What’s at stake: What started as a speech on inflation targeting by the President of a regional Fed has turned into a fierce economic debate on the impact of the collapse of a bubble on potential GDP. While it is natural for the current debate to focus on this phase of the problem, a growing literature has also explored the impact of bubbles on potential GDP during the boom phase. We start by reviewing the provocative body of work that studies bubbles in the presence of financial frictions, which often come to the conclusion that bubbles can increase potential output by reducing the inefficiency induced by financial market frictions. We then review the current debate on the econ blogosphere following… Read more
Bruegel blog
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Bubbles and potential output
17th February 2012
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The Greek tragedy: what next?
14th February 2012
With reference to the latest Weekender, Thanks Shahin for this nice piece (again!) and for incorporating some of our comments to the earlier draft. I was always sceptical about the relief that a voluntary private sector involvement (PSI) may bring and argued for an orderly debt restructuring as a part of a comprehensive solution, which should include proper provisions for Greek banks, as you also argue, and for banks of other euro-area countries, better European safety nets and a growth programme (see the comprehensive plan proposed in the policy brief A comprehensive approach to the euro-area debt crisis from February 2011, the policy contribution Debt restructuring in the euro area: A necessary but manageable evil? from June 2011, and the… Read more
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Is a voluntary Greek debt exchange possible?
13th February 2012
The Greek austerity package was approved on Sunday February 13th, making it possible for Greece to receive the second EU-IMF bailout worth €130bn. The vote in favour of the package took place in the background of violent protests in central Athens. As the €14.5bn Greek bond payment on March 20th draws closer, the issue of the private sector accepting a voluntary 50 per cent reduction of the face value of their bonds is becoming more and more pressing. In a recent paper, Mitu Gulati (Duke University) and Jeromin Zettelmeyer (EBRD and CEPR) look into whether a voluntary Greek debt restructuring is possible. The authors argue that larger creditors may be more easily persuaded to accept a 50 per cent haircut… Read more
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ECB preparation for Greek default
13th February 2012
My colleague Shahin has just posted a blog entry in which he argues that the broad framework of European Financial safety nets is in place and will not improve very meaningfully after the ESM is ratified. Therefore, time may have come to let Greece default. However, he is concerned that the ECB will not agree to do so because of lack of preparation for what would be needed. In particular, he argues that to preserve the integrity of monetary union, the ECB will either have to expand the ELA and let Target 2 balances rise substantially more. Alternatively, if it refuses to do so, in anticipation or in response to a euro area exit, it may become necessary to impose… Read more
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The Weekender
13th February 2012
Dear All, The writing of this weekender has been the occasion of a number of internal debates and disagreements with other colleagues at Bruegel. I have to stress once more that the views herein are mine and that they are not those of Bruegel as an institution and that they do not reflect those of my fellow researcher here. I hope nonetheless that they will provoke some debate with our community and stir some ideas for future research. It is another of those weekends filled with uncertainty. The relief provided by the agreement between Greek political leaders is likely to be very short lived because despite the extraordinary goodwill of the Greek political leadership, very few people believe that… Read more
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Does manufacturing really matter?
10th February 2012
What’s at stake: As countries seek to reinvigorate their job markets and move past an economic recession, the state of manufacturing has become a hotly debated topic. In the U.S., President Obama’s SOU address featured a revival of US manufacturing as one of the keys to secure a better economic future. In France, the decline in manufacturing is seen by virtually every party with disquiet and has become a central theme of the presidential race. But while new schemes to single out manufacturing for special tax breaks and supportive measures are being proposed, a compelling case for treating manufacturing differently remains to be made. The state of manufacturing Derek Thompson – a senior editor at The Atlantic – points that… Read more
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Europe’s Fiscal Union Still Lacks a Blueprint
9th February 2012
The improvement of eurozone market conditions in January can be attributed to several factors, including the progress made by Prime Minister Mario Monti in Italy, and some constructive if Delphic signals coming from Berlin. It also suggests that a lot of bad news was already priced in in December, including a “credit event” on Greek debt that would trigger payment of credit-default swaps, as now looks very likely. But the eurozone’s fundamental design problems remain unresolved. Even the main positive driver of investor sentiment, the European Central Bank’s long-term refinancing operations offering cheap 3-year liquidity to banks, creates risks of its own. The ECB must have decided to open that window with a heavy heart. A few hard realities have… Read more
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Choosing the right one
9th February 2012
Public support for new energy technologies has involved some pretty expensive decisions. Billions of public Euros have been spent on nuclear energy in countries that are currently phasing-out this technology. Research and development funding for CCS, hydrogen fuel cells, nuclear fusion, and second generation biofuels have not, as yet, led to a major commercial breakthrough. Visibly, today, thousands of cross-subsidized solar panels lie under a layer of snow in Germany. It is clear, however, that incumbent technologies such as coal fired power plants and gasoline cars lack the capability of achieving emissions reductions targets set out by the EU. Consequently, new low-carbon technologies have to enter the market. For this purpose, the EU has established horizontal policies, including carbon prices… Read more
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Making the carbon market wider and deeper
9th February 2012
A drastic change in the way we produce and consume energy is necessary to contain the risk of a global environmental catastrophe. For its part, the EU has set targets for reduction of GHG emissions by up to 80-95% of 1990 levels by 2050 to keep global temperature increases below 2°C. One key policy for achieving this target cost-effectively is the European Emission Trading System (EU ETS). However, the only partial coverage of important emitting sectors (namely transport) creates economic inefficiency. While the ETS has succeeded in containing carbon emissions in the power sector, it has not provided sufficient signals for incentivising low-carbon investments. Thus, we suggest making the EU ETS wider and deeper. Widening the ETS: Inclusion of (all… Read more
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Do we need more or less fiscal austerity in the eurozone?
8th February 2012
Do we need more or less fiscal austerity in the eurozone? The answer is simple: it depends on the country and its economic circumstances. Let's first do away with some fairy tales. No: fiscal consolidations are not expansionary. The few studies that claim to prove expansionary fiscal consolidations typically relate to very specific circumstances with strong external growth and exchange rate adjustments. All these conditions are not in place in the euro area. But also no: from an economic point of view, fiscal consolidations cannot be self-defeating. A reduction of public spending will typically result in a reduction in GDP but an even greater reduction in debt. At any reasonable multiplier, the deficit to GDP as well as the debt… Read more