The Global Crisis led to a sharp contraction and long-lasting slump in both Eurozone and US real activity, but the post-crisis adjustment in the Eurozone and the US shows striking differences. This column argues that financial shocks were key determinants of the 2008-09 Great Recession, for both the Eurozone and the US. The post-2009 slump in the Eurozone mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment linked to the poor health of the Eurozone financial system. Mono-causal explanations of the persistent slump are thus insufficient. Adverse financial shocks were less persistent for the US.
Robert Kollmann, Beatrice Pataracchia, Rafal Raciborski, Marco Ratto, Werner Roeger, Lukas Vogel, 27 April 2017
Thorsten Beck, 24 April 2017
Nine years after the onset of the Global Crisis, the problem of non-performing assets is still acute in the Eurozone. This column takes stock of the different proposals to deal with the issue. It argues that a Eurozone-level asset management company can resolve bank fragility and spur economic recovery, but warns that lack of political will and legal barriers can impede the creation of such an agency.
Jean-Pierre Danthine, 12 April 2017
In this column, Jean-Pierre Danthine, a co-author of "Making Sense of Subsidiarity: How Much Centralization for Europe?", revisits the report nearly 25 years on from its publication. He examines the main themes of the report and shows how such areas as centralisation/decentralisation, subsidiarity, and macroeconomic stabilisation have played out over the years since the report was published. He concludes that the report was both prescient and, at the same time, represents a view from the past of the 'road not taken'.
Enrico Perotti, 04 April 2017
The members of the Eurozone are diverse in terms of their institutional quality. This column outlines the redistributive effects created by the rigid structure of a monetary union next to its direct effects on monetary credibility, and highlights the general equilibrium benefits that core countries draw from it and the cost paid by the productive sector in ‘weaker’ countries. Europe faces a clear challenge, but the success of the transition to the banking union suggests that collective efforts towards institutional evolution can succeed.
Tamim Bayoumi, Barry Eichengreen, 27 March 2017
Asymmetric aggregate supply and demand disturbances across its regions prevent the smooth functioning of a currency union. This column argues that the disturbances in peripheral regions of the US show more symmetry with those in the anchor region than is the case for the Eurozone. Moreover, disturbances to the GIPPS, which previously were in Europe’s periphery, have become more correlated with disturbances to the anchor (Germany) compared to other Eurozone countries. Hysteresis operating via the financial sector may provide an explanation for this development.
Roberto De Santis, 16 March 2017
French sovereign spreads have risen in recent months, coinciding with debate over the euro ahead of the country’s presidential elections in May. Italian sovereign spreads have been rising since the beginning of 2016. This column argues that investors are not pricing a break-up of France from the Eurozone. Most likely, they are pricing the possibility that the newly elected French government will not have enough supremacy to undertake important economic reforms. Market perception of redenomination risk in Italy, on the other hand, is rising slowly.
Benoit Mojon, 04 March 2017
In the last two decades, there has been substantial co-movement of US and Eurozone interest rates. This column shows that the ECB’s unconventional monetary policy has largely succeeded in decoupling nominal interest rates in the Eurozone from those in the US since 2014. This has been especially true for rates of up to five years’ maturity since the rise in US interest rates following the election of Donald Trump.
Marco Onado, 21 February 2017
European banks have not recovered from the Global Crisis, in part due to heavy provisions for non-performing loans. This column argues that a comprehensive approach to the issue in Europe could address market inefficiencies and reduce bad loans to bearable levels. The establishment of a European scheme to securitise non-performing loans should form one of the next steps towards recovery.
Charles Wyplosz, 17 February 2017
The IMF has just released its self-evaluation of its Greek lending, in which it admits to many mistakes. This column argues that the report misses one important error – reliance on the Debt Sustainability Analysis – but notes that the IMF’s candour should be a model for the other participants in the lending, namely, the European Commission and the ECB.
Felix Hufeld, Ralph Koijen, Christian Thimann, 30 January 2017
Despite the importance of insurance, discussions about the macroeconomic role and the risks of insurance markets have been surprisingly limited. This column explores some of the key theoretical and conceptual questions still unanswered in this field, and suggests that a two-fold approach combining a focus on individual firms and an activity-based approach across the sector is needed to tackle systemic risk within the insurance industry.
Ansgar Belke, Clemens Domnick, Daniel Gros, 19 January 2017
A high correlation of business cycles is usually seen as a key criterion for an optimum currency area. This column argues that the elasticity with which countries react to the common cycle is equally important. A country with a non-unitary growth elasticity relative to the common area will experience cyclical divergences at the peak and trough of the common cycle. Despite being characterised by highly-correlated business cycles, the Eurozone suffers from widely differing amplitudes.
Ian Bright, Senne Janssen, 13 January 2017
With growth and inflation in Europe remaining low, the idea of helicopter money is slowly gaining traction with politicians and economists alike. This column presents the results of a survey that asked people how, if they were to receive an extra €200 per month to do with as they chose, they would use the money. There was broad support for the policy among respondents, but only about one in four said they would spend most of the money. The findings suggest that a larger impact might be achieved if instead the money were given to the government to finance projects.
László Andor, Paolo Pasimeni, 13 December 2016
Since its inception, the Eurozone has had lower growth and higher unemployment rates than other regions, which suggests the need for new fiscal instruments. This column argues for a stabilisation instrument based on unemployment as the driving indicator. This unemployment benefit scheme coud take the form of a basic common European scheme, or a reinsurance fund supporting national systems. In either case, the instrument wouldn’t be a panacea, and the key obstacle to implementation would be political.
Elisa Gamberoni, Claire Giordano, Paloma Lopez-Garcia, 13 December 2016
An efficient allocation of inputs across firms is a necessary condition to boost TFP growth. This column presents evidence that in large Eurozone economies, capital misallocation trended upwards in the period 2002-2012 while labour misallocation dynamics were flatter. Uncertainty and credit market frictions were strongly associated with the observed developments in capital misallocation, whereas the overall deregulation in the product and labour markets contributed to dampening input misallocation dynamics.
Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo, 12 December 2016
In the years since the Global Crisis, there has been substantial public opposition to taxpayer-funded bailouts of financial institutions. Reflecting this sentiment, a cornerstone of the EU’s post-crisis resolution framework is that losses be borne by private investors and creditors. This column surveys some of the details that need to be worked out before such bail-in measures can work. Effective implementation requires clear identification of the limits to bail-in. In particular, for such measures to be successful, bailout cannot be ruled out by assumption.
Matthieu Chavaz, Marc Flandreau, 01 December 2016
Between 1870 and 1914, 68 countries – both sovereign and British colonies – used the London Stock Exchange to issue bonds. This column argues that bond prices and spreads in this period show that the colonies’ semi-sovereignty lowered credit risk at the price of higher illiquidity risk, and further worsened liquidity by attracting investors that rarely traded. Parallels between Eurozone and colonial bonds suggest that the pricing of liquidity and credit in government bond markets is an institutional phenomenon.
Marco Buti, Lucía Rodríguez Muñoz, 28 November 2016
With growth still weaker than is desirable and challenges originating from geopolitical developments further complicating the economic outlook, responsible growth-friendly fiscal policy needs to play a bigger role in supporting demand in the Eurozone today. This column presents a new European Commission Communication on Eurozone fiscal policy, which outlines what a “positive fiscal stance" for the Eurozone would look like.
Marco Buti, Nicolas Carnot, 28 November 2016
The European Commission has just called for a fiscal stance that is more supportive of the recovery and of monetary policy in the Eurozone. This column argues that the case is strong for spending now on investment and other targeted programmes supporting growth and employment. However, fiscal space is heterogeneously distributed across the Eurozone, with some countries able to exploit a clear margin, and others needing to pursue a more prudent approach of gradual debt unwinding. A common stabilisation capacity would help for managing shocks that cannot be absorbed by national stabilisers alone.
Luca Dedola, Luc Laeven, 15 November 2016
In September 2016, the ECB held its first Annual Research Conference. This column surveys the contributions to the conference, which brought together policymakers and academics from around the world to promote discussion of topics at the forefront of monetary and financial economic research. Nobel laureate Eric Maskin gave the keynote lecture, addressing whether fiscal policy should be set by politicians, and the conference included eight further presentations and a panel discussion on monetary policy and financial stability.
Felix Roth, Lars Jonung, Felicitas Nowak-Lehmann, 11 November 2016
The euro as a common currency has recently been the subject of harsh criticism by economists from both sides of the Atlantic, including claims that citizens in some Eurozone countries are turning against it. This column argues that, in fact, the euro currently enjoys comfortable popular support in each of the 12 original member states of the Eurozone and that potential upcoming referenda in any of these countries do not appear to pose a threat to the currency. In contrast, popular support for the euro has declined sharply in non-Eurozone EU member states since the recent crisis, with the UK standing out as the country with the most negative view.