Since 2007, there has been a buildup of TARGET imbalances within the Eurosystem – growing liabilities of national central banks in the periphery matched by growing claims of central banks in the core. This column argues that, rather than signalling the collapse of the monetary system – as was the case for Bretton Woods between 1968 and 1971 – these TARGET imbalances represent a successful institutional innovation that prevented a repeat of the US payments crisis of 1933.
Michael Bordo, 21 March 2014
Daniel Gros, 19 March 2014
Since the onset of the sovereign debt crisis, the argument for a system of fiscal transfers to offset idiosyncratic shocks in the Eurozone has gained adherents. This column argues that what the Eurozone really needs is not a system which offsets all shocks by some small fraction, but a system which protects against shocks which are rare, but potentially catastrophic. A system of fiscal insurance with a fixed deductible would therefore be preferable to a fiscal shock absorber that offsets a certain percentage of all fiscal shocks.
Thomas Huertas, María Nieto, 18 March 2014
The European Resolution Fund is intended to reach €55 billion – much less than the amount of public assistance required by individual institutions during the recent financial crisis. This column argues that the Resolution Fund can nevertheless be large enough if it forms part of a broader architecture resting on four pillars: prudential regulation and supervision, ‘no forbearance’, adequate ‘reserve capital’, and provision of liquidity to the bank-in-resolution. By capping the Resolution Fund, policymakers have reinforced the need to ensure that investors, not taxpayers, bear the cost of bank failures.
Mickey Levy, 21 February 2014
A popular view among economic commentators is that rich countries face a serious risk of deflation, and should adopt aggressive macroeconomic stimulus policies to ward it off. This column argues that despite similar headline inflation rates, the US, Europe, and Japan in fact face very different macroeconomic conditions. In the US, much of the recent disinflation is attributable to positive supply-side developments. In Europe, an aggressive round of quantitative easing might encourage policymakers to delay the reforms that are necessary to avoid a prolonged Japanese-style malaise.
Jose Luis Dias Sanchez, Aristomene Varoudakis, 06 February 2014
External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.
Ayako Saiki, Sunghyun Kim, 02 February 2014
Before the introduction of the euro, it was hoped that by promoting increased intra-regional trade it would increase business-cycle synchronisation within the Eurozone, and thus help it to fulfil the criteria for an optimum currency area. This column presents recent research that compares the evolution of business-cycle synchronisation in the Eurozone and east Asia. While the euro has had some impact on business-cycle synchronisation in the Eurozone, it has done so not through increased intra-regional trade intensity, but rather through some other channel – most likely financial integration.
Nicholas Crafts, 21 January 2014
Nicholas Crafts talks to Viv Davies about his recent work on the threatening issue of public debt in the Eurozone. Crafts maintains that the implicit fault line in the EZ is evident; several EZ economies face a long period of fiscal consolidation and low growth and that a different sort of central bank might be preferable. They also discuss the challenges and constraints of banking, fiscal and federal union. The interview was recorded in London on 17 January 2014.
Willem Buiter, 10 January 2014
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
Marco Buti, 08 January 2014
Though in the past two years substantial progress has been made in completing the structure of Europe’s Economic and Monetary Union, not all economic inconsistencies have been solved. This column discusses three main challenges that still need to be addressed. First, sound fiscal policies need to be conducted while keeping sustainable welfare systems. Second is the conflict between policy objectives and economic realities – vulnerable economies cannot reduce their debts and simultaneously gain competitiveness. Third, financial stability and integrated financial markets cannot be established unless the relationship between banks and their sovereigns is reformed. Addressing each of these challenges is important, and it could benefit all Eurozone members.
Ashoka Mody, 07 January 2014
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.
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.
Nicholas Crafts, 13 December 2013
This column argues that the legacy of public debt resulting from the crisis in the Eurozone is a serious threat. Both the size of the problem and the options to address it make life much more difficult for policymakers than was the case in the late 1930s after the collapse of the gold standard. For some countries, a ‘subservient’ central bank might be preferable to the ECB.
Mai Dao, Davide Furceri, Prakash Loungani, 01 December 2013
Labour mobility is one of the keys to a successful currency union – be it within or across nations. This column discusses new evidence showing that the shock-absorbing role of migration has increased in Europe and declined in the US. During the Great Recession, European migration remained high – although not high enough given the vast differences across the Eurozone. Overall, Europe has strengthened this essential adjustment mechanism.
Alberto Cavallo, Brent Neiman, Roberto Rigobon, 29 November 2013
During the recent turmoil in the Eurozone, little attention has been paid to one of the euro’s founding objectives – price convergence. This column argues that the euro has in fact been very successful in this regard. In a study of the pricing behaviour of Apple, IKEA, H&M, and Zara, the authors find that price dispersion is 30–50% lower for countries in a currency union than for those with a fixed exchange rate.
Casper van Ewijk, Jasper Lukkezen, Hugo Rojas-Romagosa, 28 November 2013
The sustainability of government debt cannot be determined with certainty. This column presents an early warning indicator to predict sovereign debt crises using a stochastic simulation framework. What counts is the risk of a significant rise in public debt, more so than the expected evolution of the debt level. A key determinant of the indicator is the quality of budgetary policies in controlling the government budget in the event of adverse shocks.
Jens Nordvig, 25 November 2013
Having promised to do ‘whatever it takes’ to ensure the survival of the euro, the ECB now faces the problem of record high unemployment combined with a strong currency. There is accumulating evidence that the ECB is more willing to fight currency appreciation than the Bundesbank would have been. Capital inflows have been a key source of recent upward pressure on the euro. Should this continue, the ECB may need to intervene more aggressively in order to promote economic recovery in the Eurozone.
Sascha Bützer, Christina Jordan, Livio Stracca, 23 November 2013
Since the advent of the Eurozone sovereign-debt crisis, economic commentators have drawn attention to macroeconomic imbalances within the Eurozone. This column presents evidence on the link between macroeconomic imbalances and differences in culture – or more specifically, interpersonal trust. A conservative estimatation suggests that a one standard-deviation increase in trust reduces macroeconomic imbalances by about a quarter of a standard deviation. Moreover, differences in interpersonal trust can explain a fifth of the variation in intra-Eurozone imbalances.
Thorsten Beck, Christoph Trebesch, 18 November 2013
Many Eurozone banks are still in a fragile state following the Global Crisis. This vulnerability will be highlighted as the ECB takes charge of bank supervision, and the EZ moves towards a banking union. This column proposes a Eurozone bank restructuring agency as a way to speed up the crisis resolution. This temporary, centralised agency would be in charge of restructuring viable and non-viable banks throughout the Eurozone. Solving the problem of legacy assets is a necessary step towards a banking union.
Lee Buchheit , Beatrice Weder di Mauro, Anna Gelpern, Mitu Gulati, Ugo Panizza, Jeromin Zettelmeyer, 12 November 2013
Sovereign bankruptcies occur regularly and violently. The nature of sovereign-debt problems has changed in comparison to ten years ago. This column discusses policy proposals to better resolve debt crises and prevent them from happening in the future. Such proposals are given both for the Eurozone, and at a global level.
Vasiliki Fouka, Joachim Voth, 23 October 2013
The EZ crisis increased north-south conflicts between bailout providers and recipients – especially between Germany and Greece. This column shows evidence that political conflict directly translated into losses of market share for German car producers in Greece – especially in areas where German armed forces committed massacres during World War II. Six decades later, memories of conflict are never far from the surface in Europe.