In diplomatic language there is a difference between saying “event B cannot happen because condition A is not fulfilled” and saying “event B will happen if – or even as soon as – condition A is fulfilled”. This distinction helps understand what happened last weekend in the G20 ministerial meeting in Mexico City. A few hours ahead of the meeting, an agreement on a replenishment of IMF resources of the size asked by Managing Director Christine Lagarde (a “global firewall”), was a non-starter. The US, followed by almost everybody not located between the Atlantic and the Urals, opposed the move arguing that Europe should mobilize its resources first – in the implicit assumption that new IMF money would be used,… Read more
Bruegel blog
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Reflections after the G20 meeting in Mexico
29th February 2012
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The Weekender
27th February 2012
Dear All,
I’m writing these lines from Paris where the vote on the ESM took place in the parliament and passed with the abstention of most left wing parties. Now this will go before the Senate next week where the left has a majority. I have written quite a bit (in French) to advocate in favour of the ESM, here for the Huffington Post and here for Le Monde along Daniel Cohn Bendit and others. I think it will pass in the Senate but the message sent to Germany will be problematic for Hollande if and when he takes office.
I will focus on the following:
1. The nitty gritty of the ESM Treaty
2. Greek Deal
3. Softer Terms for Spain and Portugal Read more -
Eurozone countries must not be forced to meet deficit targets
27th February 2012
Last year thirteen eurozone countries surpassed the deficit to gross domestic product ratio of three per cent. The latest forecasts by the European Commission suggest the region is slipping into a mild recession this year. As a consequence, in the absence of further policy measures, most of these countries risk missing their budgetary targets. This especially applies to Spain, where last year's deficit was eight per cent of GDP. The Commission expects its output to decline by one per cent this year (not a particularly pessimistic forecast) yet the country is still supposed to reach the three per cent deficit threshold by next year. Many other countries are in the same boat. The dilemma for the EU - especially for… Read more
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Odds and consequences of a GREXIT
24th February 2012
What’s at stake: As the private sector involvement is still underway and the application of the conditionality for the second program appear both economically and politically daunting, a growing number of observers have expressed the need to work on an orderly Greek exit from the euro area. The integrity of the euro used to be non negotiable but there is now a growing number of European policymakers that are openly raising the question. Although, some argue that this could help Greece to rebalance its economy faster, there is limited experience of exit in such a financially integrated monetary union and the consequences inside and outside of Greece are difficult to fathom. The odds of a Greek exit Wilem Buiter and… Read more
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Will cohesion fund disbursement be suspended for Hungary?
24th February 2012
For the first time in history, the European Commission proposed the suspension of cohesion fund disbursement for a member state on 22 February 2012. It was judged, within the framework of the Excessive Deficit Procedure (EDP), that Hungary had not taken effective action to reduce its budget deficit. While the budget had a surplus in 2011, it was largely the result of one-off measures, without which the deficit would have been about 6 percent of GDP. And the structural deficit, which measures the underlying position of the budget without one-off measures and the impact of the economic cycle, has deteriorated by 2.5 percent of GDP from 2009 to 2011. It is now up to the Hungarian government to implement appropriate… Read more
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The turn of emerging countries
24th February 2012
The distinguishing trait of the G20 is the inclusion of the emerging economies (EME) alongside with the advanced ones. The main industrial countries have long had their proprietary policy forum: the G7. On the contrary, until the launch of the G20 summit in November 2008, the group of EME, that together with the developing bloc represent 85 percent of the people on earth and produce half of global output (a share that is rising quickly), did not enjoy this privilege. True, they are members of the IMF and the World Bank; but their influence on 19th Street still does not match their actual economic weight, let alone the prospective one. Their presence is substantial in the development banks; but these… Read more
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A Greek deal – the end of the eurozone crisis?
21st February 2012
After a long night of discussions, the eurogroup agreed on a new deal for Greece. The main elements consist of a larger contribution of the private sector and a larger contribution of the public sector with the aim to bring back Greek debt on a sustainable path. The agreement involves a PSI exchange offer with a nominal haircut of 53.5% and the approval of further structural expenditure reductions of € 325 million by the Greek parliament, aimed at closing the fiscal gap in 2012. It was agreed that the ECB’s profit on bonds held under the SMP will be disbursed to the NCBs, in line with the ECB’s statutory profit distribution rules and NCBs’ profits will be disbursed to euro area Member States. Moreover, certain government revenues from these SMP profits may be… Read more
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Who lost Greece? (update)
21st February 2012
The Brussels agreement on 21 February with private creditors and public lenders has not only removed the threat of imminent Greek default. The Europeans must be commended for having based the restructuring deal on a much more realistic assessment of Greece’s ability to pay back its private creditors. The 53% haircut and the lowering of interest rates on the remaining debt to 2% in the short term and 3.6% on average over the lifetime of the claims offer an opportunity to finally create financial conditions that are conducive to economic adjustment, reforms, and ultimately recovery. If these do not materialise, the official creditors will in the end have to forgo part of their claims – especially as the agreement protects… Read more
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The Weekender
20th February 2012
Dear all, My weekender last week was a bit provocative and created some controversy; it was the occasion of some heated debates with some of you. I think the main point of disagreement is my argument was that if Greece to leave the euro area, it would be necessary to put in place capital controls through out the euro area or at least in the most fragile countries. Some of you argued that these controls could set in motion self-fulfilling prophecies. I accept this argument so I would rephrase mine by saying there should be a contingency plan to introduce capital controls across the euro area and it should only be activated in extremis. I’m writing these lines from… Read more
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How to deal with Europe’s debt challenge
17th February 2012
Growth in Europe is projected to be weak in 2012 and 2013. This is true for the aggregate but the outlook is much worse for many countries in the South. The south of the eurozone is, in fact, struggling with a twin challenge: high external debt and weak competitiveness. The indebtedness of Greece, Portugal, Spain and Ireland to abroad is around 100% of GDP and typically results form debt increases in the private sector. At the same time, price competitiveness is weak. Efforts to reduce indebtedness are slowing growth, but weak growth hinders the deleveraging: a catch-22 situation? In such a situation, more exports are necessary as domestic growth is hampered by the deleveraging. To increase exports, competitiveness gains are… Read more