What’s at stake: After a long, hard and rancorous negotiation, the European Union split in a fundamental way on Friday 9 December. For the first time in 39 years, a British prime minister used a veto to block an EU agreement after failing to secure a protocol that would have given Britain a veto on financial-services regulation. The new rules for a "stability union", an intergovernmental agreement outside the EU legal framework, will be drafted by March 2012 and opened to ratification by nations outside the 17-member eurozone. Although Britain has always had an uneasy relationship with its EU partners, choosing not to join the single currency or sign the open borders Schengen treaty, the summit was clearly a turning point… Read more
Bruegel blog
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27 minus 1
12th December 2011
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USD liquidity, European Banks and the Fed’s Balance Sheet
5th December 2011
What’s at stake: The ECB, Fed and other major central banks agreed last Monday to lower the pricing on the existing U.S. dollar liquidity swap arrangements and extend their authorization in order to ease strains in financial markets and thereby mitigate the effects of such strains on economic activity. This issue investigates why European banks need US dollar liquidity, how the new swap program differs from the one that was introduced in December 2007, and discuss its likely impact on the Fed’s balance sheet. Why do European banks need dollars? Binyamin Appelbaum writes in the Economix that the announcement surely raises the question: Why do foreign banks need dollars? The simple answer is that foreign banks really like the things… Read more
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The ECB as a lender of last resort to sovereigns
25th November 2011
What’s at stake: As the European debt crisis continues to worsen there are growing calls for the European Central Bank to take a more active role in the crisis resolution through purchase ever-greater quantities of troubled sovereign debt. The absence of a lender of last resort has been highlighted as one of essential weaknesses of the euro area. German and French officials are now openly fighting about turning the ECB into a lender of last resort to governments in an effort to end the crisis and salvage the common currency. Fighting self-fulfilling crises Guillermo Ortiz – former Governor of Banco de Mexico – argues that the unfortunate reality leaves the European Central Bank as the sole institution able to make… Read more
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Banks deleveraging in a liquidity crisis
18th November 2011
What’s at stake: A combination of factors seems to converge to create an important wave of global liquidity withdrawal with potential important consequences for economic activity. One can trace the origins of this new leg of deleveraging to the European debt crisis and to the on-going European bank recapitalisation effort. Both issues have either not been addressed or have been addressed in the wrong way and are therefore self-reinforcing elements of the crisis that is now dragging the European economy down. Banks deleveraging In an open letter to EU leaders, Finance Watch called on European leaders to urgently make bank deleveraging the subject of supervision in order to protect the supply of credit to European businesses and households. Expectations of… Read more
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How does it end?
14th November 2011
What’s at stake: As benchmark Italian bond yields remain stuck to unsustainable levels, the intersection set between necessary and politically feasible options remains empty, and policymakers openly express doubts on the everlasting intangibility of the euro area, a growing number of commentators seem to be running out of hope regarding a solution for the euro zone. As if it was not enough, the solutions contemplated by euro zone leaders to save themselves through integration have raised fears that this process would lead to a disintegration of the European Union. The euro: thinking the unthinkable Martin Wolf argues that the unthinkable – a euro breakup – has become all too thinkable. A eurozone built on one-sided deflationary adjustment will fail. That… Read more
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The return of politics
4th November 2011
What’s at stake: The euro crisis has finally touched real politics. Although George Papandreou, Greece's prime minister, has told parliamentarians from his centre-left Pasok party that there is “no need” to go ahead with a referendum on a bail-out because the main opposition now backs the deal, the tension between complex back-room deals and the democratic imperative has certainly reached this week a point of no return. An inevitable outcome Jean-Paul Fitoussi says that Mr. Papandreou’s decision to press for a popular referendum on the bailout was the inevitable result of Greece’s loss of sovereignty to Brussels and the International Monetary Fund. It’s as if the Europeans — or Merkel and Sarkozy alone — believed that they were in control… Read more
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The European Summit and its aftermath
28th October 2011
What’s at stake: European policymakers eventually came to an agreement at 4am on Thursday after 11 hours of talk. The package consists of three related parts: (i) reducing Greece’s debt to a sustainable level by a voluntary agreement with private creditors to accept the loss of half the value of the bonds; (ii) recapitalizing Europe’s banks to the tune of €106 billion; and (iii) creating a larger firewall to prevent the spread of panic with a leverage of the EFSF. There has therefore been an agreement on all the sticking points but it could be weeks before the details that underpin the entire package are finally ironed out. Many hope that a significant amount of details will to be filled… Read more
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Traditional vs. Modern Macro
21st October 2011
What’s at stake: Larry Summers did not make a lot of friends earlier this year when he said that DSGE models played no role at all in the White House policy response to the crisis. That it was all IS-LM augmented by a liquidity trap. Since then, a series of debates has taken place on the econ blogosphere on the role of intermediate macro models, the usefulness of DGSE models, and the merits of calibration. The IS-LM ghost Paul Krugman, Greg Mankiw, and Brad DeLong have been strong defenders of the IS-LM framework as an important tool to give the intuition of how the economy works in the short run, a useful teaching device to understand the interaction of markets… Read more
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Occupy Wall Street
14th October 2011
What’s at stake: Around the world, young people – students, workers, and the unemployed – are bringing their grievances to the public square. Anti-corporate and anti-big bank protests have started up in Washington and on Wall Street, and they are spreading elsewhere. The Occupy Wall Street movement is in its infancy but seems to be getting political traction and finding echoes globally. Although its direction remains unclear, it is already raising some eyebrows in Wall Street and might be a force that traditional political formation might have to reckon with. Some are already portraying it as the Tea Party of the left but it seems to lack an integrated and cohesive platform. Infancy and political traction John Hanrahan takes stock… Read more
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The uncertainty hypothesis
7th October 2011
What’s at stake: Uncertainty is frequently blamed for the sorry state of the economy. In the US, the Speaker of the House John Boehner, for example, recently declared that regulatory, tax, and trade uncertainties are playing a hampering role on the recovery from the Lesser Depression by straining the incentives for companies to invest. After reviewing conditions under which an increase in uncertainty (second moment) – as opposed to a decrease in prospects (first moment) – can have a detrimental impact on the economy, we review the empirical evidence on the topic. We start by the specific type of uncertainty outlined by Boehner and then turn to another kind of uncertainty: our lack of knowledge about the shape of post-financial… Read more