aper delivered at the “Vancouver Seminar: The Crisis Response and Road to Recovery”, hosted by the Department of Finance and the Bank of Canada, November 30-December 1, 2009, Vancouver, CanadaGeneral BackgroundIn a note published a few years ago, in the Financial Times, (August 12, 2003), the author of this comment advanced the hypothesis that the world might be moving towards a future fiscal crisis. The reasons for such a prediction were three:First, significant structural fiscal deficits and high public debts characterized many countries (including six of the G-7 countries) at that time. Among the G-7 countries, the exception was Canada.Second, widely anticipated demographic developments that, under current policies would become significantly unfriendly to the countries’ public finances by around 2010.… Read more
Bruegel blog
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Comments on Recent Fiscal Developments and on Exit Strategies
23rd April 2010
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The volcano’s cost to Europe
22nd April 2010
What’s at stake: As Europe’s skies start to reopen, the job of counting the cost to its economy can begin. In the six days that followed a huge eruption at Iceland’s Eyjafjallajökull volcano, Europe turned into a no-fly zone. Airlines globally lost an estimated €1.3bn in revenue. Some 7m passengers were stranded, delayed or otherwise affected. Over this period, concerns have been growing that the disruption in the European economy due to the eruption of an Icelandic volcano could prove serious. The end to the flight ban also prompted claims that governments throughout Europe had overreacted to the ash cloud and should compensate the industry. Estimating the costs Real Time Economics reports that according to an estimate by analysts at Royal… Read more
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Germany should share the blame for the Greek crisis
22nd April 2010
As an EU-IMF package for conditional assistance to Greece takes shape, reactions from the market have not been favourable. With the threat of default still looming, European taxpayers are unsure how the cost of this assistance will affect them. German citizens in particular are disgruntled that they will have to pay for another countrys mistake- a scenario they were assured by their politicians would never occur thanks to the strict rules of the Maastricht treaty and the Stability and Growth Pact. Bruegel Director Jean Pisani-Ferry and Senior Fellow André Sapirexplain why Germany may have to shoulder part of the blame for the crisis in Greece by not addressing crisis management and only focusing on crisis prevention. After two months of… Read more
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G20 and macroprudential policy
21st April 2010
At the upcoming G20 meetings the issue what can be done to avoid a repetition of the current deep financialcrisis will again be debated. Much attention and criticism will be directed to central banks. That is unavoidable: central banks must never again permit the development of financial imbalances that are large enough to lead to the collapse of major parts of the financial system when they unwind. In the future, policy makers must “lean against the wind” and tighten financial conditions if they perceive that imbalances are forming, even if there is little hard data to rely on. And they must be mindful that the costs of acting too late can dwarf those of acting too early.But monetary policy is… Read more
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The Bruegel G20 Monitor
21st April 2010
The clock is ticking for the G20. Not a new actor on the international stage – it met for the first time in 1998, after the Asian and Russian defaults – the G20 has dramatically raised its profile recently, as a consequence of the financial crisis and the international recession. In its new format, the G20 summit of heads of state and government, it has taken the lead in coordinating the international response to the crisis, covering both macroeconomic policies and financial regulation, connecting inputs from the IMF and the Financial Stability Board. This enhanced role has generated expectations that must now be met, or its credibility – its existence perhaps – will be imperilled. As the global economy emerges… Read more
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The return of industrial policy
16th April 2010
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
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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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International asymmetries redux
6th April 2010
Using the very different examples of China and Germany, both of which are export dominated and have current-account surpluses, Bruegel Director Jean Pisani-Ferry examines the debate on crisis recovery which is dominated by asymmetries between countries. The US has accused China or manipulating its currency and within the EU, the French Economy Minister has asked Germany to do more to stimulate domestic demand and reduce its current account surplus. This article questions how growth will be rebalanced from deficit countries being the traditional drivers of demand to surplus countries having to boost domestic demand and the accompanying shift in relative competitiveness on account of this role reversal. On 15 April the US treasury was scheduled to tell Congress whether or… Read more