Marco Fioramanti, Robert Waldmann, 19 November 2016

The European Commission is currently evaluating compliance with the Stability and Growth Pact across the Eurozone. However, differences in the econometric methods used by member states and by the Commission can lead to estimates that are at odds. This column argues that the Commission’s method of estimating the non-accelerating wage rate of unemployment for Eurozone members, which relies on an accelerationist Phillips curve, is inferior to specifications with a traditional Phillips curve. The findings highlight how technical aspects of an estimation procedure can have serious effects on policy outcomes.

Nauro Campos, Corrado Macchiarelli, 19 October 2016

Explanations for the Eurozone Crisis rely on the notion of cross-country asymmetries. The core-periphery pattern to the EU was first established by Bayoumi and Eichengreen in 1993, prior to the Eurozone. This column replicates their approach to explore whether the euro has strengthened or weakened this pattern. A new ‘coreness index’ indicates that the core-periphery pattern has weakened, and that a new, smaller periphery has emerged.

Giacomo Calzolari, Jean-Edouard Colliard, Gyöngyi Lóránth, 30 July 2016

The presence of multiple national authorities in the EU poses substantial coordination problems for the supervision of multinational banks. The Single Supervisory Mechanism aims to solve the resulting coordination failures. This column explores how banks could strategically react to the introduction of a supranational supervisor. The banking system is likely to endogenously react by reverting to an organisational form for which supranational supervision is actually less essential.

Gabriel Felbermayr, Jasmin Gröschl, Thomas Steinwachs, 27 April 2016

The refugee crisis has placed Europe’s Schengen Agreement under stress, with some calling for the reintroduction of identity checks and other border controls. This column presents new estimates of the potential costs of such controls. On average, the removal of controls at one border acts like the removal of a 0.7% tariff. The controls currently notified to the EU Commission could lower EU GDP by around €12.5 billion. The full demise of Schengen would be about three times as costly.

Elias Papaioannou, 12 February 2016

Institutional redesign and reform are currently being debated and implemented at the EU and EZ levels. However, there is a growing institutional gap across member countries – especially between the core and periphery. This column illustrates the extent of this gap. Weak institutions have already stifled reform efforts, such as the Economic Adjustment Programs undertaken by Greece and Portugal. The success of pan-European reforms and the future of the Eurozone will require coordinated action to close this institutional gap.

Tommaso Monacelli, 12 February 2016

The boom-bust cycle in the Eurozone between 2000 and 2008 is essentially a story of cyclical asymmetries between the Core and the Periphery. While stressing the importance of addressing these asymmetries – especially via fiscal policy – the ECB has failed to take them explicitly into account in its own policy-setting. This essay argues that these asymmetries may persist precisely because they are not a central target of stabilisation policy – both fiscal and monetary. 

Giancarlo Corsetti, Matthew Higgins, Paolo Pesenti, 12 February 2016

James Tobin’s classic ‘funnel’ theory questioned how best to calibrate the overall stance of macroeconomic policy in an economic region. This column revisits key questions that emerged out of the EZ crisis through the lens of Tobin’s theory. A key insight is that monetary policy cannot achieve stabilisation objectives without stronger mechanisms for fiscal burden-sharing and risk-pooling. Although short-run solutions are possible under the existing circumstances, long-run stability will require a policy mix that convincingly deals with the issue of fiscal risk-sharing.

André Sapir, 12 February 2016

Misalignments of real exchange rates continue to be the most visible and painful symptom of asymmetric shocks within the Eurozone. An important factor behind such misalignment is the difference in national wage formation and bargaining systems, especially between core and periphery members. This column argues that all members need to have institutions that ensure wage developments are in line with productivity developments. This would eliminate an important source of asymmetric behaviour and reduce resistance to EZ-wide fiscal mechanisms capable of absorbing asymmetric shocks.

Daniel Gros, 12 February 2016

The Eurozone’s ‘Banking Union’ created a system of banking supervision and a common institution to restructure troubled banks. There remain two issues, however, that need to be addressed:  banks are holding too much debt of their own sovereign, and deposit insurance is only backstopped at the national level. This column argues that these issues need to be addressed simultaneously for economic and political reasons. Specifically, periphery and core countries hold opposing positions on remedies to the respective problems. A combination of the two makes economic sense and could represent an acceptable political compromise.

Agnès Bénassy-Quéré, 08 April 2016

The euro is unique in that it is a currency without a sovereign. Since the crisis, there have been major developments towards making the Eurozone more resilient, including the banking union and the European Stability Mechanism (ESM). This column, originally published 12 February 2016, explores whether further normalisation is required to make the Eurozone function properly. It argues that the Eurozone, unlike existing federations, lacks the ability to deliver counter-cyclical fiscal policies while complying with fiscal discipline. Macroeconomic coordination will thus require rules, a strong and independent European Fiscal Board, and the strengthening of the ESM.

Ángel Ubide, 09 December 2015

The diversity of European economic cycles, economic structures, and political dynamics is a strength of the Eurozone. However, sustainable arrangements are required to distribute risks and ensure that all countries can use fiscal policy to cushion economic downturns. This column proposes the creation of a system of stability bonds for the Eurozone. These could be structured to minimise moral hazard, improve governance, and ensure that fiscal policy can support growth during the next recession.

Jörg Decressin, Prakash Loungani, 02 December 2015

Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.

Kevin Daly, Tim Munday, 28 November 2015

The fallout from the Global Crisis and its aftermath has been deeply damaging for European output. This column uses a growth accounting framework to explore the pre-Crisis and post-Crisis growth dynamics of several European countries. The weakness of post-Crisis real GDP in the Eurozone manifested itself in a decline in employment and average hours worked. However, decomposing growth for the Eurozone as a whole conceals significant differences across European countries, in both real GDP growth and its factor inputs.

Mouhamadou Sy, 09 November 2015

From the introduction of the euro in 1999 to the Greek crisis in 2010, the Eurozone witnessed external imbalances between countries at its core and those at its periphery. These imbalances have been attributed either to differences in competitiveness or to the effect of financial integration. This column argues that in order to understand the imbalances within the Eurozone, it is necessary to consider credit costs and capital flows. The lower real cost of credit for high-inflation countries must be taken into account, as well as the inflow of capital to the non-tradable sector that this implies. Monetary policy cannot be conducted in a ‘one size fits all’ manner.

Philip Lane, 07 September 2015

In the lead up to the global financial crisis, there was a substantial credit boom in advanced economies. In the Eurozone, cross-border flows played an especially important role in the boom-bust cycle. This column examines how the common currency and linkages between member states contributed to the Eurozone crisis. A very strong relationship between pre-crisis levels of external imbalances and macroeconomic performance since 2008 is observed. The findings point to the importance of delinking banks and sovereigns, and the need for macro-financial policies that manage the risks associated with excessive international debt flows.

Paul De Grauwe, 07 September 2015

Economists were early critics of the design of the Eurozone, though many of their warnings went unheeded. This column discusses some fundamental design flaws, and how they have contributed to recent crises. National booms and busts lead to large external imbalances, and without individual lenders of last resort – national central banks – these cycles lead some members to experience liquidity crises that degenerated into solvency crises. One credible solution to these design failures is the formation of a political union, however member states are unlikely to find this appealing.

Stefano Neri, Stefano Siviero, 15 August 2015

EZ inflation has been falling steadily since early 2013, turning negative in late 2014. This column surveys a host of recent research from Banca d’Italia that examined the drivers of this fall, its macroeconomic effects, and ECB responses. Aggregate demand and oil prices played key roles in the drop, which has consistently ‘surprised’ market-based expectations. Towards the end of 2014 the risk of the ECB de-anchoring inflation expectations from the definition of price stability became material.

Anil Ari, Giancarlo Corsetti, Andria Lysiotou, 10 August 2015

Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.

Carmen Reinhart, 09 July 2015

Contrary to the intent of the designers of what was to be an irreversible currency union, Greece may well exit the Eurozone. This column argues that default does not inevitably trigger the introduction of a new currency (or the re-activation of an old one). However, if ‘de-euroisation’ is the end game, then a forcible (or compulsory) currency conversion is likely to be a central part of that process, along with more broad-based capital controls. 

Philip Lane, 07 October 2011

Philip Lane talks to Viv Davies about Ireland’s export-led recovery; they also discuss the interplay between banking and sovereign risk in Europe. Lane presents his and other economists’ proposals for European Safe Bonds and a reform agenda for the Eurozone. The interview was recorded on 05 October 2011. [Also read the transcript.]



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