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1. Disappearing government bond spreads in the eurozone — Back to normal?

Author:
Paul De Grauwe and Yuemei Ji
Publication Date:
05-2014
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
Since the announcement of the Outright Monetary Transactions (OMT) programme by Mario Draghi, President of the ECB, in 2012, the government bond spreads began a strong decline. This paper finds that most of this decline is due to the positive market sentiments that the OMT programme has triggered and is not related to underlying fundamentals, such as the debt-to-GDP ratios or the external debt position that have continued to increase in most countries. The authors even argue that the market's euphoria may have gone too far in taking into account the same market fundamentals. They conclude with some thoughts about the future governance of the OMT programme.
Topic:
Economics, International Trade and Finance, and Markets
Political Geography:
Europe

2. In Search of Symmetry in the Eurozone

Author:
Paul De Grauwe
Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
One of the major problems of the eurozone is the divergence of the competitive positions that have built up since the early 2000s. This divergence has led to major imbalances in the eurozone where the countries that have seen their competitive positions deteriorate (mainly the so - called ' PIIGS ' – Portugal, Ireland, Italy, Greece and Spain ) have accumulated large current account deficits and thus external indebtedness, matched by current account surpluses of the countries that have improved their competitive positions (mainly Germany).
Topic:
Economics, Markets, Regional Cooperation, Global Recession, and Financial Crisis
Political Geography:
Europe, Greece, Germany, Spain, Italy, Portugal, and Ireland

3. 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

4. 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

5. Crisis in the eurozone and how to deal with it

Author:
Paul De Grauwe
Publication Date:
02-2010
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The crisis that started in Greece culminated into a crisis of the Eurozone as a whole. How did we get into this mess? To answer this question it is useful to distinguish the three actors that have played a role in the development of the crisis: Greece, the financial markets (including the rating agencies) and the eurozone authorities. Let us analyse the role of these three actors in the drama.
Topic:
Economics and Markets
Political Geography:
Europe and Greece

6. Should central banks target stock prices?

Author:
Paul De Grauwe
Publication Date:
09-2008
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The question of whether central banks should react to stock price developments has been hotly debated. This discussion has intensified since the eruption of the credit crisis. According to some analysts, including myself, the failure of the US Federal Reserve under Alan Greenspan to react to the bubbles in the stock and housing markets helps to explain the financial excesses and the subsequent crisis.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States

7. 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