Search

Begin New Search Topic Monetary Policy Political Geography Europe Publishing Institution Peterson Institute for International Economics

1. Stability Bonds for the Euro Area

Author:
Angel Ubide
Publication Date:
12-2015
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
Topic:
Economics, International Trade and Finance, Monetary Policy, and GDP
Political Geography:
Europe

2. Is the European Central Bank Failing Its Price Stability Mandate?

Author:
Ángel Ubide
Publication Date:
02-2014
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Inflation in the euro area is too low, just 0.9 percent year-on-year in December 2013, and inflation expectations, measured from inflation derivative contracts, have shifted lower, indicating that markets expect some small probability of deflation in 2014 and average inflation over the next five years in the 1.25 to 1.5 percent range. The European Central Bank (ECB), however, seems to be content with this outlook. Its current projections show a very slow economic recovery and inflation at just 1.3 percent in two years' time. Yet the ECB describes the risks to inflation as balanced. This puzzling assessment might be due to the fact that the ECB's definition of price stability is less precise than that employed by other central banks, and some ECB members may interpret the definition as setting a ceiling, rather than a target, for inflation at close to but below 2 percent. But if one considers the ECB's self-assessment of success since its creation—achieving 2 percent inflation on average—its current inflation forecast of 1.3 percent would fall short of achieving its price stability mandate.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Europe

3. Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework

Author:
Arvind Subramanian and Kevin Stahler
Publication Date:
11-2014
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better—Balassa-Samuelson-Penn (BSP)—framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation—defined as real competitiveness improvements in excess of nominal exchange rate changes—is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains.
Topic:
Economics, Industrial Policy, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe

4. The Greek Debt Restructuring: An Autopsy

Author:
Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief— over 50 percent of 2012 GDP—with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult.
Topic:
Debt, Economics, Monetary Policy, and Financial Crisis
Political Geography:
Europe and Greece

5. 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

6. Updated Estimates of Fundamental Equilibrium Exchange Rates

Author:
William R. Cline and John Williamson
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
In 2008 we introduced a semiannual series providing estimates of fundamental equilibrium exchange rates, or FEERs (Cline and Williamson 2008a). The economic concept of FEERs was first set forth by Williamson (1983). An operational method for arriving at multilaterally consistent estimates of FEERs was developed by Cline (2008) and has been applied over the past five years in this series of estimates. This issue marks the valedictory round of the series for Williamson, who is retiring.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
Europe and Lisbon

7. Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One

Author:
Anders Åslund
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Hyperinflation is one of the most misused words in the English language. Two years ago, I heard a prominent American investor say that we were about to get hyperinflation, “not 15 percent a year as under Jimmy Carter but perhaps 5 percent a year.” Hyperinflation is usually 1,000 percent or more a year. The standard definition by Philip Cagan (1956) is that hyperinflation starts when inflation reaches 50 percent a month, and then the economy is in hyperinflation for one year until monthly inflation falls and stays below 50 percent.
Topic:
Economics, International Trade and Finance, Markets, Regional Cooperation, and Monetary Policy
Political Geography:
Europe

8. Why a Breakup of the Euro Area Must Be Avoided: Lessons from Previous Breakups

Author:
Anders Åslund
Publication Date:
08-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
One of the big questions of our time is whether the Economic and Monetary Union (EMU) will survive. Too often, analysts discuss a possible departure of one or several countries from the euro area as little more than a devaluation, but I argue that any country's exit from the euro area would be a far greater event with potentially odious consequences. Exit from the EMU cannot be selective: It is either none or all.
Topic:
Economics, International Trade and Finance, and Monetary Policy
Political Geography:
Europe

9. Combating Widespread Currency Manipulation

Author:
Joseph E. Gagnon Gagnon
Publication Date:
07-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Widespread currency manipulation, mainly in developing and newly industrialized economies, is the most important development of the past decade in international financial markets. In an attempt to hold down the values of their currencies, governments are distorting capital flows by around $1.5 trillion per year. The result is a net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps in the United States and the euro area. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies and instead achieved sustainable growth through higher domestic demand.
Topic:
Economics, International Trade and Finance, Markets, and Monetary Policy
Political Geography:
United States, America, and Europe

10. The Coming Resolution of the European Crisis: An Update

Author:
C. Fred Bergsten and Jacob Funk Kirkegaard
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Getting the diagnosis right is a prerequisite for understanding the euro area predicament and evaluating key decisions taken since early 2010. As we laid out in Bergsten and Kirkegaard (2012), while the euro area faces multiple overlapping and mutually reinforcing elements of fiscal (Greece), banking (Ireland/Spain), and competitiveness (Southern periphery) crises, it is first and foremost facing a crisis of institutional design. The common currency as designed in the Maastricht Treaty of 1992 is a half-built house without the critical components of banking and fiscal union necessary to sustain it through the type of crushing economic and financial down- turn witnessed since October 2008.
Topic:
Economics, International Trade and Finance, Monetary Policy, and Financial Crisis
Political Geography:
Europe