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31. Adjustment Difficulties and Debt Overhangs in the Eurozone Periphery

Author:
Daniel Gros and Cinzia Alcidi
Publication Date:
05-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
This paper describes four key drivers behind the adjustment difficulties in the periphery of the eurozone: The adjustment will be particularly difficult for Greece and Portugal, as two relatively closed economies with low savings rates. Both of these countries combine high external debt levels with low growth rates, which suggest they are facing a solvency problem. In both countries fiscal adjustment is a necessary condition for overall sustainability, but it not sufficient by itself. A sharp cut in domestic consumption (or an unrealistically large jump in exports) is required to quickly establish external sustainability. An internal devaluation (a cut in nominal wages in the private sector) is unavoidable in the longer run. Without such this adjustment in the private sector, even continuing large-scale provision of official funding will not stave off default. Ireland's problems are different. They stem from the exceptionally large losses in the Irish banks, which were taken on by the national government, leading to an explosion of government debt. However, the Irish sovereign should be solvent because the country has little net foreign debt. Spain faces a similar problem as Ireland, although its foreign debt is somewhat higher but its construction bubble has been less extreme. The government should thus also be solvent, although further losses in the banking system seem unavoidable. Italy seems to have a better starting position on almost on all accounts. But its domestic savings rate has deteriorated substantially over the last decade.
Topic:
Economics, International Trade and Finance, and Financial Crisis
Political Geography:
Spain and Ireland

32. Governance of a Fragile Eurozone

Author:
Paul De Grauwe
Publication Date:
05-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
When entering a monetary union, member countries change the nature of their sovereign debt in a fundamental way, i.e. they cease to have control over the currency in which their debt is issued. As a result, financial markets can force these countries' sovereigns into default. In this sense, the status of member countries of a monetary union is downgraded to that of an emerging economy. This makes the monetary union fragile and vulnerable to changing market sentiments. It also makes it possible that self-fulfilling multiple equilibria arise.
Topic:
Debt, Markets, Regional Cooperation, and Financial Crisis
Political Geography:
Europe

33. The New Stability and Growth Pact: Primum non nocere

Author:
Claudio Vicarelli and Marco Fioramanti
Publication Date:
03-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The recent economic and financial crises have shown the weakness of EU economic governance. A process of strengthening macroeconomic and fiscal surveillance started in the course of 2010; among other proposals, the European Commission suggested a new binding criterion of debt reduction: debt-to-GDP ratio is to be considered sufficiently diminishing if its distance with respect to the 60% of GDP reference value has reduced over the previous three years at a rate of the order of one-twentieth per year.
Topic:
Debt, Economics, International Trade and Finance, Financial Crisis, and Governance
Political Geography:
Europe

34. Has the financial crisis shattered citizens' trust in national and European governmental institutions? Evidence from the EU member states, 1999-2010

Author:
Felix Roth, Felicitas Nowak-Lehmann D., and Thomas Otter
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The financial crisis has affected trust in national and European governmental institutions in different ways. This paper analyses the determinants of trust in the national and European institutions over the last decade and comes to the conclusion that inflation reduces citizens' trust only when the economy runs smoothly. In times of crisis, citizens do not worry about inflation but rather about jobs and the effects of a recession. Declining trust in national governments is related to an increase in unemployment in the EU-15 in all time periods, whereas trust in the European Commission and the European Parliament seems to be strongly associated with the situation in the real economy (unemployment and growth of GDP per capita) only in times of crisis. Yet in the EU-27, falling levels of trust in the national and European governmental institutions during times of crisis seem to be primarily related to an increase in government debt. In an EU-15 country sample, this negative relationship appears to be driven by countries that owe a larger share of their increase in government debt to aiding/bailing out their financial sector and the implementation of significant austerity measures.
Topic:
Debt, Economics, Financial Crisis, and Governance
Political Geography:
Europe

35. TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area

Author:
José M. Abad, Axel Löffler, and Holger Zemanek
Publication Date:
07-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
This paper analyses the implications of a continued divergence of TARGET2 balances for monetary policy in the euro area. The accumulation of TARGET2 claims (liabilities) would make the ECB's liquidity management asymmetric once the TARGET2 claims in core countries have crowded out central bank credit in those regions. Then while providing scarce liquidity to banks in countries with TARGET2 liabilities, the ECB will need to absorb excess liquidity in countries with TARGET2 claims. We discuss three alternatives and their implications for absorbing excess liquidity in core regions: 1) using market-based measures might accelerate the capital flight from periphery to core countries and would add to the accumulation of risky assets by the EC B; 2) conducting non-mark et based measures, such as imposing differential (unremunerated) reserve requirements, would distort banking markets and would support the development of shadow banking; and 3) staying passive would lead to decreasing interest rates in core Europe entailing inflationary pressure and overinvestment in those regions and possibly future instability of the banking system.
Topic:
Economics, Monetary Policy, and Financial Crisis
Political Geography:
Europe

36. An evaluation of the French proposal for a restructuring of Greek debt

Author:
Christian Kopf
Publication Date:
06-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
French commercial banks are proposing a swap of €85.5 billion in Greek government bonds maturing between 2011 and 2014 into a combination of new long-term Greek bonds with principal guarantee and cash payments. If this initiative were implemented under the proposed parameters, private creditors would only suffer a minimal haircut and official lenders would be provided with cash-flow relief of around €20 billion over the next three years, but the solvency of the Hellenic Republic would worsen significantly.
Topic:
Debt, Economics, and Financial Crisis
Political Geography:
Europe

37. Iran in the shadow of the 2009 presidential elections

Author:
Rouzbeh Parsi
Publication Date:
04-2011
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
In the past two years the Iranian domestic political scene has undergone a major upheaval where many established norms and institutional frame-works have been abandoned or seriously weakened. A new baseline and sense of normalcy has yet to be established.
Topic:
Democratization, Economics, Politics, Insurgency, and Financial Crisis
Political Geography:
Iran and Middle East

38. The Eurozone Debt Crisis: From its origins to a way forward

Author:
Diego Valiante
Publication Date:
08-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The Eurozone debt crisis has now reached a turning point. This paper argues for a more organised intervention by the ECB to stop contagion through the creation of a quantitative easing programme, coupled with a political agreement among member states on a more federalist budget for the Eurozone.
Topic:
Debt, Economics, Regional Cooperation, and Financial Crisis
Political Geography:
Europe

39. Only a more active ECB can solve the euro crisis

Author:
Paul De Grauwe
Publication Date:
08-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The biggest threat for the eurozone is the contagion of the Greek sovereign debt crisis to the rest of the system. If the Greek crisis could be isolated, it would barely matter for the eurozone as a whole. After countless crisis meetings of the European Council, however, it has to be admitted that the European leaders have failed to isolate the Greek crisis and to stop the forces of contagion. The latest meeting of the heads of state or government of the euro area on July 21st is no exception.
Topic:
Debt, Markets, Regional Cooperation, and Financial Crisis
Political Geography:
Europe

40. Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today)

Author:
Daniel Gros
Publication Date:
11-2011
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
Is a high level of public debt inherently more dangerous within a monetary union? During the 1990s it was often argued that only by entering the EMU could Italy (or Spain) protect itself from the high interest rates it had to pay on its large public debt. The argument was that by joining the single currency, Italy could convince financial markets that it would not inflate away the value of its debt and hence benefit from lower risk premia.
Topic:
Debt, Economics, and Financial Crisis
Political Geography:
Europe, Spain, and Italy