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271. Central Banks in Times of Crisis: The FED vs. the ECB

Author:
Daniel Gros, Cinzia Alcidi, and Alessandro Giovannini
Publication Date:
07-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies
Abstract:
Different economic and financial structures require different crisis responses. Different crises also require different tools and resources. The first 'stage' of the financial crisis (2007-09) was similar on both sides of the Atlantic, and the response was also quite similar. The second stage of the crisis is unique to the euro area. Increasing financial disintegration within the region has forced the ECB to become the central counterparty for the entire cross-border banking market and to intervene in the sovereign bond market of some stressed countries. The actions undertaken by the European Central Bank (ECB), however, have not always represented the best response, in terms of effectiveness, consistency and transparency. This is especially true for the Securities Markets Programme (SMP): by de facto imposing its absolute seniority during the Greek PSI (private sector involvement), the ECB has probably killed its future effectiveness.
Topic:
Debt, Economics, International Trade and Finance, Markets, Monetary Policy, and Financial Crisis
Political Geography:
Europe

272. Reshaping the Security Order in Asia-Pacific

Author:
Alain Guidetti
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
The Geneva Centre for Security Policy
Abstract:
The international strategic landscape is evolving at an unprecedented pace. The widespread assumption is that the global balance of power is shifting from the West to the East (and the South), as a consequence of the convergence of two variables: the sustained economic growth of China and Asia over recent decades, and the Western economic downturn since the 2008 global financial crisis. Though interpretations differ on the meaning and magnitude of this power shift, the prevailing assumption is that it reflects the weakness, and for some the relative decline, of the US and the West against Asia's and primarily China's strong rise. The implications of these developments across the Asia-Pacific are deep and have already led to growing strategic competition between Beijing and Washington for preeminence over the Asia-Pacific and new uncertainties over global and regional governance.
Topic:
Economics, Human Rights, and Financial Crisis
Political Geography:
United States, China, Washington, Beijing, Asia, Australia, and Asia-Pacific

273. 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

274. Aging Eagle and Dark Clouds on the Security Horizon

Author:
Dong-Joon Jo
Publication Date:
10-2012
Content Type:
Working Paper
Institution:
East Asia Institute (EAI)
Abstract:
The financial crisis in 2008 exposed a latent weakness that the United States would not have resources enough to cope with its population aging and maintain its global leadership. The crisis led the federal government to increase its welfare spending, bail out faltering industries, and rely on measures of economic stimulation. These measures resulted in the swelling of the public debt, which increased by $5,077 billion from fiscal year 2006 to fiscal year 2010, and intensified the U.S. federal government’s budgetary difficulties in meeting the welfare and medical needs of senior citizens and carrying out the war on terror abroad (See Figure 1). The belief in the sustainability of the public debt severely weakened, as the interest expense on the public debt rose to 8.6 percent of the total federal spending in 2010; the belief in the comparability between U.S. domestic welfare and its global leadership eroded. The financial crisis evoked a fairly routine set of behavior in partisan politics in 2011. When the public debt was about to reach the ceiling in 2011, Republicans and majority members of the Tea Party threatened not to agree on raising the debt ceiling. They pressured the Barack Obama administration to reduce the federal budget and governmental regulations. Meanwhile, the Obama administration and Democrats wanted to raise the maximum amount of governmental borrowing and keep boosting the economy. In the gunfire between the two parties loomed the possibility of sovereign default. Amid the partisan conflict the credit rating of the U.S. government bonds was downgraded for the first time in history; major market indexes plunged in the third quarter of 2011. The Budget Control Act was the result of bipartisan negotiations, accommodating conflicting goals and instruments from both sides. It provided breathing room for the Obama administration and Democrats by allowing the debt ceiling to increase by $900 billion two times in 2011 and additionally by $1.2 trillion in 2012. Meanwhile, it reduced the budgetary leeway of the administration and gave more power to the House, where Republicans and Tea Party members held the majority. More specifically, it established binding limits on annual appropriations bills to reduce the funding for discretionary programs, relative to the funding in the Congressional Budget Office’s 2010 baseline; it set up a Joint Select Committee on Deficit Reduction, the “Supercommittee,” to come up with a bill to reduce deficits by at least $1.5 trillion through 2021. The legislation appeared to keep the partisan gunfire under control.
Topic:
Security, Financial Crisis, Budget, and Welfare
Political Geography:
North America and United States of America

275. The Reform of European Economic Governance : Towards a Sustainable Monetary Union?

Author:
Stijn Verhelst
Publication Date:
06-2011
Content Type:
Working Paper
Institution:
EGMONT - The Royal Institute for International Relations
Abstract:
The euro is a rather unusual currency as it is shared by a union of largely independent states. This results in a single supranational monetary union, while most 'economic' matters are decided on a national level. A key challenge in such a system is to ensure that the different levels of decision-making do not undermine the advantages of the common currency. For this reason, the European monetary union has been buttressed by economic integration, resulting in the Economic and Monetary Union (EMU).
Topic:
Debt, Economics, Monetary Policy, Financial Crisis, and Governance
Political Geography:
Europe

276. Renewed Financial Supervision in Europe – Final or transitory?

Author:
Stijn Verhelst
Publication Date:
03-2011
Content Type:
Working Paper
Institution:
EGMONT - The Royal Institute for International Relations
Abstract:
In order to obtain financial sector stability, adequate financial regulation and supervision are paramount. Despite their crucial role, both failed to prevent or at least mitigate the financial crisis. While financial regulation strives to impose a set of rules that ensure a safe and resilient financial sector, it has proven to contain too many gaps and loopholes.
Topic:
Debt, Economics, Markets, Monetary Policy, Financial Crisis, and Governance
Political Geography:
Europe

277. The Evolving Structure of the American Economy and the Employment Challenge

Author:
Michael Spence and Sandile Hlatshwayo
Publication Date:
03-2011
Content Type:
Working Paper
Institution:
Council on Foreign Relations
Abstract:
This paper examines the evolving structure of the American economy, specifically, the trends in employment, value added, and value added per employee from 1990 to 2008. These trends are closely connected with complementary trends in the size and structure of the global economy, particularly in the major emerging economies. Employing historical time series data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, U.S. industries are separated into internationally tradable and nontradable components, allowing for employment and value-added trends at both the industry and the aggregate level to be examined. Value added grew across the economy, but almost all of the incremental employment increase of 27.3 million jobs was on the nontradable side. On the nontradable side, government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades. There are obvious questions about whether those trends can continue; without fast job creation in the nontradable sector, the United States would already have faced a major employment challenge.
Topic:
Economics, Markets, Labor Issues, and Financial Crisis
Political Geography:
United States and America

278. Aid Supplies Over Time: Accounting for Heterogeneity, Trends, and Dynamics

Author:
Sam Jones
Publication Date:
01-2011
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The recent financial crisis has rekindled interest in the foreign aid supply behaviour of bilateral donors. Using the latest data covering the period 1960-2009, this paper examines how such behaviour is related to domestic factors. Based on a simple empirical model, a distinction is made between long-run supply trends and short-run dynamics, which motivates use of error correction methods. Panel econometric techniques are employed that are consistent in the presence of parameter heterogeneity and cross-section dependence. Results support the error correction framework, but point to very substantial heterogeneity between countries. There is also good evidence that donor behaviour continues to evolve over time. As such, past trends in aid supplies are unlikely to provide a good guide to those of the future.
Topic:
Development, Bilateral Relations, Foreign Aid, and Financial Crisis

279. Webinar: Lower the floor or raise the ceiling? US fiscal and economic outlook

Author:
Leo Abruzzese
Publication Date:
04-2011
Content Type:
Working Paper
Abstract:
A serious deficit-reduction debate is underway. Despite wide policy differences, this is encouraging and long overdue. Agreement on some basic steps may happen soon. A serious, long-term deal won't happen until after the election. A credible plan will require revenue increases. These won't come quickly or easily, but they are unavoidable, The debt ceiling will be raised, amidst much drama. The US will not default on its debt. The US economy is still recovering...but higher energy and food prices are creating headwinds.
Topic:
Debt, Economics, Global Recession, and Financial Crisis
Political Geography:
United States

280. Growth and Recovery in a Time of Default: Lessons from the Role of the Urban Sector in Argentina

Author:
Michael Cohen
Publication Date:
03-2011
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
International narratives on Argentina's recovery from the crisis of 2001-02 tend to emphasize the role of rising commodity prices and growing demand from China. Argentina is said to have been 'lucky', saved by global demand for its agricultural exports. The international narrative has also been used by local agricultural exporters to justify their objections against higher export taxes during periods of high commodity prices. These narratives are not correct. Data on the country's recovery show that it was not led by agricultural exports but was fuelled by urban demand and production. When the Convertibility period ended and the peso was devalued in 2002, price increases for imports stimulated the production of domestic goods and services for consumers. This production in turn generated multiplier effects which supported small and medium-sized firms and helped to create many new jobs. This later produced a revival of the construction and then the manufacturing sectors as well.
Topic:
Agriculture, Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
China, Argentina, and Latin America