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11. The financial crisis and citizen trust in the European Central Bank

Author:
Daniel Gros and Felix Roth
Publication Date:
07-2010
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
Trust in the ECB, as measured by the standard Eurobarometer (and other) surveys has fallen to an unprecedented low – especially in the larger euro area countries. The authors find that up to the start of the recession in 2008, trust in the ECB was little affected by business cycle variables such as growth and inflation. This changed radically with the recession, with trust in the ECB becoming correlated quite closely with growth. However, even the recovery of growth in 2009 was not sufficient to restore trust in the ECB to previous levels. This finding implies that European citizens seem to have placed a heavy share of the blame on the European Central Bank for the real economic downturn caused by the financial crisis.
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
Europe

12. Foreign Investment in the US (I): Disappearing in a black hole?

Author:
Daniel Gros
Publication Date:
04-2006
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The US international investment position today should in principle be equal to the sum of past current account balances (mostly deficits). However, this is by far not the case even taking into account the balancing item 'errors and omissions'. Between 1982 and 2004, the US has accumulated a grand total of around $4.5 trillion (thousand billion). (The sum of current account deficits has been about $1 trillion smaller than the amount of net sales of US assets to the rest of the world because of the anomaly in reinvested earning.) Despite this accumulation of deficits the US net international debtor position (IIP) has deteriorated 'only' by $2.7 billion (and is now estimated – at the end of 2004, end 2005 figures are not yet available for the US IIP – at 'only' around $2.5 trillion). This implies a total of 'unearned' gains to the US of around $1.8 trillion during 22 years. The quite detailed data available for a somewhat shorter period (1989-2004) show that only a very small part of this sum, around 10-20%, can be explained by exchange rate and stock market changes.</p
Topic:
International Relations and International Trade and Finance
Political Geography:
United States

13. Foreign Investment in the US (II): BEING TAKEN TO THE CLEANERS?

Author:
Daniel Gros
Publication Date:
04-2006
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The income account of the US balance of payments has so far remained in surplus because of a very large differential in reported earnings on direct investment – US firms seem to enjoy a much higher rate of return than foreign firms in the US. There is little difference in terms of the rate of dividend payments; the difference is due to what is called 'reinvested earnings' (earnings minus dividends). Foreign firms report almost no reinvested earnings on their direct investment in the US whereas US firms report substantial reinvested earnings from their direct investment abroad, on average over $100 billion more p.a. than foreign firms report on their US investment. This anomaly is probably due to the desire of foreign firms to minimise their US taxes, whereas US firms do not face tax liabilities if they report high foreign profits to the US authorities. The procedure used to generate the data for reinvested earnings thus has a built-in bias to improve the US current account and – over time – its international investment position. The true picture is likely to be much worse.</p
Topic:
International Relations and International Trade and Finance
Political Geography:
United States

14. Who Needs Foreign Banks?

Author:
Daniel Gros
Publication Date:
09-2002
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
This paper shows that countries with weak banking system and fiscal institutions, might benefit from the presence of foreign banks, which can constitute a commitment and transparency device. Foreign banks can also reduce the probability of self-fulfilling speculative attacks. A strong presence of foreign banks can make a currency peg feasible in the first place by rendering it more resistant to speculative attacks. The European experience is instructive in this respect. In all of the candidate countries from Central and Eastern Europe (CEEC) the banking system is now dominated by foreign banks. This is now taken for granted, but it is unusual if one looks at the existing EU-15 members, where foreign banks play a marginal role in even the smallest economies.
Topic:
Economics and International Trade and Finance
Political Geography:
Europe

15. Fiscal Policy Spillovers in the Euro Area: Where Are They?

Author:
Daniel Gros and Alexandr Hobza
Publication Date:
11-2001
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
What impact would a fiscal expansion in Germany have on the rest of the euro area? It has been generally suggested that it could go in either of two opposite directions, depending on the relative strength of two effects: the direct trade linkage and the financial market repercussions. A review of the results from four major macroeconomic models shows that the cross-country spillover effects of fiscal policy are indeed of uncertain sign and magnitude. Different models give quite different results if used in standardised simulations in terms of the sign, magnitude and time profile of the impact of a fiscal expansion in one member country (e.g. Germany) on other euro area countries. Fewer results are available concerning the potential spillover effects of structural policies, but they are similar to the ones concerning a budgetary stimulus: the magnitude of the spillover is small and varies across countries and over time.
Topic:
Economics, Government, Human Rights, International Trade and Finance, Migration, and Political Economy
Political Geography:
Europe and Germany

16. Is the ECB Sufficiently Accountable and Transparent?

Author:
Daniel Gros and Lorenzo Bini-Smaghi
Publication Date:
09-2001
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
More than two years after its inception, the ECB is still perceived as lacking transparency by many academics and market participants. Our analysis, based on a series of indicators, suggests instead that the ECB is, at least on paper, one of the most transparent and accountable central banks. The discrepancy between theory and public perception suggests that much remains to be done within the given institutional framework to improve the transparency of the ECB. What is the best way to achieve this goal? Several suggestions have been put forward, such as publishing the detailed minutes of the ECB Governing Council meetings. This would result in shifting the true debate to informal meetings of the Governing Council, while formal meetings would only record pre-packaged consensus with no or little discussion. In our view, the best way to make the ECB more accountable is to engage it in substantive discussions about its policy. The ECB should provide more information about the background analysis that leads to policy decisions. For example, the ECB should transform its 'staff projections' into true inflation forecasts and it should be more open about the arguments that shape the internal debates, which precedes decisions. Accountability cannot be ensured by the ECB alone. An important role has to be played by its counterparts, such as the European Parliament, the Council of EU Finance Ministers and the public at large.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
Europe

17. Who Needs an Extenal Anchor?

Author:
Daniel Gros
Publication Date:
03-2001
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
This paper argues that there might be non-monotonic relationship between the strength of the domestic framework for fiscal policy and the interest of a country to use an external anchor to achieve price stability. Countries with a strong domestic framework, e.g. low public debt, little pressure for excessive expenditure and an efficient tax system, would anyway enjoy low inflation rates and therefore have little need for an external anchor. Countries with high debt or very weak institutions would greatly benefit from an external anchor to save them from the extreme inflation rates they would otherwise have to endure because the market knows that the temptation for them to inflate public debt away is so strong. By contrast, countries with moderately weaknesses might be in a situation where they need some inflation to supplement government revenues with seigniorage, but the inflation resulting from the interaction with the market, which knows about this, is still moderate.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
Europe

18. One Size Must Fit All: National Divergences in a Monetary Union

Author:
Daniel Gros and Carsten Hefeker
Publication Date:
07-2000
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
What policy objective should a common central bank in a heterogeneous monetary union pursue? Should it base its decisions on the EU-wide average of inflation and growth or should it instead focus on (appropriately weighted) national welfare losses based on national rates of inflation and growth? We find that a central bank that minimises the sum of national welfare losses reacts less to common shocks and that this can lead to higher average union-wide expected welfare, if the variability of common shocks is large relative to the inflation bias. But for countries with a transmission mechanism close to the average, welfare can actually be lower in this case. The inflationary bias depends on the interaction between the transmission mechanism and distortions in labour markets.
Topic:
Economics, Government, Human Rights, International Trade and Finance, Migration, and Political Economy
Political Geography:
Europe

19. An Economic System for Post-War South-East Europe

Author:
Daniel Gros
Publication Date:
05-1999
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
Economic recovery in the region requires stable currencies and open markets. The best way to establish these two basic conditions quickly is for the countries concerned to immediately link their currencies to the euro via a currency board and join the customs union of the EU. The EU should support this radical approach financially in two ways: a) through compensation for lost tariff revenues (conditional on clean and efficient border controls), and, b) emergency loans to acquire the necessary backing for the currency board. The currency boards should graduate to full euroisation in 2002. The total cost for the EU would be modest: around 2 billion euro p.a. if all countries participate. A market-led approach that pays local hosts to house refugees would ensure that the expenditure on refugees benefits the local economies.
Topic:
Development, Economics, International Trade and Finance, and Migration
Political Geography:
Europe and Eastern Europe

20. A Primer on the Balance Sheet of the Eurosystem

Author:
Daniel Gros
Publication Date:
02-1999
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The ECB has just published the opening balance sheet for the Eurosystem, which is the official name given to the ECB plus the 11 national central banks of the euro zone. All 15 national central banks are part of the ESCB, but the participation of the four outsiders is purely formal. The balance sheet, which is reproduced at the end of this Commentary, reveals two very interesting facts: During 1998, the national central banks of the euro zone increased their holdings of dollar foreign exchange reserves by the equivalent of about 38 bn euro. This means that they de facto intervened consistently to support the dollar during that year. The ECB starts with huge foreign exchange reserves: 237 bn euro plus gold worth 100 bn euro. This is much more than the amount held by the US Federal Reserve and constitutes a major share of the reserves held by all OECD countries.
Topic:
Economics, International Trade and Finance, and Regional Cooperation
Political Geography:
Europe