Did the euro kill governance in the periphery?
Jesús Fernández-Villaverde, Luis Garicano, Tano Santos 30 April 2013
By the end of the 1990s, under the incentive of Eurozone entry, most peripheral European countries were busy undertaking structural reforms and putting their fiscal houses in order. This column argues that the arrival of the euro, and the subsequent interest-rate convergence, loosened a tide of cheap money that reversed the incentives for further reforms. As a result, by the end of the euro’s first decade, the institutions and governance in the Eurozone periphery were in worse shape than they were at the start of the decade.
The conventional wisdom before the creation of the euro was that the monetary union would force its least productive members to undertake the structural reforms needed to modernise their economies. In the past, the peripheral European countries had used devaluations to recover from adverse business-cycle shocks, but without correcting the underlying imbalances of their economies. The euro was expected to eliminate the bias of their monetary policy toward inflation, force sound fiscal policy and encourage widespread liberalisation.
EU institutions Politics and economics
euro, governance, resource curse
Infrastructure: The governance failures
Nicklas Garemo, Jan Mischke 30 March 2013
Investment in infrastructure can bring growth and social benefits. This column highlights the infrastructure opportunities open to depressed economies, stressing that the main obstacles are governance-related. To bring opportunities to life will require an overhaul of infrastructure governance – a root cause of infrastructure projects’ poor productivity.
Europe’s infrastructure programme was the big loser from February’s EU budget deal. Planned infrastructure investment of €50 billion over seven years was reduced to just €24 billion. Among the programmes that now look in doubt is the Connecting Europe Facility, which included financial support for the development of cross-European transport, cleaner energy supply, and fast broadband connections, and was designed to catalyse private investment in all three, too.
Industrial organisation Politics and economics
The problems of European monetary union – asymmetric shocks or asymmetric behaviour?
Andrea Boltho, Wendy Carlin 31 March 2012
Divergent behaviour from Eurozone countries that have very different economic, social, and political structures is threatening the existence of the single currency. This column argues that the Eurozone is a fragile bureaucratic creation that has hardly ever raised much popular enthusiasm anywhere. If behaviour across the area remains as asymmetric as it has been over the last decade or so, the project could run into even stronger headwinds in the long run.
Much of the literature that was sceptical of the prospective success of the euro feared the effects of Mundellian asymmetric shocks on an area which (unlike the US) had little inter-country labour mobility and no common fiscal policy. Early research, for instance, pointed out that Europe’s periphery, in particular, had suffered from large idiosyncratic shocks in comparison to Europe’s core, let alone to US regions (Bayoumi and Eichengreen 1992). This, many felt, could create difficulties for the operation of a monetary union.
Europe's nations and regions
eurozone, growth, governance
What is holding Italy back?
Daniel Gros 09 November 2011
As Italy’s debt crisis enters the danger zone the question arises: Can Italy ever overcome its decade-old growth slump? This column shows that Italy’s growth fundamentals are all in pretty good shape, except one - good governance. Worldwide Governance Indicators show a dramatic worsening during the Berlusconi governments especially when it comes to the rule of law, government effectiveness, and control of corruption. Progress on improving these might in the end be more important for growth than the reforms the EU demands.
Italy’s economy has clearly underperformed since it entered the euro – both relative to its peers and relative to the previous decade. Italy’s growth rate averaged just over 1% during the boom years preceding the crisis. During the crisis, its GDP plunged 5%; instead of rebounding, its economy is now growing at only about 1%.
At this rate, Italy’s public debt, at 120% of GDP, becomes an existential threat to the entire Eurozone (Eichengreen 2011).
Understanding and curing Italy’s growth problems is thus vital for the survival of the euro.
Europe's nations and regions Global crisis
Italy, governance, global crisis
The long shadow of the fall of the wall
Daniel Gros 17 June 2010
Many analysts of the Eurozone crisis take members’ asymmetric competitiveness for granted and underplay the role of the global crisis. This essay argues that some of the trends which now are widely assumed to be the result of the euro are actually natural consequences of two unique events: German unification and the mid-decade global credit boom.
Economists call a happy monetary union an ‘optimum currency area’. The Eurozone is clearly no longer a happy family, but as Tolstoy observed some time ago, unhappy families are unhappy in their own ways.
The Eurozone is not really suffering the kind of ‘asymmetric’ shock that economists used to take as the biggest problem for a monetary union. The crisis of 2010 seems rather to be the result of a large global shock which affects different Eurozone member countries differently because some are not prepared for rough times.
governance, Eurozone crisis, Eurozone rescue
Eurozone governance: What went wrong and how to repair it
Jean Pisani-Ferry 17 June 2010
The crisis has revealed deep flaws in the Eurozone’s governance regime. This essay argues that EU leaders should address fundamental questions about the operational principles upon which the euro is based. Key choices for Eurozone leaders are the nature of the economic policy framework, the optimal degree of decentralisation, and the identification of reforms that will ensure the policy regime can deal with all eventualities.
The EU faces two challenges: managing the crisis while coordinating Eurozone adjustment, and reforming its governance to avoid future crises. The first is vital in the eyes of the markets but creation of the Van Rompuy task force has focused attention on the second.
governance, Eurozone crisis, Eurozone rescue
Natural resources and development strategy after the crisis
Milan Brahmbhatt, Otaviano Canuto 02 March 2010
How important are primary commodities for economic development? This column suggests that primary commodity prices are likely to ease over the next five years. Nevertheless, commodity revenues will remain high, raising challenges that, if not addressed, can harm long-run development. With good governance, however, such revenues can also be a valuable resource to help accelerate overall development.
Recent events have rekindled interest in the role of primary commodities in development. Was the boom in commodity prices from 2003 to 2008 just a cyclical event or does it represent a period of strength, driven by factors such as demand in fast-growing developing countries like China?
development, governance, resource curse
Elections in developing countries: do they improve economic policy?
Paul Collier, Lisa Chauvet 21 November 2009
There is some evidence that democracies enjoy better economic growth. How do elections, a core component of democracy, impact economic policy? This says that free and fair elections in developing countries improve economic policy by disciplining governments. But infrequent or uncompetitive elections may actually make things worse.
The relationship between democracy and development has been extensively debated. Most cross-country analyses suggest that democracy has no robust impact on growth.
elections, democracy, governance
Sovereign wealth funds, governance, and reserve accumulation
Joshua Aizenman, Reuven Glick 16 January 2009
This column provides evidence that there is great deal of difference between the governance standards of the economies in which sovereign wealth funds have been established and the standards of the industrial economies in which they are seeking to invest. It also discusses how the expansion of asset holdings of sovereign wealth funds may reduce official reserve holdings.
Sovereign wealth funds (SWFs) are saving funds controlled by sovereign governments that hold and manage foreign assets. While not a new phenomenon, the recent activities and projected growth of SWFs have stirred debate about the extent to which their size may allow them to affect financial markets and their policies may be driven by non-economic considerations.
foreign exchange reserves, sovereign wealth funds, governance
Board (in)competence and the subprime crisis
Harald Hau, Johannes Steinbrecher, Marcel Thum 12 January 2009
This column shows that German banks with more competent supervisory board members suffered smaller losses in the subprime crisis. Improving bank governance is therefore desirable – from both the public and private perspectives – and may be more robust than other regulatory tools.
“Who were the first bank supervisory board members?” Answer: “The three Magi in the holy bible. They were politicians with time to spare, were dressed in expensive clothing, and did not really know where the journey was going!”
Europe's nations and regions Microeconomic regulation
Germany, governance, bank supervisory board