Paul Krugman writes that it’s important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity. China has done nothing to change its policy of massive currency manipulation, and its exports are surging. Meanwhile, Europe is going wild for fiscal austerity. Angela Merkel says that budget cuts will make Germany more competitive — but competitive against whom, exactly? Everyone is again counting on the US to become the consumer of last resort, sucking in imports thanks to a weak euro and a manipulated renminbi. Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being,… Read more
Bruegel blog
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Krugman declares war on European austerity and Chinese FX manipulation
14th June 2010
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The European Financial Stability Facility
14th June 2010
What’s at stake: On Monday, the Finance Ministers of the Euro-area states signed documentation establishing the European Financial Stability Facility (EFSF) in line with the actions taken by the Economic and Financial Affairs (ECOFIN) Council last month, providing more details about how this will work. Most notably, they plan to create a joint eurozone "special purpose vehicle"(SPV) which will issue up to €440bn in bonds, if needed, to provide loans which can then be used to support countries. Together with €60bn from the European Union and €250bn from the International Monetary Fund, it provides a total of €750bn – initially for three years – which troubled Eurozone members can borrow from in times of need. After three years the fund… Read more
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The ECB bond-purchasing program
6th June 2010
What's at stake: On May 10, 2010, the ECB announced that it would intervene directly in the euro area public and private debt securities markets in exchange for an explicit commitment to front-loaded fiscal adjustment by eurozone member states. The ECB Securities Market Programme (SMP) has since played an important role in stabilising Greek and Portuguese government debt markets. But past the announcement effect, other EMU countries which didn't enjoy direct ECB purchases have seen their spreads widening back to levels higher than before the ECB intervention. On Tuesday, the ECB will reveal in its Weekly Financial Statement its sovereign debt purchases for this past week. Up until a week ago they had bought €40bn (reportedly all in Greece, Portugal and Ireland)… Read more
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In praise of German conservatism
5th June 2010
Europe has been used to Germany providing a strong monetary anchor since the collapse of Bretton Woods, but Europe should also value the strength of the German fiscal anchor. By running a balanced budget at the peak of the economic cycle in 2007 (sustained also into 2008), Germany was well equipped to lay its fiscal credibility on the line when doing so became essential for the future cohesion of monetary union. At a time of crisis for Europe, it is indeed fortunate that the German budget deficit ratio to GDP this year is likely to be a relatively moderate 4% (or thereabouts).Advocates of fiscal activism have been served a sharp reminder by bond market vigilantes that there is no such… Read more
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Impact of the eurozone crisis on the US
30th May 2010
What’s at stake: How vulnerable is the U.S. economy to the turmoil in Europe? How much further would the crisis in Greece have to spread to significantly affect the United States? Have the risks of contagion been exaggerated, or underestimated? James Bullard, President of the Federal Reserve Bank of St. Louis, argues that European financial troubles are unlikely to send the world back into recession, and the U.S. may actually benefit from unsettled markets over the near term as investors look for a safe place to preserve their wealth. Because the trouble in Europe is rooted in government debt problems, there is good reason to think events will probably fall short of becoming a worldwide recessionary shock. The world has… Read more
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Budget cut fever sweeps Europe
30th May 2010
What’s at stake: Fearful of becoming the next Greece, European governments are lining up to demonstrate to investors that an era of austerity has begun. The severity of the steps being enacted varies by country, as does the timing, but most of the measures centre on freezing or cutting public-sector pay, increasing retirement ages and reversing temporary tax breaks and other cushions that were encouraged in 2008 and 2009 to help beat back the worst recession in decades. Francesco Daveri writes in LaVoce that we are witnessing an unprecedented political and social experiment as, for the first time, Europe as a whole is reducing public expenditure. Even countries not deemed at risk of default or the need to accelerate their… Read more
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Proposal for a French fiscal rule
26th May 2010
In this article, Bruegel Director Jean Pisani- Ferry and Olivier Garnier, member of the Conseil d'Analyse Economique, explain why France needs to implement a rigorous fiscal policy that should be complemented by an operational definition of fiscal responsibility. With Germany setting a new benchmark against which the performance of other European states will be measured, the authors outline three main principles most suitable for the French. Le Président de la République vient d’annoncer qu’il souhaite faire inscrire dans la Constitution l’obligation pour chaque nouveau gouvernement de s’engager pour cinq ans sur une trajectoire de solde structurel des finances publiques. Après l’Allemagne, la France s’apprête donc à se doter d’une règle budgétaire.Il est grand temps que la France se dote d’une… Read more
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Restructuring the eurozone
21st May 2010
What’s at stake: As initially designed, the eurozone has failed. The current arrangements have proved unstable – encouraging countries to run excessive budget deficits while also giving banks an incentive to both finance profligate governments and also fuel real estate bubbles. On May 6 in anticipation of the European Council of the following day the French Presidency and the German Chancellery released a letter setting out a few avenues for reforms of the governance of the eurozone. The Commission has since then published its proposals for strengthening policy coordination. The initiatives, if approved by national governments, would represent the most significant advance in eurozone economic governance since the euro’s launch in 1999. The Commission’s proposals Eurointelligence summarises the main points… Read more
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The era of corporate split personalities
17th May 2010
The saga of securities exchanges consolidation is a vivid illustration of links between companies and nations in a state of flux. The likes of the New York Stock Exchange (NYSE) are national icons of capitalism. But they are also technology-enabled networks that connect market participants and seek a global reach to maximize economies of scale, just like Facebook or eBay. The tension between symbol and business substance has permeated the battle over NYSE Euronext. New York Senator Charles Schumer said he would support Deutsche Börse’s bid only if the NYSE name came first in christening the merged entity. Nasdaq envisaged moving one of its data centers from the UK to France to signal commitment to the place de Paris, but… Read more
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Time to deliver
12th May 2010
In a defining year for its credibility as a cooperation forum (for reasons, see my previous Editorial), the G20 is now approaching a critical juncture. The two meetings scheduled for June (a finance ministers and central bank governors meeting in Busan, Korea, on 4-5 June, in preparation for a leaders’ summit on 23-24 June in Toronto, Canada) are not the last planned for this year, but will unquestionably set the tone going forward and signal what can realistically be achieved in later months. In June we will probably know better how the postcrisis reform program will look like: what can be achieved and what will remain in the book of intentions. We will also begin to understand if the decision… Read more