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51. Fighting the Fed

Publication Date:
08-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Since the US Federal Reserve signalled that a turn in the interest rate cycle may be on the horizon, UK and to a lesser extent Eurozone interest rates have tracked US rates higher. But the UK and Eurozone economies are less well placed than the US to cope with higher interest rates. Simulations carried out on our Global Economic Model show that higher rates would be particularly harmful to the UK economy's embryonic recovery. In an attempt to stem the rise in interest rates, the Bank of England and the ECB have introduce forward guidance but with little, if any, success. Markets do not seem convinced by the Bank of England's commitment to forward guidance and are testing its resolve. It seems likely that over time both central banks may have to strengthen their forward guidance, in the case of the Bank of England by augmenting it with further quantitative easing.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, United Kingdom, and Europe

52. Draghi's "Whatever it takes" speech was turning point in euro crisis

Publication Date:
07-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Mario Draghi's commitment a year ago to do “whatever it takes” to save the euro looks to have been an important turning point in the Eurozone crisis. Systemic risk has fallen, the euro has strengthened, spreads on peripheral debt have narrowed and bond and equity markets have become less sensitive to bad Eurozone news flow. Indeed, to date markets seem to have taken Draghi at his word and seem unwilling to test his resolve. But although confidence in the outlook for the Eurozone among investors has risen over the past year, the real economy is yet to emerge from recession. We continue to expect this to happen in the second half of this year, a view supported by this week's improvement in the PMI data. However, unless action is taken to reduce borrowing costs paid by households and companies in the peripheral economies, the recovery will be anaemic. With that in mind, the ECB's announcement that it will ease its collateral rules only marginally is disappointing.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
Europe

53. Our bond market, your problem?

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
Comments from the US Federal Reserve aimed at signalling that monetary policy cannot stay at historically low levels indefinitely have caused bond yields and credit spreads to rise both in the US and abroad. Higher borrowing rates are particularly inappropriate for the Eurozone which, unlike the US, is still struggling to emerge from recession. This tightening of financial conditions will place pressure on the ECB to act. Although surveys show that investors' bearishness on US government bonds is at an extreme level, suggesting that in the coming weeks bond yields are more likely to fall than rise, the longer-term trend in bond yields is now upwards. But we do not expect the rise in yields over the next two or three years to kill off the US recovery. Consequently, we believe that the US equity market is still on an upward uptrend, albeit one that will experience regular spikes in volatility as the Fed gradually moves away from its ultra-loose policy.
Topic:
Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States and Europe

54. Why the ECB should cut borrowing costs in periphery

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
The European Central Bank has postponed any plans to introduce targeted measures to reduce the cost of borrowing for small and medium-sized businesses in the credit-starved peripheral Eurozone economies. Given the widening gap between the lower costs of borrowing for companies in Germany and France and the higher costs in the periphery, we think that there is a strong case for the ECB to take action. Simulations using our Global Macroeconomic Model show that if half the tightening in credit conditions seen since 2008 were to be reversed within two years, Eurozone GDP would be 0.7% higher by the end of 2017 than under our baseline forecast. There would be over 400,000 fewer people unemployed. This would be particularly beneficial for peripheral Eurozone risk assets.
Topic:
Debt, Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Europe and Germany

55. UK housing market: bellows to a bubble?

Publication Date:
06-2013
Content Type:
Policy Brief
Institution:
Oxford Economics
Abstract:
The housing market is recovering, according to recent price and activity data. Post-crisis price corrections were smaller in the UK than in the US and much of Europe, and demand is now being bolstered by the government's Funding for Lending and Help to Buy schemes. This has given rise to some worries that the UK is in danger of inflating another house price bubble. While housing supply is very tight, we are not convinced that these schemes will have enough impact on demand to cause prices to take off.
Topic:
Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
United States, United Kingdom, and Europe

56. Assessing the Single Supervisory Mechanism: Passing the point of no return for Europe's Banking Union

Author:
Stijn Verhelst
Publication Date:
06-2013
Content Type:
Working Paper
Institution:
EGMONT - The Royal Institute for International Relations
Abstract:
Europe's financial and sovereign debt crises have become increasingly interconnected. In order to break the negative feedback loop between the two, the EU has decided to create a common supervisory framework for the banking sector: the Single Supervisory Mechanism (SSM). The SSM will involve a supervisory system including both the national supervisors and the European Central Bank (ECB). By endowing the ECB with supervisory authority over a major part of the European banking sector, the SSM's creation will result in a shake-up of the way in which the European financial sector is being supervised. Under the right circumstances, this could be a major step forward in addressing Europe's interconnected crises.
Topic:
Debt, Economics, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe

57. Money for Structural Reforms in the Eurozone:making sense of contractual Arrangements

Author:
Xavier Vanden Bosch
Publication Date:
05-2013
Content Type:
Working Paper
Institution:
EGMONT - The Royal Institute for International Relations
Abstract:
Both the Commission's proposal for a 'Competitiveness and Convergence Instrument' and the 'contractual arrangement' presented by President Van Rompuy share a common concept: associating EU money with national structural reforms under a binding arrangement.
Topic:
Economics, Markets, Regional Cooperation, Labor Issues, Monetary Policy, and Reform
Political Geography:
Europe

58. Three Options for the EU: Assessing the EU's powers in a true economic and political union

Author:
Teija Tiilikainen
Publication Date:
09-2013
Content Type:
Policy Brief
Institution:
Finnish Institute of International Affairs
Abstract:
Safeguarding the EU's unity in the long-term development of the EMU is currently one of the major challenges for the Union. The de facto adjustments made to the EU's economic and fiscal powers due to the economic and financial crisis, including the completion of the Banking Union, create pressures to address the treaty-based division of powers and to strengthen the democratic control of the powers executed by the Union. The need to back the EU's macroeconomic goals with fiscal instruments has been made evident by the economic crisis; the position of these instruments outside the common budget might become increasingly controversial. A further increase in economic solidarity (jointly guaranteed debt, taxation power) might jeopardize the EU's stability and democratic legitimacy if carried out in the current political and institutional framework. A system of constitutional and fiscal federalism would produce a more stable outcome, but would require major changes in the EU's democratic system and system of policy implementation, in its external policies and the way its constitutional powers are arranged.
Topic:
Debt, Economics, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe

59. How to Form a More Perfect European Banking Union

Author:
Ángel Ubide
Publication Date:
10-2013
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The euro area has made significant strides in the last six months in designing a banking union. The goal has been to centralize supervisory decision making and improve the management of failing banks while protecting European taxpayers and imposing costs on creditors through so-called bail-ins to reduce moral hazard. Euro area leaders have reached some political agreements, and legislation is being prepared for eventual adoption by the European Parliament and then the various member states. This progress has been hailed as a step in the right direction, with particular praise for the euro area leaders' plan to endow the European Central Bank (ECB) with supervisory powers and create new rules for managing troubled banks.
Topic:
Economics, Markets, Regional Cooperation, and Monetary Policy
Political Geography:
Europe

60. The EU Beyond the Crisis: The Unavoidable Challenge of Legitimacy

Author:
Richard Youngs
Publication Date:
10-2013
Content Type:
Working Paper
Institution:
Carnegie Endowment for International Peace
Abstract:
The euro crisis has mobilized the masses and unleashed vitally important debates about changing the model of European integration, both economically and politically. Yet, as European governments deepen economic cooperation and the crisis appears to have calmed, European Union (EU) member states feel increasingly confident that fundamental political changes are not necessary. This is a dangerously short-sighted calculation. To build a truly democratic EU, citizens need to have a greater voice in decision making.
Topic:
Debt, Economics, Markets, Regional Cooperation, Monetary Policy, Financial Crisis, and Reform
Political Geography:
Europe