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61. The Transformational Impact of EMU and the Global Financial Crisis

Author:
Francesco Paolo Mongelli
Publication Date:
12-2010
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The headwinds facing the euro area are many and substantial: there is no pretence of denial. While most attention is correctly devoted to the size of rescue packages for some countries and the terms of crisis management and resolution mechanisms, we argue that these challenges must also be met from within the euro area. We are aided by a simple framework illustrating how the benefits the euro can generate depend on the degree of openness, flexibility and income correlation among euro area countries. Sharing the euro has steadily transformed euro area economies that are now deeply interconnected. This is generating largely benign effects that represent the intrinsic value of the euro area: it is a shared asset. Yet, such integration has provided the ground for the transmission of the sovereign crisis: through financial exposure, trade linkages and cross-country asset ownership.
Topic:
Economics, Global Recession, Monetary Policy, and Financial Crisis
Political Geography:
Europe

62. The European Council Summit and the Political Economics of the EMU Crisis

Author:
Christian Fahrholz and Cezary Wójcik
Publication Date:
11-2010
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
Roger Ailes, a former advisor to Ronald Reagan, recalls in his book an intriguing practice of the ancient Romans: when they finished building a bridge or an arch, they enforced accountability by placing the engineer in charge beneath the construction when the scaffolding was removed. If the edifice did not hold, he was the first to know. We do not follow such drastic practices these days in Europe, but with some European economies shaking and the Greek sovereign debt crisis still not over, the architecture of the euro area has been certainly come under severe stress. Unfortunately, the 28-29 October 2010 European Council Summit has not made this architecture much safer.
Topic:
Economics, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe

63. What lessons from the 1930s?

Author:
Daniel Gros and Cinzia Alcidi
Publication Date:
05-2009
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to the limit of what was possible within the confines of sustainability, as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit-taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities in both the US and Europe have little choice but to make up for the losses on 'legacy' assets and wait for banks to earn back their capital. But to prevent future crises of this type, one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking thus seems justified by the greater stability of commercial banking operations.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States and Europe

64. The Effect of the Financial Crisis on Systemic Trust

Author:
Felix Roth
Publication Date:
07-2009
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The financial crisis had a significant impact on the levels of trust that citizens place in the system and its institutions. Recent data from Eurobarometer show a significant fall in confidence on the part of European citizens in the EU's institutions. For the first time since its creation, a majority of European citizens no longer trust the European Central Bank. However, confidence levels in national governments have actually risen, supporting a contrasting trend between confidence levels in European and national institutions. This decrease in confidence towards the ECB is flanked in the case of Germany by strong anti-capitalist sentiments and a sharp decline in support for the social market economy.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
Europe and Germany

65. Tajikistan: 'Revolutionary situation' or a Resilient state?

Author:
Anna Matveeva
Publication Date:
12-2009
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
Since 2008, after a period of relative growth and social stability, the situation in Tajikistan has been steadily deteriorating, leading to increased speculation that the country could emerge as a failing state. Given its proximity to Afghanistan and Pakistan, and the role it plays in the Northern Distribution Network – a line that funnels military supplies from Europe to NATO ISAF troops in Afghanistan – the ramifications of potential instability in Tajikistan would resonate beyond the country. The current briefing assesses to what extent such danger is in fact real by outlining developments in the key areas of economy and security, and examining the regime's capacity to cope with emerging challenges. The briefing concludes with recommendations for the EU and an outlook for future.
Topic:
NATO, Fragile/Failed State, and Financial Crisis
Political Geography:
Afghanistan, Central Asia, and Tajikistan

66. Who can be trusted after the financial crisis?

Author:
Felix Roth
Publication Date:
11-2009
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
The financial crisis has damaged citizens' trust in public institutions, especially the confidence that European citizens invest in the European institutions. The results of major public opinion surveys show a severe decrease in citizens' trust in the immediate aftermath of the financial crisis with a slight recovery nine month later. In particular, citizens' net trust in the European Central Bank hit an historical low point in the aftermath of the financial crisis with a majority of people distrusting that institution. A variety of other surveys also show that confidence levels in the free market economy have decreased in most of the largest economies and demand for stronger state regulation has increased on both sides of the Atlantic. The key question now is whether this loss of confidence is a temporary or permanent phenomenon, which would have important consequences for the economy and for the proper working of the European institutions.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
Europe

67. Iceland on the brink? Options for a Small, Financially Active Economy in the Current Financial Crisis Environment

Author:
Daniel Gros
Publication Date:
04-2008
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
For small financially active countries the exchange rate assumes particular importance, not only as a shock absorber, but potentially also as a source of shocks during financial market crises. This is very much in evidence today in the case of Iceland which is being hit hard by the recent turbulence in financial markets.
Topic:
Economics and Financial Crisis
Political Geography:
Europe

68. The Banking Crisis: Causes, Consequences and Remedies

Author:
Paul De Grauwe
Publication Date:
11-2008
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The paradigm that financial markets are efficient has provided the intellectual backbone for the deregulation of the banking sector since the 1980s, allowing universal banks to be fully involved in financial markets, and investment banks to become involved in traditional banking. There is now overwhelming evidence that financial markets are not efficient. Bubbles and crashes are an endemic feature of financial markets in capitalist countries. Thus, as a result of deregulation, the balance sheets of universal banks became fully exposed to these bubbles and crashes, undermining the stability of the banking system. The Basel approach to stabilise the banking system has as an implicit assumption that financial markets are efficient, allowing us to model the risks universal banks take and to compute the required capital ratios that will minimise this risk. I argue that this approach is unworkable because the risks that matter for universal banks are tail risks, associated with bubbles and crashes. These cannot be quantified. As a result, there is only one way out, and that is to return to narrow banking, a model that emerged after the previous large-scale banking crisis of the 1930s but that was discarded during the 1980s and 1990s under the influence of the efficient market paradigm.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
Europe