The Monday morning Eurozone Cyprus bailout is now public, although details are scant. This column argues that this package cancels out some of the mistakes in last week’s package. Last week, the Troika should have vetoed the small-deposit tax and prepared a plan B for the Cypriot parliament’s rejection. Avoiding the risky scenario of a Cyprus exit will require further fiscal commitments from Eurozone partners. One possibility is a temporary, but EZ-wide, 'deposit reinsurance', or backing of national deposit-guarantee schemes by the ESM.
Nicolas Véron, 25 March 2013
Laurence Boone, Céline Renucci, Ruben Segura-Cayuela, 25 March 2013
What happens after the crisis ends? This column estimates the long-term effects of the current cyclical downturn on Eurozone economies. In the absence of any real impetus for bold reform, estimates show that the damage will indeed be long lasting, permanently impairing growth for an ageing population that requires higher growth capacity more than ever before.
Marco Annunziata, 20 March 2013
The Cyprus rescue package has elicited sharp reactions. This column argues that a tax on deposits is logical given the limited options, but guaranteed deposits should be spared on fairness and systematic grounds; a 15% tax on big deposits would be enough. Contagion is unlikely since Cyprus is different. Italian and Spanish savers are already alert to surprises such as the 1992 Italian bank deposit tax.
Mitu Gulati, Lee Buchheit, 20 March 2013
Eurozone leaders’ radical step of putting insured depositors in Cypriot banks in harm’s way was not their only option. This column argues that none of the alternatives were pleasant but some were less ominous.
Maurizio Bovi, 20 March 2013
How do everyday Italians feel about their economic prospects? How are political reactions related to economic events? This column presents evidence suggesting that Italians are becoming disillusioned. Comparing Berlusconi's and Monti’s resignation, sentiment was more positive after Belusconi's. Rather than a test on Italian citizens’ realism or on their views on austerity, recent political elections should instead be read as a test of voters’ utter disaffection with political institutions.
Paolo Manasse, Giulio Trigilia, Luca Zavalloni, 19 March 2013
Who saved Italy? This column argues that the crisis began with Silvio Berlusconi and ended with Mario Monti. Evidence suggests that restoring a sense of credibility to Italian policymaking was difficult to earn but may be very easy to lose (as the recent run on Italian debt suggests). New and old Italian politicians cannot afford to underestimate the formidable challenge ahead: getting Italy out of this depression without jeopardising its credibility.
Geoffrey Underhill, Jasper Blom, 19 March 2013
David Cameron’s promise of a referendum on British participation in the EU has re-ignited the debate about the EU’s democratic legitimacy, just as the struggle to overcome the crisis continues. This column argues that in order to both successfully resolve the crisis and maintain states’ ability to sustain liberal finance, a substantial shift in policy is required. Enhancing the democratic legitimacy of crisis resolution measures and wider financial reforms is essential. Without diffuse support for reforms, crisis resolution is likely to collapse under centrifugal populist pressures.
Charles Wyplosz, 18 March 2013
The Cyprus bailout package contains a tax on bank deposits. This column argues that the tax is a deeply dangerous policy that creates a new situation, more perilous than ever. It is a radical change that potentially undermines a perfectly reasonable deposit guarantee and the euro itself. Historians will one day explore the dark political motives behind this move. Meanwhile, we can only hope that the bad equilibrium that has just been created will not be chosen by anguished depositors in Spain and Italy.
Marco Buti, Nicolas Carnot, 14 March 2013
As the Eurozone growth continues to be negative, debates over the correct degree of austerity continue. This column presents the Commission’s view on how and why austerity continues to be necessary.
Peter Temin, David Vines, 13 March 2013
Although policymakers want to help foster a global recovery, they are not sure how. Presenting lessons from the last two centuries, this column argues that we need to reduce unemployment first and deal with debt second if we are to see the back of this recession. Ultimately, the problems we face necessitate international cooperation. History shows us that international leadership is possible, and our current circumstances also show us that it is urgently necessary.
Hans-Werner Sinn, Akos Valentinyi, 09 March 2013
Will addressing large internal imbalances lead us out of the Eurozone crisis? This column argues that it might. Periphery countries should devalue in order to regain competitiveness and reduce imbalances. As to whether they should pursue internal or external devaluation, the answer remains unclear. Overall, given that policymakers have excluded the option of exit, economic policymaking must focus on the possibilities for internal devaluations, despite some of the difficulties it may bring.
Richard Wood, 04 March 2013
Despite recent calm in the markets, the Eurozone crisis seems far from over. So far, responses have worked little magic. This column argues that at some point soon, Eurozone governments will be forced by voters to reverse austerity and stimulate growth. A number of policy options are available, but it is clear that pro-growth fiscal stimulus policies should take their place. Longer-term fiscal consolidation will nonetheless also be required to reduce excessive levels of public spending relative to GDP.
Ugo Panizza, 03 March 2013
Can we avoid delayed sovereign defaults? This column sketches out a flexible mechanism focused on the international lender, and competition between lenders, of last resort to ensure timeliness, transparency and larger sums than are currently available. The threat of competition should provide strong incentives for addressing imbalances in the governance of the main multilateral financial institutions
Alfonso Arpaia, Alessandro Turrini, 02 March 2013
Is policy-related uncertainty at the root of lacklustre Eurozone job creation? This column presents evidence that is consistent with this idea. The main implications for policy are straightforward: credible solutions to the Eurozone debt crisis will alleviate the critical unemployment situation of a number of Eurozone countries. How? Not only by helping to kick start investment and production, but also by an additional, direct boost to job creation that is linked to confidence.
Thomas Grennes, Andris Strazds, 28 February 2013
Can European countries share their debts? This column argues that higher government indebtedness means larger household net financial assets. Thus, any pooling of European legacy debt would be considered unacceptable by countries with less government debt unless it also involved the pooling of households’ financial assets. Yet, this would be legally and technically insurmountable. The EU must face forced Ricardian equivalence: the countries with the largest legacy-debt burdens must reduce them by increasing the tax burden or, alternatively, reduce their budget expenditure.
Dirk Schoenmaker, Arjen Siegmann, 27 February 2013
So far, discussions around Europe’s prospective banking union have focused only on the supervision of banks. This column argues that policymakers must also think about the resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority could incorporate domestic and cross-border effects. A cost-benefit analysis of a hypothetical resolution of the top 25 European banks shows that the UK, Spain, Sweden, and the Netherlands would be the main winners.
Willem Thorbecke, 26 February 2013
Policymakers everywhere are concerned about currency wars. Are quantitative easing and managed exchange rates bad for the global economy? This column looks at the hard empirical evidence, arguing that, in fact, Japan is behaving rather responsibly and that other strong economies have themselves benefited from undervalued currencies. That said, it is true that politicians’ short time horizons often lead to stealthy policy and large swings in exchange rates. Economists should therefore aim to promote longer-run cosmopolitan interests rather than shorter-run nationalistic agendas where possible.
Luca Papi, Andrea Presbitero , Alberto Zazzaro, 25 February 2013
The IMF’s role in past systemic banking crises has been hotly debated. Indeed, prominent intellectuals have criticised the Fund for creating or exacerbating crises. This column discusses new evidence showing that IMF lending programmes are in fact associated with a lower probability of banking crises occurring in future.
Harold James, Hans-Werner Sinn, 26 February 2013
Can the euro exist without fiscal or political union? This column draws on the history of the US – especially its assumption of states’ debt after the War of Independence – to investigate which path might best serve the Eurozone. History tells us that unions require a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states.
Mary Amiti, Oleg Itskhoki, Jozef Konings, 19 February 2013
Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.