Director Jean Pisani-Ferry takes a look at the economic situation in China and examines whether China's growth can be rebalanced and whether the Chinese government will participate fully in global governance. The concept has stuck in the mind ever since Robert Zoellick, president of the World Bank, and his chief economist Justin Lin came up with it in April. The core of the world economy is not the overpopulated G20, nor an outdated G7, but the ‘G2’ of the US and China. Whether it is the relaunch of the Sino-American economic dialogue or the recent visit of Barack Obama to China, all the evidence seems to support the inference that the co-pilot’s seat in the global economy, which Europeans were… Read more
Bruegel blog
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Can China Change?
30th November 2009
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European Zombies
29th November 2009
What’s at stake: European banks have made a come back to the forefront over the past few weeks. Whether it be the fall out of their exposure to Dubai World, changes in the regulatory system or the activism of the European Commission when it comes to pushing through restructuring in compliance with rules for the internal market, European Banks are definitely back at the centre of European economic policy. Our focus is here on banks’ profits and losses. On banks’ expected losses… The Bundesbank's Financial Stability Review argued on Wednesday that losses stemming from securities have been largely accounted for if not overstated but losses from the cycle in 2010 could be understated. The range of write downs expectations for… Read more
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Triangular Trouble: the Euro, the Dollar and the Renminbi
29th November 2009
What’s at stake: China has come under renewed pressure this weekend to begin strengthening its currency as the European Troika – ECB president Trichet, Eurogroup chairman Juncker and Commission president Barroso – visits the country for their annual summit with Chinese PM Wen Jiabao und People's Bank of China governor Zhou Xiaochuan. Kevin O’Rourke says the issue of the renminbi peg to the dollar is one that needs to be confronted sooner rather than later, for everyone's sake. Based on an analysis of the trade collapse in the interwar period, O’Rourke argues that if we want to avoid such a scenario, we need to avoid two things. First, policy makers must ensure that the recovery continues as many of the… Read more
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Europe: Mission Accomplished?
24th November 2009
Angela Merkel and her colleagues are about to claim ‘mission accomplished’. José Manuel Barroso has been reappointed, the new treaty has been ratified, and the two new positions it has created are about to be filled. There may still be hiccups: at the European Parliament over the choice of some commissioners; with a Tory government in the UK; during the future negotiations on the EU budget; and with the new competition commissioner. But all this amounts to little more than routine. In the years to come, Europe is unlikely to be on the shortlist of strategic issues that durably capture the leaders’ attention.The mission, however, was not only to appoint two generals and a lieutenant. Europe also needs defined purpose… Read more
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What the U.S. Long Bond Market Is Telling Us
22nd November 2009
What’s at stake: Short-term interest rates in the US turned negative on Thursday. That means that investors are piling into Treasuries to such an extent that they’re now willing to effectively pay the government for the benefit of owning them. But it’s not clear how long we can expect this to go on, especially if, as the Obama administration seems to worry, the demand for long-term government debt is driven by a “carry trade” where financial players borrow cheap money short-term, and use it to buy long-term bonds. Could further increases in deficit financing cause long term rates to spike? Paul Krugman says that we should be worried if long-term rates looked unreasonably low given the fundamentals. But they don’t… Read more
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Jobs, Jobs, Jobs, Jobs!
22nd November 2009
What’s at stake: Now that they've finished their health-care bill, US House leaders are turning their attention to the soaring unemployment rate. House leaders have asked key committee chairmen to offer up proposals that would be compiled into a single larger piece of legislation, with a goal of bringing a "jobs bill" to a House vote before the Christmas break. President Obama also announced that he will convene a jobs summit at the White House next month. In its latest economic outlook released on Thursday, the OECD warned that unemployment is set to continue to rise well into 2010 and to fall only modestly the following year from a peak of over 9 per cent. Daniel Gross says that the… Read more
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Turbulence Ahead for the City of London
16th November 2009
The city of London has been Europe’s dominant financial center since the 18th century, and its prominence has been especially marked in the decade before the current financial crisis. The city has succeeded by combining the intermediation of global financial imbalances, channeling Asian and Middle Eastern savings toward investment products in the West, and increasing the concentration of wholesale financial services for the entire European financial system. Domestically, it was seen as the goose that laid golden eggs for the United Kingdom’s economy, and was rewarded with generous tax treatment and a light-touch regulatory regime rationalized as “risk based.” In Brussels, the city became an objective ally of the European Union institutions in their drive to complete cross-border market integration,… Read more
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Financial Stability and Central Banking
15th November 2009
What is at stake: The focus on financial stability is helping to reshape central banking and the assignment of prudential responsibility is becoming an important political and economic debate potentially affecting Central bank, fiscal authorities and regulators. Central banks have become in many respects quasi-fiscal actors creating conflicts of interests, potential lack of accountability and difficult trade-offs between price and financial stability, drawing attention to the need for renewed tools. The European Systemic Risk Board recommended by the De La Rosiere Report is making a first attempt at this difficult exercise by creating a forum where Central Bankers and National Regulators are meant to discuss macro-prudential risks. Sylvester Eijffinger argues that the micro-prudential supervision set forth in the De La… Read more
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Of Asset Bubbles and Bursts
15th November 2009
What’s at stake: Concerns are mounting that efforts by governments and central banks to stoke a recovery will create a nasty side effect: asset bubbles in real-estate, stock and currency markets, especially in emerging countries. Prices are surging across a host of markets. Gold is up about 44% this year. In the U.S., risky assets are rising rapidly in price: The risk spreads, or interest-rate premiums, on low-rated junk bonds have narrowed to about where they were in February 2008, before Bear Stearns and Lehman Brothers fell. Nouriel Roubini says that the mother of all carry trades is behind the massive rally in risky asset prices, setting up the biggest co-ordinated asset bust ever. A more important factor than the… Read more
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Europe’s banks still need restructuring
27th October 2009
Whether in G20 summits or in more local venues, most current discussions on financial stability tend to focus on ensuring that last year’s meltdown does not happen again, with tighter regulation of capital and compensation policies, prevention of moral hazard through new resolution mechanisms, overhaul of supervisory structures, and reform of governance and disclosures. But while Europe’s policymakers ponder how to prevent the next crisis, they should remind themselves that the current one has not been solved yet. True, the market is no longer in panic mode, and macroeconomic contagion has been successfully prevented so far in the EU’s more volatile central and eastern countries. But while some banks have started repaying state aid, the banking system remains largely under… Read more