The financial crisis has exposed the need to devise stronger and broader international and regional safety nets in order to deal with economic and financial shocks and allow for countries to adjust. The euro area has developed several such mechanisms over the last couple of years through a process of trial and error and gradual enhancement and expansion. Their overall architecture remains imperfect and leaves areas of vulnerabilities. Europe suffers from three simultaneous and mutually reinforcing crises: banking crises, fiscal crises, and balance-of-payment (BOP) crises. Each can occur because of transitory liquidity shock or a more permanent solvency problem but the lines are very often blurred and the associated policy response therefore often uneasy. Table 1 shows the various categories… Read more
Bruegel blog
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The creation of euro area safety nets
5th July 2012
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Paths to eurobonds
3rd July 2012
The defining feature of the European Monetary Union is that it was purposefully designed as a monetary union without a fiscal union. In this sense, the political and intellectual consensus that gave birth to the euro was one in which this unusual form of economic and monetary union was deemed both politically and economically sustainable. The defining feature of the European Monetary Union is that it was purposefully designed as a monetary union without a fiscal union. In this sense, the political and intellectual consensus that gave birth to the euro was one in which this unusual form of economic and monetary union was deemed both politically and economically sustainable. Yet both the history of monetary unions (see Bordo et al (2011)) and the ongoing crisis seem to challenge this very assumption. Read more
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Banking union vs. fiscal union and capture
2nd July 2012
Banking union is all the rage these days. There seems to be a general intellectual agreement that cutting the vicious feedback loop between banks and their respective sovereigns is one pressing matter (see Bruegel’s recent publications on the matter). There seems to be some convergence on the idea of (i) a supranational guarantee of deposits to avoid destabilizing bank runs, (ii) a supranational mechanism to resolve, restructure and recapitalize banks as well as (iii) the resulting supranational authority to regulate and supervise banks with the necessary intrusive powers centralized above national authorities. Yet if these proposals are appealing on paper, they pose at least three essential political challenges that can easily be overlooked and come back with a vengeance: The… Read more
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The Weekender (last edition)
25th June 2012
Dear All, I have to inform you that this is my last weekender. I have recently accepted to join the Cabinet of President Van Rompuy and I will be starting very soon. I understand that writing this weekender somewhat helped me to get this job and so I'm thankful to Bruegel for offering me the platform and the nurturing environment to do it. I also wanted to thank all of you who responded, argued, exchanged working documents and debated my views every week. These exchanges were extremely useful and I sincerely hope we can continue to have them as much as possible. I won't write a proper issue this week but I want to stress the importance for the coming… Read more
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The Weekender: Enhancing the Spanish program - A new Greek program
18th June 2012
Dear All, World leaders are meeting in Los Cabos ahead of a G20 meeting that is likely to be relatively underwhelming. There is a good chance that the increase in the IMF resources will be solidified by formal and precise BRIC commitments. But most of the time will be spent pressuring Europeans to come together. But the results of the Greek elections with a slight victory of New Democracy are likely to provide some relief to financial markets although it might tough to form a government and the reality remains that the current program is now running way off track and will certainly need to be renegotiated. I will focus this week on both the redesign of the Spanish and Greek programs: 1. Enhancing the Spanish program - 2.A new Greek program? Read more
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The Weekender: From the Spanish program to the banking union - Riga to Athens with love
11th June 2012
Dear All, It has been a busy week with conference calls by G7 Minfins and eventually the eurogroup to hammer out an agreement for a Spain program. The release of the FSAP on Spain by the IMF on Friday somewhat conflicted with views of the Europeans (and in particular of the EFSF) suggesting that recapitalization needs would be greater than the 50bn announced. Europeans were already discussing then a larger package that would be more consistent with current market expectations. The ability to achieve a relatively high number has therefore created a largely positive surprise but although this is quite positive, the real questions remain unanswered. This week I will focus on: 1. From the Spanish program to the banking union - 2. Riga to Athens with love Read more
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The Weekender
4th June 2012
Dear All, There are a number of important events to monitor this week. In Japan, PM Noda’s will decide whether to restart nuclear reactors in Ohi against massive popular opposition. This is an important step to determine the future energy mix of Japan, the associated oil demand and the scope for additional global rebalancing stemming from Japan’s future current account position. In Europe, Spain remains in the limelight and the increasingly likely program to help recapitalize its banks, raises a number of important questions for all the stakeholders, including for the IMF and the ECB. President Draghi once again made a very explicit and bold call for a banking union but leaving to governments the responsibility of clarifying what it encompasses and not specifying the role that the ECB could play in the process. I will focus on: 1.Eurobonds and the proposals of the Goulard report, 2.The future Spanish program and burden sharing issues, 3.Deposit guarantee schemes Read more
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The Weekender
29th May 2012
Dear All, It has been an eventful week with financial instability in Europe over the last few weeks translating into very weak high frequency survey (PMI). A growth agenda is therefore probably urgent but the fiscal and monetary multipliers will remain extraordinarily low across the euro area so long as financial instability persists. This should therefore be addressed as a priority. The increasing capital injection for Bankia, the expansion in the activated guarantees of Dexia, the substandard recapitalization process in Greece all call for a more comprehensive response and certainly one that no member state alone can deliver. Luckily, the “informal” European Council has been the occasion of bringing this discussion to the fore. It has remained quite superficial but it is the first time that HoSG have discussed the possibility of a banking union in such a clear language and evoked Eurobonds so precisely. President Von Rompuy has been tasked to prepare a report on the necessary steps to strengthen the monetary union including “eurobonds in a time perspective, a more integrated banking supervision and resolution, and a common deposit insurance scheme.” This is very encouraging although achieving deliverables is urgent and unlikely by June, in the meantime there are two challenges to keep in mind: 1. Banking Union, bail-in and the risk of another Deauville moment 2. Eurobonds but what Eurobonds? Read more
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Chart of the week: the silent run
24th May 2012
Yesterday’s informal dinner of the European Council discussed the growth agenda and the prospect for Eurobonds. But it also, for the first time, erred the idea of a supranational deposit guarantee scheme. This is something we had been advocating for a very long time but has taken a whole new sense of urgency with the acceleration of deposit attrition in a number of countries. The monthly data suggest nonetheless that “runs” on banks are still very localized and that they are largely concentrated in Greece and Ireland. However, the debate over a deposit guarantee (whose shape and form is still unclear) could be immensely helpful in reducing the risks of deposits flight in other fragile banking systems (Spain, Cyprus…). More… Read more
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The Weekender
21st May 2012
Dear All, It has been intense week of European brinksmanship. There are many clouds on the horizons and a pressing need for decisive policy actions. European and world leaders at the G8 were having largely consensual debates about the need for economic growth but came up with no deliverables. Meanwhile, deposit attrition in Greece is growing fast. Some see it or hope it could be large and brisk enoughto affect political outcomes of the June 17th election in Greece but I doubt it will and I still expect syriza to lead the polls. Its leader, Mr.Tsipras is starting a European tour with a stop in Paris on Monday and in Berlin on Tuesday. I expect his message to combine some provocation with a genuine and honest call to renegotiate the adjustment program while staying in the euro. He is also increasingly drawing parallels between his economic program and his renegotiation agenda and that of President Hollande. This parallel is potentially very slippery for France but the reality is that France is the most suitable broker of a compromise between Greece and Germany. In all this gloom, there is one piece of good news for the medium term. The IG metall deal achieved in the early morning of Saturday after a night of fierce negotiation settled for a 4.3% increase in wages over a 13 months period. This is short of the 6.5% initially demanded but is the biggest wage deal by IG metall in 20 years and is likely toset in motion similar wage increases throughout the private sector. This is good news for domestic demand and internal rebalancing. If rebalancing in theSouth is slow; that in the North is now on the move. But these considerations might well be irrelevant if financial instability takes hold. I will discuss in particular: 1. ECB, the HFSF and Greece and 2. Cyprus: the forgotten Greek drama Read more