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  • Author: Ansgar Belke, Timo Baas
  • Publication Date: 09-2014
  • Content Type: Working Paper
  • Institution: Centre for European Policy Studies
  • Abstract: Member countries of the Economic and Monetary Union (EMU) initiated wide-ranging labour market reforms in the last decade. This process is ongoing as countries that are faced with serious labour market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbour policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyse the impact of labour market reforms on the transmission of macroeconomic shocks in both non-reforming and reforming countries. By analysing the impact of reforms on foreign debt, we contribute to the debate on whether labour market reforms increase or reduce current account imbalances.
  • Topic: Debt, Economics, Politics, Labor Issues, Reform
  • Author: Daniel Gros
  • Publication Date: 07-2012
  • Content Type: Working Paper
  • Institution: Centre for European Policy Studies
  • Abstract: This paper presents a simple model that incorporates two types of sovereign default cost: first, a lump-sum cost due to the fact that the country does not service its debt fully and is recognised as being in default status, by ratings agencies, for example. Second, a cost that increases with the size of the losses (or haircut) imposed on creditors whose resistance to a haircut increases with the proportional loss inflicted upon them.
  • Topic: Debt, Economics, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: Europe
  • 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, Financial Crisis
  • Political Geography: Europe
  • Author: Claudio Vicarelli, Marco Fioramanti
  • Publication Date: 03-2011
  • Content Type: Working Paper
  • Institution: Centre for European Policy Studies
  • Abstract: The recent economic and financial crises have shown the weakness of EU economic governance. A process of strengthening macroeconomic and fiscal surveillance started in the course of 2010; among other proposals, the European Commission suggested a new binding criterion of debt reduction: debt-to-GDP ratio is to be considered sufficiently diminishing if its distance with respect to the 60% of GDP reference value has reduced over the previous three years at a rate of the order of one-twentieth per year.
  • Topic: Debt, Economics, International Trade and Finance, Financial Crisis, Governance
  • Political Geography: Europe
  • Author: Felix Roth, Felicitas Nowak-Lehmann D., Thomas Otter
  • Publication Date: 02-2011
  • Content Type: Working Paper
  • Institution: Centre for European Policy Studies
  • Abstract: The financial crisis has affected trust in national and European governmental institutions in different ways. This paper analyses the determinants of trust in the national and European institutions over the last decade and comes to the conclusion that inflation reduces citizens' trust only when the economy runs smoothly. In times of crisis, citizens do not worry about inflation but rather about jobs and the effects of a recession. Declining trust in national governments is related to an increase in unemployment in the EU-15 in all time periods, whereas trust in the European Commission and the European Parliament seems to be strongly associated with the situation in the real economy (unemployment and growth of GDP per capita) only in times of crisis. Yet in the EU-27, falling levels of trust in the national and European governmental institutions during times of crisis seem to be primarily related to an increase in government debt. In an EU-15 country sample, this negative relationship appears to be driven by countries that owe a larger share of their increase in government debt to aiding/bailing out their financial sector and the implementation of significant austerity measures.
  • Topic: Debt, Economics, Financial Crisis, Governance
  • Political Geography: Europe
  • Author: Daniel Gros
  • Publication Date: 03-2010
  • Content Type: Working Paper
  • Institution: Centre for European Policy Studies
  • Abstract: This paper describes the key economic variables and mechanisms that will determine the adjustment process in those euro area countries now under financial market pressure. (Greece, Ireland, Portugal, Spain and Italy = GIPSY) The key finding is that the adjustment will be particularly difficult for Greece (and Portugal) because these are two relatively closed economies with low savings rates. Both of these countries are facing a solvency problem because they combine high debt levels with low growth and high interest rates. Fiscal and external adjustment is thus required for sustainability, not just to satisfy the Stability Pact. By contrast, Ireland and Spain face more of a liquidity than a solvency problem. Italy seems to have a much better starting position on all accounts. Fiscal adjustment alone will not be sufficient to ensure sustainability. Without significant reductions in labour costs, these economies will face years of stagnation at best. Especially in the case of Greece, it is imperative that the cuts in public sector wages are transmitted to the entire economy in order to restore competitiveness, and thus ensure that export growth can become a vital safety valve. Without an adjustment of wages in the private sector, the adjustment will become so difficult that failure cannot be excluded.
  • Topic: Debt, Economics, Monetary Policy, Financial Crisis
  • Political Geography: Europe, Greece, Spain, Italy, Portugal, Ireland