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61. Bringing Stability to Europe: Why Europe needs a banking union

Author:
Erik Jones
Publication Date:
11-2012
Content Type:
Policy Brief
Institution:
Finnish Institute of International Affairs (FIIA)
Abstract:
The European sovereign debt crisis is the result of capital flows across the single market. The danger that such capital flows could unleash market speculation was known from the start; indeed, the single currency was created to remove the threat of exchange rate instability. The problem is that the architects of the single currency did not consider the impact of capital market integration on the banking sector or on the relationship between banks and national governments. Once markets lost confidence in the security of their cross-border investments, investors began to pull back their capital and the internal market for financial services started to disintegrate. The creation of a banking union is part of the solution. However, the euro area also needs a common 'risk-free' asset to use as a safe haven in times of crisis.
Topic:
Debt, Economics, Markets, and Financial Crisis
Political Geography:
Europe

62. Lessons from Reforms in Central and Eastern Europe in the Wake of the Global Financial Crisis

Author:
Anders Åslund
Publication Date:
04-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The response of the ten new eastern members of the European Union to the global financial crisis has valuable lessons of crisis resolution for the euro area. These countries were severely hit by the crisis in the fall of 2008 and responded with extensive reforms. Crisis made the unthinkable possible. This paper outlines the main reform measures that the ten Central and East European (CEE) countries carried out. It then quantifies to what extent the CEE countries resolved the macroeconomic crisis and explores the effects of the reforms on future growth prospects. The fourth and major section discusses how the political economy of the crisis resolution actually worked. Finally, the author examines what lessons euro area countries can learn from the crisis resolution of the newest members of the European Union.
Topic:
Debt, Economics, International Trade and Finance, Markets, Political Economy, and Financial Crisis
Political Geography:
Europe

63. Fiscal Federalism: US History for Architects of Europe's Fiscal Union

Author:
C. Randall Henning and Martin Kessler
Publication Date:
01-2012
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
European debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The “fiscal compact” agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as “debt brakes” in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are “sovereign”: The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important caveats. First, debt brakes are likely to be more durable and effective when “owned” locally rather than mandated centrally. Second, maintaining a capacity for countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and create a common fiscal pool for restructuring the banking system.
Topic:
Debt, Financial Crisis, and Governance
Political Geography:
United States and Europe

64. Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis

Author:
Liliana Rojas-Suarez and Carlos Montoro
Publication Date:
02-2012
Content Type:
Working Paper
Institution:
Center for Global Development (CGD)
Abstract:
The financial systems in emerging market economies during the 2008–09 global financial crisis performed much better than in previous crisis episodes, albeit with significant differences across regions. For example, real credit growth in Asia and Latin America was less affected than in Central and Eastern Europe. This paper identifies the factors at both the country and the bank levels that contributed to the behavior of real credit growth in Latin America during the global financial crisis. The resilience of real credit during the crisis was highly related to policies, measures and reforms implemented in the pre-crisis period. In particular, we find that the best explanatory variables were those that gauged the economy's capacity to withstand an external financial shock. Key were balance sheet measures such as the economy's overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). The quality of pre-crisis credit growth mattered as much as its rate of expansion. Credit expansions that preserved healthy balance sheet measures (the “quality” dimension) proved to be more sustainable. Variables signalling the capacity to set countercyclical monetary and fiscal policies during the crisis were also important determinants. Moreover, financial soundness characteristics of Latin American banks, such as capitalization, liquidity and bank efficiency, also played a role in explaining the dynamics of real credit during the crisis. We also found that foreign banks and banks which had expanded credit growth more before the crisis were also those that cut credit most. The methodology used in this paper includes the construction of indicators of resilience of real credit growth to adverse external shocks in a large number of emerging markets, not just in Latin America. As additional data become available, these indicators could be part of a set of analytical tools to assess how emerging market economies are preparing themselves to cope with the adverse effects of global financial turbulence on real credit growth.
Topic:
Debt, Economics, Emerging Markets, Globalization, and Financial Crisis
Political Geography:
Europe, Asia, and Latin America

65. Interest Rate Shock and Sustainability of Italy's Sovereign Debt

Author:
William R. Cline
Publication Date:
02-2012
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Contagion from Greece, together with domestic political uncertainty in Italy, caused interest rates on Italian sovereign debt to spike in the second half of 2011. As shown in figure 1, the risk spread above German bunds for 10-year Italian government bonds rose from 200 basis points in early July 2011, to a range of 300 to 400 basis points after the July 21 Greek package with its new emphasis on private sector involvement. There was a second surge to the 400 to 500 basis point range in November through January, following the October 27 Greek package that insisted on a 50 percent reduction in private sector claims.
Topic:
Debt, Economics, and Financial Crisis
Political Geography:
Europe, Germany, and Italy

66. The Spanish Hangover

Author:
Daniel Gros and Cinzia Alcidi
Publication Date:
04-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
Spain faces high unemployment and slow growth. This paper focuses on an important source of those problems, namely its housing market. While some adjustment has occurred since Spain's housing bubble burst in 2008, the authors find that house prices and construction need to decrease more to slow Spain's unsustainable accumulation of foreign debt.
Topic:
Debt, Economics, Markets, and Financial Crisis
Political Geography:
Europe and Spain

67. The Image of Crisis-Ridden Europe and the Division Between Creditor and Debtor Countries: The Case of Italy

Author:
Michele Comelli
Publication Date:
06-2012
Content Type:
Working Paper
Institution:
Istituto Affari Internazionali
Abstract:
The eurozone's debt crisis has exposed structural economic and political rifts within the European Union. Specifically, it has created a new cleavage between creditor and debtor countries, the former being mainly located in Central-Northern Europe and the latter in Southern Europe, each with its own understanding of the causes of and remedies to the crisis. This paper explores how a debtor country - Italy - has changed its political discourse on the EU as a result of the crisis, focusing on political elites, civil society and public opinion. It argues that while the discourse of political elites and of civil society clearly mirrors this cleavage, public opinion does not necessarily follow this pattern, being mainly concerned with the country's domestic ills.
Topic:
Civil Society, Debt, and Financial Crisis
Political Geography:
Europe and Italy

68. Be Outraged: There are alternatives

Author:
Richard Jolly, Frances Stewart, Giovanni Andrea Cornia, Stephany Griffith-Jones, Rolph van der Hoeven, Diane Elson, Carlos Fortin, Gerry Helleiner, Raphie Kaplinsky, Richard Morgan, Isabel Ortiz, and Ruth Pearson
Publication Date:
05-2012
Content Type:
Book
Institution:
Oxfam Publishing
Abstract:
Pushed to extremes, austerity is bad economics, bad arithmetic, and ignores the lessons of history. We, an international group of economists and social scientists, are outraged at the narrow range of austerity policies which are bringing so many people around the world to their knees, especially in Europe. Austerity and cutbacks are reducing growth and worsening poverty. In our professional opinions, there are alternatives – for Britain, Europe and all countries that currently imagine that government cutbacks are the only way out of debt. The low-growth, no-growth trap means that the share of debt in GNP falls ever more slowly, if at all. It may even rise – as it has in some countries.
Topic:
Debt, Development, Economics, Foreign Aid, and Financial Crisis
Political Geography:
Britain and Europe

69. EIU: Global outlook summary

Publication Date:
06-2012
Content Type:
Policy Brief
Abstract:
The global economy remains in precarious shape. Europe's debt crisis rages on, and although the euro appears to have survived its most recent test in the form of the Greek election on June 17th, austerity and financial-market uncertainty are depressing economic activity in Europe and, by extension, in much of the rest of the world. The Economist Intelligence Unit continues to expect global GDP growth to slow in 2012, and while our forecasts for the G3 economies—the US, euro zone and China—are essentially unchanged this month, we have cut our projections for Brazil and India.
Topic:
Debt, Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States, China, Europe, India, and Brazil

70. Implementing Basel III in Europe: Diagnosis and avenues for improvement

Author:
Rym Ayadi, Emrah Arbak, and Willem Pieter De Groen
Publication Date:
06-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
Adopted by the European Commission in July 2011, the proposed Capital Requirements Directive and Regulation (CRD IV-CRR) translate into EU law the Basel III standards adopted by the Basel Committee for Banking Supervision (BCBS). Among other things, the proposal increases the quality and quantity of the minimum capital; introduces new rules on liquidity, leverage ratios, counter-cyclical buffers and systemically important financial institutions; and amends the definitions of counterparty credit risk and rules for the banking book. The rules complement the earlier amendments that strengthened the capital and disclosure requirements for the trading book and resecuritization instruments as well as requirements to ensure that remuneration policies do not lead to excessive risk-taking.
Topic:
Debt, Economics, Markets, and Financial Crisis
Political Geography:
Europe

71. 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 (CEPS)
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

72. '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 (CEPS)
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

73. Sovereign Debtors in Distress: Are Our Institutions Up to the Challenge?

Author:
Susan Schadler
Publication Date:
08-2012
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation (CIGI)
Abstract:
Global economic developments over the past two years have dashed hopes that the risks of sovereign debt crises have been tamed. The turmoil in Europe has, of course, been the most acute of these developments, but growing national fiscal imbalances, anemic prospects for growth and the expanding reach of private financial markets to newly emerging economies are potent, if less immediately threatening, signs of the risks ahead. After lying dormant for almost a decade, pressing questions about whether global institutions are capable of containing the costs of debt crises are again being raised.
Topic:
Debt, Economics, Globalization, Political Economy, Financial Crisis, and Governance
Political Geography:
Europe

74. Can Italy and Spain survive rates of 6-7%?

Author:
Daniel Gros
Publication Date:
07-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
The sentiment that the euro is now in real danger is based in large part on the widespread conviction that interest rates of 6-7% are simply unsustainable for both Italy and Spain., After taking a closer look at the fundamentals, however, Daniel Gros concludes in this new Policy Brief that both countries should be able to live with this level of interest rates for quite some time, but only if they mobilize domestic savings, which remain strong in both countries. For Spain, some debt/equity swaps are also needed.
Topic:
Debt, Economics, Markets, and Financial Crisis
Political Geography:
Europe, Spain, and Italy

75. Unholy compromise in the eurozone and how to right it

Author:
Stefano Micossi
Publication Date:
07-2012
Content Type:
Policy Brief
Institution:
Centre for European Policy Studies (CEPS)
Abstract:
Two years after the first Greek rescue in May 2010, crisis management in the eurozone has still failed to restore confidence. A vivid picture of the situation can be found in Figure 1: the constellation of spreads on ten-year sovereign debts over the Bund in the eurozone is wider than it was before monetary union, as though financial markets had already discounted its breakdown. Temporary respites, notably in the early part of 2012, have not interrupted the trend of increasing divergence that risks undermining the credibility of adjustment efforts under way.
Topic:
Debt, Economics, Markets, Monetary Policy, and Financial Crisis
Political Geography:
Europe

76. 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 (CEPS)
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

77. A simple model of multiple equilibria and sovereign default

Author:
Daniel Gros
Publication Date:
07-2012
Content Type:
Working Paper
Institution:
Centre for European Policy Studies (CEPS)
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, and Financial Crisis
Political Geography:
Europe

78. Money and power: EU budget negotiations in a time of austerity

Author:
Sara Hagemann
Publication Date:
05-2012
Content Type:
Policy Brief
Institution:
Danish Institute for International Studies (DIIS)
Abstract:
The ongoing negotiation of the EU's multi-annual budget is heavily constrained by how the decision process takes place. Governments focus on narrowly defined national interests, rather than on securing a better budget for Europe. While the budget is small in size, it could be used as a powerful political tool for much needed economic growth policies on a larger scale.
Topic:
Debt, Economics, Government, and Financial Crisis
Political Geography:
Europe

79. 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
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

80. The global crisis: Have we learned the right lessons?

Author:
György Surányi
Publication Date:
03-2012
Content Type:
Policy Brief
Institution:
Center for Social and Economic Research - CASE
Abstract:
The global crisis, which was the worst economic and financial downturn since the Great Depression, revealed the fundamental deficiencies in the global financial system and drastically changed the way we view the world and the global financial system. The crisis challenged long-standing views and ideas, and in response, after the most acute phase of the crisis, joint global efforts were launched to put the system on firm footing again and prevent the next crisis. These efforts can only be successful if we fully understand the root causes of the crisis and learn the right lessons from it. In his E-brief Dr. György Surányi focuses on four topics: regulation, external position, monetary policy and the European debt crisis. This E-brief is based on Dr György Surányi’s presentation at the CASE 2011 International Conference on Europe 2000: Exploring the Future of European Integration held on November 18-19, 2011.
Topic:
Debt, Monetary Policy, Regulation, and Economic Crisis
Political Geography:
Europe