What’s at stake: British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right. It seems that industrial policy is back for the better and the worse. Dani Rodrik writes that, in fact, industrial policy never went out of fashion. Economists enamoured of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation. The shift toward embracing industrial policy is therefore… Read more
Bruegel blog
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The return of industrial policy
16th April 2010
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Greece: what about a few months from now?
16th April 2010
What’s at stake: When they announced their provisional rescue package for Greece on Sunday, European officials pointed not only to its size but also its details. For euros and details is what the markets have been demanding these last weeks. Yet, there still seems to be a fair amount of confusion about the mechanism and how it will be activated. Greek bond yields are rising again against worries that the Greek aid package will not pass through the parliaments of other European countries. More down the line, it remains far from clear how Greece will deal with its solvency issue. Activating the package Felix Salmon writes that though this weekend's EU deal told us more about how a rescue would work, it didn't tell us when, or… Read more
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The recession’s end?
9th April 2010
What's at stake: It was about one year ago that the phrase "green shoots" began being batted around, as economic trends which had been deteriorating at an increasing pace started deteriorating at a declining pace. By late summer, a number of important economic indicators – including GDP – had moved all the way back to expansion, and many economists felt comfortable asserting that the recession was officially over. But for the next nine months, there was little sign that the recovery was feeding back through to the labour market, or that it would prove particularly durable in the absence of government supports. But finally we're starting to see some convincing indications of economic recovery. Perhaps the biggest news was the… Read more
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FinReg
6th April 2010
What's at stake: There is a broad international process underway, via the G20, the BIS and the IMF, to come up with new capital and liquidity rules to be applied around the world to replace Basle 2. And now that healthcare reform is off the agenda in the US, there is a pretty serious discussion about financial reform and how good the legislation – the bill put together by Senator Chris Dodd of Connecticut – currently on the table is. One side — exemplified by Paul Volcker — sees limiting the size and scope of the biggest banks as the core issue in reform. The other side disagrees, and argues that the important thing is to regulate what banks do,… Read more
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ECB liquidity operations and monetary policy
2nd April 2010
What's at stake: President Trichet’s announcement before the European parliament that the return to the stricter collateral requirements originally foreseen by the end of 2010 will be postponed removes the risk of Greek Government Bonds being barred from the repo operations of the ECB. Instead, the ECB will introduce a sliding scale of haircuts for sovereign debt instead of the present flat structure for all Euro-zone sovereigns starting January 2011. Details will be provided on April 8 at the next monthly meeting, but one can clearly see that this change might end up not being so helpful for Greece if the haircuts imply high extra costs. More broadly, this policy change poses the question as to whether ECB is in the middle… Read more
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Hardly an epilogue for Greece
2nd April 2010
What’s at stake: After much dispute, eurozone leaders decided this week to ask the IMF to finance a rescue package for Greece, one-third funded by the Fund and two-thirds funded by other members. If Greece is cut off from capital markets, it will be the IMF which will take the lead, to be followed by a second and third tranche from the EU – even though the conditions of the loan would be decided jointly by EU and IMF. The new agreement from this week's summit is being sold as a grand bargain of sorts: an offer of loans on suitably harsh terms to assure markets that a euro member cannot go bust, matched with toughened surveillance of national economic and budgetary policies… Read more
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Does the zero bound bind?
25th March 2010
Paul Krugman argues that being in a liquidity trap reverses many of the usual rules of economic policy. Virtue becomes vice: attempts to save more actually make us poorer, in both the short and the long run. Prudence becomes folly: a stern determination to balance budgets and avoid any risk of inflation is the road to disaster. Mercantilism works: countries that subsidise exports and restrict imports actually do gain at their trading partners’ expense. For the moment — or more likely for the next several years — we’re living in a world in which none of what you learned in Econ 101 applies. According to Krugman, you’re in a liquidity trap when conventional open-market operations — purchases of short-term government… Read more
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Timing the fiscal exit
25th March 2010
What’s at stake: Timing the withdrawal of macroeconomic stimulus poses a difficult tradeoff. Unwinding public intervention too early could jeopardise progress in securing a sustained economic recovery, but continuing deficits are spooking markets. According to the OECD, every developed country except Norway ran a deficit last year. But if everyone tightens simultaneously, the contraction in demand will be large and needs to be offset by higher spending elsewhere or rapid underlying growth. Otherwise, deficient global demand will undermine both the economic prospects of the OECD, the world and the fiscal consolidation plans. Olivier Blanchard, Carlo Cottarelli and José Viñals argue that on balance, fiscal consolidation should take priority over monetary tightening. In general, fiscal and monetary stimulus may need to… Read more
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Are sovereign debt crises inevitable?
18th March 2010
What’s at stake: Historical experience – as shown in a new book by Carmen Reinhart and Ken Rogoff (“This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”) – suggests that “balance sheet” crises driven by excessive private sector leverage lead to economic recoveries that are slow, anaemic and below trend for many years and often lead, down the line, to serious sovereign debt problems given the massive re-leveraging of the public sector. They conclude that there is a “strong link” between banking crises and sovereign defaults. In fact, they state, banking crises can help predict sovereign debt crises. Carmen Reinhart has a new working paper out that’s an extremely valuable resource: more than 100 pages of charts showing the history… Read more
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The return of the get tough approach to China
18th March 2010
What’s at stake: the political heat surrounding China’s currency policy intensified in Washington. For the first time in 16 years, thirty Congressmen are urging President Obama to label China a currency manipulator. The senators have proposed a bill that would require the Treasury to identify countries with “fundamentally misaligned currencies” as well as those that need to be tackled with “priority action”. Their efforts may have gained fresh impetus on the back of a recent flare-up in tensions between Beijing and Washington on issues including currency. Paul Krugman writes that it’s time to take a stance on China’s policy of keeping its currency undervalued and proposes to impose a temporary 25 percent surcharge on Chinese imports. Some still argue that we must reason… Read more