Let us begin by acknowledging two positives in the euro decisions. First, there will be significant ammunition at the disposal of the firefighters: the swifter introduction of the European Stability Mechanism (ESM), its temporary coupling with the financial facility (EFSF) already in place, and new resources to the IMF (which are certainly going to be matched by contributions from the emerging world) add up to a serious intervention power. Markets are likely to take notice. Second, there is new emphasis on a more decentralised approach to budgetary responsibility, with national rules and procedures of the ‘golden rule’ kind. If properly designed and seriously implemented, tailor-made provisions for fiscal discipline are likely to be more effective than micromanagement from Brussels. The… Read more
Bruegel blog
-
The eurozone and the streetlamp syndrome
12th December 2011
-
A German fiscal union?
5th December 2011
The euro area has come to a critical point. Failure to act will lead to disintegration with non-calculable costs for all member state economies, massive increases in unemployment and a large drop in well-fare. Why has no viable solution been found so far in face of such massive cost? The main reason is a classic coordination problem. In the absence of trust or a strong supra-national institution, individual countries will negotiate based on narrowly defined national interest, despite the fact that the final result will be worse for everybody. From a technical point of view, three things need to be addressed. First, a lender of last resort needs to be created in order to stop self-fulfilling sovereign crises. Interest rates… Read more
-
Germany's hour
28th November 2011
A series of events over the last few weeks have created a new situation in Europe. First, the euro area has failed to turn the tide. Mario Draghi was right to note last week that in spite of numerous ministerial meetings and three summits, implementation of the decision taken in July is still lacking. There are by now growing doubts about the very wisdom of holding them. Second, and partially as a consequence, the debt of virtually all euro-area countries is trading at a discount to the German Bund. While a more accurate pricing of risk was necessary, it is hard to believe that with a debt ratio nearly twenty percentage points lower, the Netherlands deserves to be assessed more… Read more
-
Eurozone is on its way to fiscal union
28th November 2011
Europe’s leaders may still harbour secret hopes that the European Central Bank will come to their rescue, but at least they seem to have understood that the surest way to make that happen is to deliver on what they have responsibility for, starting with budgets. Fiscal union is now officially on the European agenda. For some, this is all about strengthening sanctions for budgetary slippages through more automatic decision procedures and granting the power to veto national budgets to a European body. Angela Merkel, the German chancellor has spoken along these lines recently and Mark Rutte, the Dutch prime minister, is on a similar page. However, this plan alone is not likely to deliver much more than another layer of… Read more
-
Europe’s leaders must start making tough decisions
26th November 2011
Days and nights, Europe’s leaders have discussed the minutiae of private-sector involvement in the Greek debt restructuring. They have immersed themselves in financial engineering with the aim of leveraging the European financial stability facility. This is all necessary, but it’s the job of finance ministers or Treasury officials. What citizens and markets alike expect from the heads of state and government is that they do the job for which they are indispensable, and map out the political choices Europe is now screaming for. A key reason why the eurozone is under challenge is that markets have become conscious of a fundamental weaknesses in its design. It relies on three hardly-compatible principles: national banking systems, which both finance the sovereign and… Read more
-
The end-game is debt sustainability
21st November 2011
There is one aspect of the euro zone that was little understood when the project was launched and embraced by the member states: countries in a monetary union issue debt in a currency that is foreign to them. As they do not control it, they are unable to use it to soften their own debt burden through devaluation and inflation. In the new scenario, national governments can only restore and secure debt sustainability by means of structural reform and economic growth. Fiscal retrenchment should be just a transitory phase that allows them to move to a stage where structural and growth-enhancing reforms are the name of the game. Greece has been running undisciplined fiscal policy for years, both before and… Read more
-
Will the euro survive 2012?
18th November 2011
With the rise of the government bond spread to Germany of AAA-rated euro-area members (Austria, Finland, France and the Netherlands), the euro crisis has moved to a new stage. The issue now is not just if Greece will default, but if there will be a chain of government defaults in several countries and a consequent meltdown of the euro-area financial system, including in Germany. Let me state beforehand: in my view the euro will survive and the crisis will even result in highly beneficial governance changes. But the risk of a disorderly outcome has increased, and finding the right way forward will require far-reaching changes to the euro area – and thus political agreement. We first need to understand the… Read more
-
(Com-)Mission to Rome or what a euro area finance ministry means
16th November 2011
The house is on fire. Interest spreads of Italian bonds relative to German Bunds have increased significantly since the summer. Rating agencies have downgraded Italy and market participants increasingly voice their skepticism as regards the ability of Italy to repay its large government debt. The emerging consensus now is that a strong commitment by Italy to reforms will be an important element of the solution. ECB assistance continues to be needed in the absence of any further fiscal integration steps. However, there is a need for a clear framework to define the terms and conditions of assistance and reforms. While IMF involvement is welcome, the euro area should itself use available instruments to frame and guide the process. Using existing… Read more
-
Europe needs institutional creativity
15th November 2011
“I guess you guys have to be creative here,” US President Barack Obama was reported as exhorting German Chancellor Angela Merkel at the Cannes Summit on November 4. This is an apt tagline for the current moment in the eurozone crisis. The European Union needs to radically change its ways, or it may not survive. Beyond the headlines about Greece and Italy, the central problem is a crisis of decision-making at the European level. At no point since early 2010 has the contagion ever been seriously contained. This is an astounding policy failure, almost universally seen as such from outside Europe. Blaming the individuals would be unfair. Europe’s leaders may not be heroes but, from a historic or international perspective,… Read more
-
How does it end?
14th November 2011
What’s at stake: As benchmark Italian bond yields remain stuck to unsustainable levels, the intersection set between necessary and politically feasible options remains empty, and policymakers openly express doubts on the everlasting intangibility of the euro area, a growing number of commentators seem to be running out of hope regarding a solution for the euro zone. As if it was not enough, the solutions contemplated by euro zone leaders to save themselves through integration have raised fears that this process would lead to a disintegration of the European Union. The euro: thinking the unthinkable Martin Wolf argues that the unthinkable – a euro breakup – has become all too thinkable. A eurozone built on one-sided deflationary adjustment will fail. That… Read more