In June it was Greece. In August it was France, Italy, Spain and Portugal. In September it was Greece and, once again, Spain. In November, France again. Soon very likely Belgium. And perhaps France for a third time. In spite of an ever-darker economic outlook, every month countries under pressure in the bond markets are announcing new budget restrictions in the hope of limiting their deficits and halting the slippage in their borrowing terms. Only Germany stands out, announcing a tax cut, though a modest one. The cause of this shift to austerity at the very moment a downturn is materialising is obviously the interest-rate spreads in the eurozone. While the yield on German ten-year debt remains under two percent,… Read more
Bruegel blog
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Fiscal consolidation is no indiscriminate belt-tightening
14th November 2011
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Is Europe sliding into a double-dip recession? - Focus on the long term
12th November 2011
It is difficult now to see how Europe and the euro area in particular could avoid at least two consecutive quarters of negative growth in 2012 (possibly starting in the fourth quarter of this year) and hence a “double dip.” The more troubling fact is that this is likely to be followed by a relatively long period of slow growth as most European economies continue to draw down their public and private-sector debt, which is likely to fuel unemployment. There are a number of concerning developments. First and foremost, the sovereign debt crisis is dragging on — and slowly reaching the core of the euro area. This will force national governments to retrench further, sometimes making long-overdue structural reforms but… Read more
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Europe must unchain itself to save itself
7th November 2011
Europe has enough resources to resolve its current crisis but an extraordinary series of constraints means it has to turn to emerging economies for help For all of its troubles and mediocre growth prospects, Europe is still remarkably rich by world standards. According to the McKinsey Global Institute, it still accounts for 30% of the $212 trillion global financial market, whereas emerging markets only account for 18%. Even taking into account a negative net foreign asset position (of the order of $2.5 trillion), there is considerable wealth in the EU. It may therefore seem strange to wonder whether it can rescue itself without a helping hand from China and other emerging countries. The reason is that Europe is bound by… Read more
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The return of politics
4th November 2011
What’s at stake: The euro crisis has finally touched real politics. Although George Papandreou, Greece's prime minister, has told parliamentarians from his centre-left Pasok party that there is “no need” to go ahead with a referendum on a bail-out because the main opposition now backs the deal, the tension between complex back-room deals and the democratic imperative has certainly reached this week a point of no return. An inevitable outcome Jean-Paul Fitoussi says that Mr. Papandreou’s decision to press for a popular referendum on the bailout was the inevitable result of Greece’s loss of sovereignty to Brussels and the International Monetary Fund. It’s as if the Europeans — or Merkel and Sarkozy alone — believed that they were in control… Read more
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The Greek demos vs. the Greek demons
3rd November 2011
There is something natural in the return of democracy to its European cradle. But Prime Minister Papandreou caught every one by surprise by announcing a referendum on the last programme that had just been negotiated a few days earlier in a marathon summit in Brussels. The eruption of politics in what was seen by the Europeans as a fairly technocratic process was bound to happen sooner or later. European democracies cannot be expected to make fundamental choices without the full legitimate backing of their own people. In this respect, the call of the Greek Prime Minister to seek legitimacy for its actions could be a blessing in disguise. In other countries, including in particular in Germany, leaders have sought broad… Read more
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Greece after the referendum
3rd November 2011
Prime Minister George Papandreou’s call for a referendum on the new European Union bailout deal took almost everyone by surprise. Policymakers are holding emergency meetings, markets are falling and commentators are envisioning not just the departure of Greece from the euro area and possibly from the EU, but a collapse of the single currency as well. The announcement has indeed come at an unexpected time. Conclusions at the October 26 summit were also incomplete, since the voluntary private sector involvement is unlikely to deliver sufficient debt reduction. But the new agreement and also the lower primary surplus target indicated in the leaked documents of the fifth review of the first program give at least a higher chance of success for… Read more
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How to restore trust in the ECB
1st November 2011
When Mario Draghi takes office on November 1, he will face tough choices. Should he be more “German” than the Germans or more “Italian” than the Italians? Should he increase or lower rates? More fundamentally, should he continue or discontinue the European Central Bank’s bond purchasing programme? Failure to steer the right course amid formidable obstacles could very well lead to the end of the euro; to a melt-down of the financial system and a severe recession; or to an end of German support for the ECB and the euro. The new ECB president will have to square the circle. Regaining trust in debtor and creditor countries will be of central importance. Public trust in the ECB and the euro… Read more
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The European Summit and its aftermath
28th October 2011
What’s at stake: European policymakers eventually came to an agreement at 4am on Thursday after 11 hours of talk. The package consists of three related parts: (i) reducing Greece’s debt to a sustainable level by a voluntary agreement with private creditors to accept the loss of half the value of the bonds; (ii) recapitalizing Europe’s banks to the tune of €106 billion; and (iii) creating a larger firewall to prevent the spread of panic with a leverage of the EFSF. There has therefore been an agreement on all the sticking points but it could be weeks before the details that underpin the entire package are finally ironed out. Many hope that a significant amount of details will to be filled… Read more
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Egy csúcs a sok közül?
28th October 2011
A csütörtök hajnalba nyúló uniós csúcstalálkozó célja az euróövezet megmentését segítõ átfogó megoldás meghozatala volt. Bár a döntések elõrelépést jelentenek a júliusi csúcshoz képest, nem fogják egyszer és mindenkorra megoldani a válságot. Az euróövezet válságát kezelõ csúcs öt fontos területen hozott döntést, amelyeket érdemes sorra venni. A bankok képviselõi „önként” vállalták, hogy 50 százalékkal csökkentik követelésüket a görög állammal szemben egy kötvénycsere keretében, amelynek részleteit késõbb dolgozzák ki, és 2012 elsõ negyedévében hajtják végre. Egyfelõl örvendetes, hogy a magánbefektetõk hozzájárultak az 50 százalékos veszteséghez, ugyanakkor kétséges, hogy a piaci hitelezõk valóban kellõen nagy számban lesznek hajlandók részt venni a programban. Ha nem, akkor az egész görög adósságmizéria újrakezdõdik. Az új terv szerint 2020-ig Görögország államadóssága a GDP 120 százalékára csökken,… Read more
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The Greek public debt misery: the right cure should follow the right diagnosis
26th October 2011
In sharp contrast to the cautiously positive tone of the 11 October official press release about the fifth review of the Greek programme, the leaked confidential debt sustainability analysis by the troika of the European Commission, European Central Bank and International Monetary Fund (dated 21 October) was devastating, projecting Greek public debt (net of collateral required for private sector involvement) to peak at 186 percent of GDP in 2013 and to stay above 150 percent even in 2020. Market access is unlikely to be restored before 2021. Therefore, without a more sizeable reduction in privately-held debt, official financing would reach € 362 billion by 2020. And this is the baseline. Lower growth, primary budget surplus or privatisation revenues could make… Read more