A summary of the Spanish and German perspectives on the #Spailout. Read more
Bruegel blog
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You say Rettung, I say imposición
27th July 2012
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Chart of the week: Emergency on funding costs for sovereigns, financial and non-financial corporations
26th July 2012
The funding cost of Spain and Italy are high and continue to rise. Yet, how does this increase in sovereign riskiness affect the riskiness of corporate bonds as measured by CDS? We look at the 5 largest financial and non-financial corporations in Italy, Spain, France and Germany. In Italy, risk premia for financial and non-financial corporations exceed 600 respectively 500 basis points. They also significantly exceed Italian sovereign risk. This contrasts with Spain, where the large non-financial corporations are considered less risky than the government and pay a risk premium of “only” 300 basis points, or 200 basis point more than French and German corporations. Italian government risk may look less dramatic than Spanish, but a continuation of such high… Read more
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Views on Grexit: a summary of German media
24th July 2012
According to the Spiegel on 22 July the IMF signalled to EU leaders that it would not participate in further support for Greece. Countries like the Netherlands and Finland have made the involvement of the IMF a prerequisite for their aid. This review looks at recent voices in Germany on the so-called Grexit, which appears to become less of a taboo than before. The Süddeutsche Zeitung (SZ) reports on 23 July that the Federal government rejects additional financial aid for Greece. According to government sources it is “inconceivable that Angela Merkel asks once again for permission to the German Bundestag for a third aid package for Greece” as Merkel already struggled to unify her coalition in recent parliamentary decisions on… Read more
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Blogs review: the youth unemployment crisis
23rd July 2012
What’s at stake: The global youth unemployment rate, which was already high before the start of the Great Recession, has reached skyrocketing levels in the past two years. While youth unemployment rates have increased in almost all countries, there has been wide divergence in the size of this increase – often reflecting the country specific aspects of the transition from school to work. For most, if not all, a serious discussion about the potential “scarring effects” induced by such a situation appears, however, warranted if we want to avoid having one generation permanently bear the burden of this crisis. Read more
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Should the eurozone be mutualised?
20th July 2012
The debate on Eurobonds is at risk of missing the forest for the trees. Discussions about their various colours and shapes, their incentive properties, and the conditions for implementing them without implicit transfers from responsible to irresponsible governments are all of significant importance, as discussed in a recent paper by Bruegel and IMF scholars. But the principal issue is why we may need them in the first place. Paul De Grauwe makes a strong case for Eurobonds based on first principles. Let me add an argument that has often been overlooked in recent debates. Read more
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Ein Ende der Abwärtsspirale
20th July 2012
Die Schwächen des Euro-Raums werden immer offensichtlicher. Der bisher integrierte Finanzmarkt des Euro-Raums tritt in einen Prozess der Fragmentierung ein: Banken waren in ruhigen Zeiten europäisch, wurden jedoch national in Krisenzeiten, weil sie nun von ihren nationalen Regierungen abhängig sind, um gerettet zu werden. Dies wiederum hat einige Regierungen an den Rand der Zahlungsunfähigkeit gebracht, insbesondere da Verluste oft nicht an Bankgläubiger weitergegeben wurden. Darüber hinaus haben nationale Behörden die grenzüberschreitende Kreditvergabe erschwert. Dies hat zwar die entsprechenden Risiken in einigen Banken reduziert, gleichzeitig aber die Risiken für den deutschen Steuerzahler erhöht, indem die Europäische Zentralbank (EZB) die Kapitalabflüsse durch Liquidität ersetzen musste. Die Finanz-Fragmentierung hat zu einer enormen finanziellen und politischen Unsicherheit geführt mit schweren Auswirkungen auf Wachstum, Arbeitsplätze… Read more
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Firefighting has limits
19th July 2012
There is now widespread recognition that the euro’s woes are rooted in three mutually reinforcing economic issues: fragility of sovereigns, fragility of banks, and a fragile economic outlook. These three economic issues are coupled with a very inefficient decision-making process at the euro-area level. When a government gets into trouble, so does the country's banking system (eg Greece), and vice versa (eg Ireland). Troubled banks worsen the economic outlook, because financing of European firms is very much dependent on banks. Weak economic outlook worsens bank balance sheets and reduces the tax revenues of governments, feeding the three-fold crises of banks, sovereigns and growth (eg Spain). Since the crisis has reached Spain and nearing Italy, the risk of a catastrophic crisis… Read more
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Are wages too high in the French automobile industry?
17th July 2012
Following the announcement of 8,000 job cuts by PSA Peugeot Citroën chief executive Philippe Varin, citing the high cost of French labour as a main reason, an intense debate emerged. Referring to a study by INSEE (National Institute of Statistics and Economic Studies), the blog of Monde.fr "Les Décodeurs" reported that hourly labour cost in Germany is 29 percent higher than in France. Several politicians expressed disapproval of the layoffs and the high labour cost argument. How do French hourly labour costs compare with other countries? The left hand-panel of Figure 1 shows that hourly labour costs in the automobile industry are indeed higher in Germany than in France. However, the gap has narrowed recently, and French labour costs increasingly exceeded… Read more
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To rescue Europe, our leaders need a new sense of resolve
16th July 2012
The two most important questions for the future of Europe are, first, what the euro area must do to rescue itself and, second, whether it has a strategy. The first question arises because the euro crisis has exposed grave design flaws. It is these flaws, compounded by repeated tactical mistakes in responding to market alarms, that explain at least as much as failures to enforce rules why Europe has reached the point at which the very existence of its currency is at stake. Read more
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Blogs review: HP Filters and business cycles
16th July 2012
What’s at stake: a recent speech by St. Louis Federal Reserve President James Bullard has launched a debate on the blogosphere over the use of a statistical technique called the Hodrick-Prescott filter. The technique – as well as so-called Bandpass filters – is used to decompose economic data into a trend and a cyclical component. The controversy came out as James Bullard pointed to these estimates – together with the fact that we don’t see deflationary pressures (see our review here) – as evidence that advanced economies are operating near potential, if not above. Defining the trend and the cycle Stephen Williamson writes that in studying the cyclical behavior of economic time series, one has to take a stand on… Read more