
Kyle Handley, Nuno Limão, 23 November 2013
The impact of policy uncertainty on economic activity is potentially important, but controversial because it is hard to identify and quantify. Recent research provides a framework to identify the impacts of policy uncertainty on firm decisions, and finds it has strong effects in the context of international trade. China’s WTO accession secured its most-favoured nation status in the US, and the evidence shows this reduction in uncertainty can explain a significant fraction of its export boom to the US.
Isabella Baldini, Paolo Manasse, 04 November 2013
Unlike the US, Europe is struggling to recover from the crisis. This is especially the case in certain European countries. This column discusses why the process of convergence in the Eurozone has slowed down. It proposes a way for European institutions to cope with the structural problems-- by individual country-level reforms and a federal budget. Otherwise, the alternative could be a disintegration of the Eurozone.
Isabella Baldini, Paolo Manasse, 04 November 2013
Unlike the US, Europe is struggling to recover from the crisis. This is especially the case in certain European countries. This column discusses why the process of convergence in the Eurozone has slowed down. It proposes a way for European institutions to cope with the structural problems – with individual country-level reforms and a federal budget. Otherwise, the alternative could be a disintegration of the Eurozone.
Mike Wickens, Vito Polito, 30 October 2013
A good credit rating has become a key fiscal objective, even if it requires austerity when unemployment is high. Recent experience has raised doubts about the sovereign ratings provided by the credit-rating agencies. This column suggests a new way to measure credit ratings based on a country’s ability to meet its liabilities using fiscal policy. This measure would have identified and signalled to market participants signs of the impending European sovereign-debt crisis well before 2010, when the rating agencies first reacted to the crisis.
Harold James, 08 October 2013
The global nature of the recent financial crisis required a coordinated response from central banks. After the fall of Lehman Brothers, several of them simultaneously reduced their policy rates, and the Fed extended dollar swap lines to its overseas counterparts. However, the second phase of the crisis has put increasing strain on international cooperation. This column presents two explanations. First, the Eurozone crisis threatens the solvency of governments, thus creating conflict over who will pay the costs of maintaining financial stability. Second, unconventional monetary policy has had spillover effects in developing countries.
Norbert Gaillard, 09 September 2013
Credit rating agencies didn’t anticipate the Eurozone Crisis and their ratings have been procyclical ever since. This column discusses research on the agencies' recent performance. Since 2009, credit ratings have persistently lagged behind market spreads, suggesting that ratings have been more lenient with respect to Eurozone countries than generally believed. Bond spreads may be too volatile for regulatory purposes.
Christiane Nickel, Andreas Tudyka, 07 September 2013
Fiscal stimulus can either be a boon for an economy or its bane. This column discusses new empirical research on how the effects of fiscal stimuli interact with public debt-to-GDP ratios. Using data on real GDP, private investment and the trade balance, evidence suggests that the cumulative effect on real GDP is positive at moderate debt-to-GDP ratios but turns negative as the ratio increases. The evidence also suggests that the cumulative trade-balance effect is negative at first but switches sign at higher degrees of indebtedness.
Harald Uhlig, 05 September 2013
EZ banks are more exposed to their own nation’s government bonds than ever. This column argues that Eurozone members can now afford to tell their banks to diversify, but pressure from Germany, Austria, France and the ECB might be necessary. Defusing the pernicious entanglement between the Eurozone’s weak banks and weak sovereigns would reduce the cost of any new crisis and reduce the likelihood of such a crisis occurring.
Luis Catão, Gian Maria Milesi-Ferretti, 04 September 2013
Debt seems to be a lightning rod for crises. This column presents new research showing that the ratio of net foreign liabilities to GDP, and in particular its net external debt component, is indeed a significant crisis predictor for both advanced economies and emerging markets. Large current-account deficits and real exchange rate appreciation – the standard predictors – still matter, but we should be thinking more about net external debt.
Hendrik van Dalen, Kène Henkens, 28 August 2013
In times of economic crisis, managers often take drastic measures to survive. This column presents new research on the preferences of managers from across Europe when faced with ‘downsizing’. It seems that, when recession bites, the instincts or ‘animal spirits’ of employers that were previously suppressed by prosperity or considered to be outdated resurface. European employers predominantly resort to offering early retirement packages (and to a lesser extent buy-outs) in response to the threat of downsizing, exacerbating, in the long run, the problems associated with Europe’s ageing population. The only notable exception to this rule is the response of Danish employers, who prefer to tackle this problem by reducing the working hours of their employees.
Dirk Schoenmaker, 25 August 2013
After the financial crisis, there was a shift from international to multinational banks due to supervisors’ increasingly national approach. This column provides an alternative solution that aims to keep international banking alive. What is key is that, first, national supervisors are internationally coordinated and, second, that the whole system is supported up by an appropriate fiscal backstop.
Pierre Pâris, Charles Wyplosz, 06 August 2013
The Eurozone’s debt crisis is getting worse despite appearances to the contrary. How can we end it? This column presents five major options for reducing crisis countries’ debt. Looking into the details, it seems the only option that is both realistic and effective is for countries to default by selling monetised debt to the ECB. Moral hazard aside, burying the debt seems to be the only way we can end the crisis.
Alexander Schäfer, Isabel Schnabel, Beatrice Weder di Mauro, 02 August 2013
Lax financial-sector regulation was the fulcrum of the Global Crisis and policymakers reacted by introducing sweeping reforms. But has it had any impact? This column reviews evidence from bank stock returns showing that four major reforms in the US and Europe have reduced bailout expectations – especially for systemic banks. The strongest effects were found for the Dodd-Frank Act (especially the Volcker rule); the German restructuring law had little effect.
Aerdt Houben, Jan Kakes, 30 July 2013
Financial cycles have increasingly diverged across members of the Eurozone. National macroprudential tools are thus key to managing financial imbalances and protecting Europe’s economic integration. This column discusses research suggesting that reasonable macroprudential policies by the GIIPS countries in the euro’s first decade would have helped avoid much pain in Italy, Portugal and Spain. Greece’s public debt problems were far too large and its banks could not have been shielded with macroprudential policies.
Kevin O'Rourke, 24 July 2013
The current economic and financial crisis has given rise to a vigorous debate about what training graduate and undergraduate economics students are receiving. This column argues that we don't teach enough economic and financial history, even though it is crucial in thinking about the economy. It also offers a wealth of opportunities for teachers who wish to motivate their students.
Harald Benink, Harry Huizinga, 12 July 2013
How well has OMT done? This column attempts to temper Mario Draghi’s recent plaudits that “it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times”. Yes, OMT should provide unlimited liquidity to troubled countries, but not at the expense of necessary structural reforms. The ECB should cover Eurozone countries’ current expenditures, but should not pay off all long-term debt holders. That way, capital markets will be disciplined and incentives for implementing economic reforms will be maintained.
Almut Balleer, Britta Gehrke, Wolfgang Lechthaler, Christian Merkl, 12 July 2013
During the Great Recession, 25 of 33 OECD countries have used some version of short-time work, a form of publicly subsidised working-time reductions. This column argues that despite its popularity, knowledge of the macroeconomic effects of this measure is limited. Using Germany as a case study, it’s clear that the existence of a short-time work system stabilises the economy and reduces job losses by roughly 20% during a recession. However, short-time work is a lot less effective for Anglo-Saxon labour markets.
Viral Acharya, Richard Portes, Richard Reid, 03 July 2013
Many central banks have recently employed unprecedented expansionary monetary policy, keeping interest rates at near-zero levels for an extended period of time. Quantitative easing interventions have been employed to affect asset prices directly, most notably in government-bond and mortgage markets, in order to keep sovereign and mortgage borrowing costs low. CEPR recently organised a conference to discuss existing theory and empirical evidence on the implications of an extended phase of unconventional monetary policy. This short column outlines the key issues and also includes a Vox Views video summary of the event.