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11. Southern Europe Ignores Lessons from Latvia at Its Peril

Author:
Anders Åslund
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In the current financial crisis plaguing Europe, Latvia stands out for resolving its financial problems quickly and resolutely. After contracting 24 percent in 2008 and 2009, it grew at the rate of 5.5 percent in 2011. The speed and determination. with which the government carried out austerity measures in 2009 and restored confidence after suffering the worst output decline is a crucial lesson for the ailing South European countries—Greece, Italy, Portugal, and Spain. Many policy observers and economists have dismissed Latvia's crisis resolution as irrelevant to the situation in Southern Europe. The Latvian orange, they say, cannot be compared with the South European apples. I argue otherwise.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe, Greece, and Latvia

12. Stepping up Growth Policies

Author:
Stefano Micossi
Publication Date:
03-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
The eurozone is in recession and will show negative growth in 2012; GDP will fall sharply in Greece and Portugal, and there is substantial risk that Spain and Italy will follow suit (the Commission's recent forecasts seem overly optimistic and complacent; the IMF is more downbeat). But fiscal policies are uniformly restrictive throughout the eurozone and much of the Union, and the hopes that fiscal consolidation could spur growth by improving household and business confidence are not materialising. In reality, domestic demand has been hit too hard by fiscal consolidation, and investment throughout the Union remains well below pre- crisis levels. Credit is tight due to the deteriorating quality of borrowers and the ongoing deleveraging in banking.
Topic:
Economics, Foreign Exchange, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
Europe and Greece

13. Mispricing of Sovereign Risk and Multiple Equilibria in the Eurozone

Author:
Paul De Grauwe and Yuemei Ji
Publication Date:
01-2012
Content Type:
Working Paper
Institution:
Centre for European Policy Studies
Abstract:
This paper finds evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios, and was the result of negative market sentiments that became very strong since the end of 2010.
Topic:
Economics, Monetary Policy, and Financial Crisis
Political Geography:
Europe, Greece, Spain, Portugal, and Ireland

14. Liquidity in times of crisis: Even the ESM needs it

Author:
Daniel Gros and Thomas Mayer
Publication Date:
03-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
This paper argues that the new permanent European rescue fund, the European Stability Mechanism (ESM), should be provided with a liquidity backstop by having it registered as a bank – and be treated as such by the European Central Bank. If the crisis were to become acute again, the ESM would stand ready to intervene in secondary markets, potentially with almost unlimited amounts of funding. Access to central bank financing will be crucial in a future crisis, because in such a crisis risk aversion is likely to be extreme, and even the ESM might not be able to raise at very short notice the huge sums that might be required to prevent a breakdown of the financial system. Hundreds of billions of euro might be needed just to top up the programmes for Greece, Ireland and Portugal – and Spain and Italy may require more than a thousand billion euro. Sums of this order of magnitude cannot be raised quickly by a new institution. Simply increasing the headline size of the ESM might thus be of little use.
Topic:
Debt, Economics, Monetary Policy, and Financial Crisis
Political Geography:
Greece, Spain, Italy, Portugal, and Ireland

15. 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

16. An Agenda for the European Council: Feasible steps to bring the eurozone back from the precipice

Author:
Stefano Micossi
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
Once again the European Council will meet in an emergency session at the end of June, with the eurozone economy in recession and actually plummeting in its Southern periphery. Further doubts are also growing on the sustainability of sovereign debts due to the vicious spiral of deteriorating bank balance sheets, ballooning potential liabilities from banking rescues and widening spreads on government borrowings. The sovereign debt crisis in the periphery has now turned into a fully fledged banking crisis that threatens to spread from Greece to Spain and tomorrow, who knows, to Italy, France and even Germany itself.
Topic:
Debt, Economics, Regional Cooperation, Financial Crisis, and Governance
Political Geography:
Europe, Greece, France, Germany, Spain, and Italy

17. 'Grexit': Who would pay for it?

Author:
Daniel Gros, Cinzia Alcidi, and Alessandro Giovannini
Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
What would be the cost if Greece were to exit from the eurozone? This much-debated question cannot be answered with a single number. The consequences of Greece's exit would depend decisively on the exact circumstances of events in the country itself as well as the general state of financial markets in the eurozone.
Topic:
Debt, Markets, Regional Cooperation, Monetary Policy, and Financial Crisis
Political Geography:
Europe and Greece

18. Greek Entrepreneurs to the Rescue: How to Reinvent the Greek Economy after the Sovereign Debt Crisis

Author:
Nasos Mihalakas
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
The Diplomatic Courier
Abstract:
The Greek dimension of the EU sovereign debt crisis is by now well known to all. Investor anxiety over excessive national debt throughout the EU led to demands for higher interest rates from several governments with higher debt levels and current account deficits. This in turn made it difficult for some governments to finance further budget deficits and service existing debt. Unable to pay for its public debt, the Greek government turned to the EU for financial assistance. The first bailout package was approved on May 2010, which provided the Greek government with a three-year, €110 billion loan. In February 2012, the lending troika (EU, IMF, and ECB) eventually agreed to provide a second bailout package worth €130 billion. This second package included an agreement with banks to "voluntarily" accept a 53.5 percent write-off of some Greek debt, the equivalent of €100 billion, to reduce the country's debt level from €340 billion to €240 billion – or 120.5 percent of GDP – by 2020. So far, all the reforms forced upon Greece centers on how to reduce the government budget. These reforms include reducing the minimum wage for public (and therefore, also private) sector employees by 22 percent, cutting benefits to pensioners and health-care recipients, reducing the government payroll by laying off 150,000 public sector employees by 2015, privatizing government companies, and opening up some industries that were closed to competition. For now, Greece has been brought back from the brink of bankruptcy. Though safe for now, the country could find itself struggling to meet the strict conditions outlined in the second bailout agreement if key structural reforms don’t take place. It is not too late for the crisis to serve as an opportunity.
Topic:
Debt, Financial Crisis, European Union, and IMF
Political Geography:
Europe and Greece

19. Europe on the Brink

Author:
Simon Johnson and Peter Boone
Publication Date:
07-2011
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Attempts to resolve the problems in Europe are failing, and the crisis is spreading from Greece, Ireland, and Portugal to larger nations. Europe's financial system relies on moral hazard, i.e., a “no defaults” policy, to attract the funding needed to roll over large amounts of short–term bank and sovereign debt. Now that politicians in creditor nations are calling for private sector burden sharing, investors are demanding higher interest rates to hold these debts. But higher rates may tip banks and nations toward bankruptcy. Europe's banks and financial system are highly integrated across countries. Rising expectations of default in some countries could lead to large-scale capital flight into “safe” countries. This shift will raise concerns regarding solvency and liquidity of many financial institutions. The payments system of the euro area is serving as an opaque bailout mechanism that is currently preventing the euro area from falling apart at this time. If the number of nations in trouble spreads beyond Greece, Ireland, and Portugal, this bailout system will be stressed because of the potential size of accumulated funding. The European Central Bank (ECB) could soon see a vocal debate between inflationist and hawkish (anti–inflation) members. Inflationists will call for large–scale interventions, including bond buybacks and emergency loans, while the hawks will attempt to close loopholes in the payments system that effectively permit each troubled nation to create money needed to finance capital flight and budget deficits. At this stage in the debate, we see little chance that Europe can avoid ending the “moral hazard” regime, in which case it needs to plan for widespread sovereign and bank debt restructurings.
Topic:
Debt, Economics, Regional Cooperation, and Financial Crisis
Political Geography:
Europe, Greece, and Ireland

20. Turkey's 2000/1 Banking Crisis: A Case Study for the Transformation of the Greek Finance?

Author:
Onur Bayramoğlu
Publication Date:
08-2011
Content Type:
Policy Brief
Institution:
Global Political Trends Center
Abstract:
On April 2010, recently after the eruption of the Greek crisis, an unexpected hand from Turkey reached to Greece. Proud with his country's last decade growth figures, Turkey's then Vice Prime Minister, Ali Babacan, paid a visit to Greece in order to share his country's reform period after its 2000/1 crisis, arguing that it could also be a case study for Greece. In this brief, I analyzed Greek and Turkish financial crises. Although it is a mere fact that the structural problems in Greek economy complicate the reform period in Greece, there are certain lessons that Greeks can learn from the Turkish experience. As Turks did after 2001, they should see the crisis as an opportunity to overcome the long time problems . In this regard, Greeks first and foremost should establish consensus among themselves, signaling to the markets that they are ready to face the burdens of the reform period.
Topic:
Debt, Economics, International Political Economy, and Financial Crisis
Political Geography:
Europe, Central Asia, Turkey, and Greece