<![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Wed, 04 Mar 2015 09:57:41 +0000 http://www.bruegel.org/fileadmin/images/bruegel-logo.png <![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Zend_Feed http://blogs.law.harvard.edu/tech/rss <![CDATA[Dynamic scoring and budget forecasting]]> http://www.bruegel.org/nc/blog/detail/article/1584-dynamic-scoring-and-budget-forecasting/ blog1584

What’s at stake: In January, House Republicans formally adopted a budgeting rule known as “dynamic scoring”, which aims to account for the macroeconomic effects of major legislations. While the move from static to dynamic scoring makes economic sense, some worry that it will invite politicized scorekeeping.

Source: Econbrowser

Gregory Mankiw writes that the new appointed CBO director, Keith Hall, will face a big challenge. Until now, conventional budget analysis has used a process called static scoring, which assumes that the path of gross domestic product remains the same when the government changes taxes or spending. This procedure has the virtues of simplicity and transparency. Yet the assumption of unchanged G.D.P. has one notable drawback: It is patently false. House Republicans have recently changed the rules: The Congressional Budget Office and Joint Committee on Taxation are now required to use “dynamic scoring” when evaluating major changes in tax and spending policy. 

Alan Auerbach writes that working together, CBO and JCT provide two types of revenue and expenditure projections for Congress: (1) forecasts of expenditures and revenues based on assumptions about what `current’ policy is, and (2) forecasts of the changes in expenditures and revenues that would result from proposed legislation. The first type of forecast is known as a baseline. The second type is called scoring. The two types of forecasts are interdependent. Projected effects of legislation depend on the starting point, so the baseline affects scoring. Updates of the baseline reflect the estimated impact of legislation, so scoring affects the baseline.

Alan Auerbach writes that in a sense, the debate over dynamic scoring may be traced to an inconsistency in the way that legislative changes are handled by the two agencies. Under standard scoring procedures, JCT scores proposed legislation taking the macroeconomic forecast underlying the CBO baseline – including nominal GDP and other aggregates – as given. Macroeconomic feedback effects are ultimately incorporated in CBO’s baseline, but are not attributed by JCT to any source when the proposals are scored.

Donald Marron writes that for more than a decade, CBO and JCT have published dynamic analyses using multiple models and a range of assumptions. The big step in dynamic scoring will be winnowing such multiple estimates into the single set of projections required for official scores. Chye-Ching Huang writes that the new rule indeed asks for an official cost estimate that reflects only a single estimate of a bill’s supposed impact on the economy and the resulting revenue impact. 

Pros and cons

Gregory Mankiw writes that the case for dynamic over static scoring is strong in theory.  Alan Auerbach writes that arguments in favor of dynamic scoring generally emphasize its consistency with the principles of economic and statistical analysis.

1. Dynamic scoring makes use of all available information.

2. The lack of dynamic scoring biases the legislative process against tax cuts.

3. Current methods impose constraints on scoring that are at odds with economic evidence.

4. Advances in technology and economics strengthen the case for dynamic scoring.

Gregory Mankiw writes that the task is difficult in practice. First, any attempt to estimate the impact of a policy change on G.D.P. requires an economic model. Because reasonable people can disagree about what model, and what parameters of that model, are best, the results from dynamic scoring will always be controversial. Second, accurate dynamic scoring requires more information than congressional proposals typically provide. The impact of the initial tax cut depends crucially on how future Congresses will deal with the revenue shortfall, but budget analysts usually have little to go on but speculation.

Ezra Klein writes that it’s not just Congress whose behavior the CBO will now have to predict. It's also the Federal Reserve. If Congress passed a massive deficit-reduction bill and, in response, the Federal Reserve decided to lower interest rates a bit, that would have a huge effect on the cost of the bill under dynamic scoring. But how is the CBO supposed to read Janet Yellen's mind three years from now?

Alan Auerbach writes that arguments against dynamic scoring point to the technical difficulties of doing it correctly and the political reality of the context in which scoring is done.

1. Dynamic scoring must rely more on assumptions and is susceptible to political pressure.

2. Dynamic scoring would require an impractical integration with the baseline process.

3. Dynamic scoring would have to account for all channels and expenditure-side changes.

4. Dynamic scoring requires assumptions about monetary and fiscal policy reactions.

CBO and JCT credibility

Ezra Klein writes that the trust the CBO and JCT have won is a rare and fragile thing. By adding complexity, it adds more opportunities for political manipulation and partisan skepticism. The CBO isn't particularly transparent in how its models work now. But in a dynamic scoring world, the assumptions built into those models become much more important — and much more contestable. Which study the CBO and JCT end up using on the elasticity of labor in the face of higher marginal tax rates can decide whether a tax hike looks like a great idea or a disaster. If you want to get really sinister about it, as the models require more assumptions, there's more opportunity for tampering. But you don't even need to go that far. More complex, assumption-dependent models increase the importance of sincere disagreements over which research to believe.

Donald Marron writes that cherry picking model assumptions to favor the majority’s policy goals runs against the DNA of both organizations. Even if it didn’t, the discipline of twice-yearly budget baselines discourages cherry picking. Neither agency wants to publish rosy dynamic scenarios that are inconsistent with how they construct their budget baselines. You don’t want to forecast higher GDP when scoring a tax bill enacted in October, and have that GDP disappear in the January baseline.

Jared Bernstein writes that CBO’s estimates should always be delivered to the public with explicit confidence intervals, to better convey to the public the uncertainty of their guesstimates. I was reminded of the need for this approach in their recent report on the impact of the Senate immigration bill on the economy. They reported the following: “CBO’s central estimates also show that average wages for the entire labor force would be 0.1 percent lower in 2023 and 0.5 percent higher in 2033 under the legislation than under current law.” Given the uncertainty of such an estimate—10 and 20 years away!–it seems inconceivable that we could measure such a small change with any degree of accuracy that would distinguish 0.1 percent from good old 0 percent.

Selective Voodoo

Paul Krugman writes that we’re not just looking at a possible mandate for using voodoo in budget estimates, we’re talking about selective voodoo, which incorporates some supposed dynamic effects while ignoring others for which there is if anything stronger evidence. Although we don’t know how CBO will embrace supply-side fantasies, one thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects. Neither will dynamic scoring be applied to the damage to potential output caused by cutting spending in a depressed economy.

Peter Orszag (HT Econbrowser) writes that dynamically scoring tax proposals but not expenditure programs would create an even larger incentive to transform spending programs into tax incentives, even if that involves unnecessary administrative and economic costs.

Keith Hennessey writes that it’s a little hard to see how one would practically expand the new rule to apply to discretionary spending. The House rule would only apply dynamic scoring to big fiscal policy changes, those with an aggregate static budget impact bigger than 0.25% of GDP (>$45 B per year in 2015). That high de minimis threshold is a smart practical limitation so that CBO doesn’t have to worry about the growth impacts of the cars-for-crushers program or a $50M increase in spending for pet project X. But since nobody is proposing adding >$45B/year to discretionary spending, this limitation in the new rule has no practical impact. But the House rule doesn’t create a bias for tax cuts. It eliminates a pre-existing bias against very large policy changes that would expand the supply side of the economy, including but not limited to broad-based reductions in tax rates.

Tue, 03 Mar 2015 08:31:21 +0000
<![CDATA[Eurozone enlargement]]> http://www.bruegel.org/videos/detail/video/147-eurozone-enlargement/ vide147



Fri, 27 Feb 2015 10:07:57 +0000
<![CDATA[Euro-area governance: what to reform and how to do it]]> http://www.bruegel.org/publications/publication-detail/publication/870-euro-area-governance-what-to-reform-and-how-to-do-it/ publ870
  • The Issue Reform of the governance of the euro area is being held back by disagreement on what is at the root of the euro area’s woes. Pre-crisis, the euro area suffered from the built-up of financial imbalances, price and wage divergence and an insufficient focus on debt sustainability. During the crisis, the main problems were slow resolution of banking problems, an inadequate fiscal policy stance in 2011-13 for the area as a whole, insufficient domestic demand in surplus countries and slow progress with structural reforms to overcome past divergences.
  • Policy Challenge Euro-area governance needs to move beyond the improvements brought about by banking union and should establish institutions to prevent divergences of wages from productivity. We propose the creation of a European Competitiveness Council composed of national competitiveness councils, and the creation of a Eurosystem of Fiscal Policy (EFP) with two goals: fiscal debt sustainability and an adequate area-wide fiscal position. The EFP should have the right in exceptional circumstances to declare national deficits unlawful and to be able to force parliaments to borrow more so that the euro-area fiscal stance is appropriate. A euro-area chamber of the European Parliament would have to approve such decisions. No additional risk-sharing would be introduced. In the short term, domestic demand needs to be increased in surplus countries, while in deficit countries, structural reform needs to reduce past divergences.

Euro-area governance: what to reform and how to do it (English)
Fri, 27 Feb 2015 07:32:12 +0000
<![CDATA[A Greek primary issue]]> http://www.bruegel.org/nc/blog/detail/article/1583-a-greek-primary-issue/ blog1583

On the 25th February, the Greek ministry of finance published the final data for the execution of the State Budget in January 2015.

This data is available at monthly frequency and on cash basis, which makes it well suited to assess the situation of public finances from a short term financing perspective. Moreover, it allows comparing actual outcomes with expected ones.


Source: Greek Ministry of Finance - State Budget Execution Bulletins

Over the period January-September 2014, the State primary budget outperformed expectations. The actual outcome for the 9-months period was 2.5bn against. 1.6bn expected. This has remained the case up until November 2014, when the 11-months State primary balance amounted to 3.6bn against an expected 2.9bn.

Then came the elections, and the situation drastically reverted. For the 12-months period of January-December 2014, in fact, the outcome has been 1.9bn against 4.9bn expected, meaning that the State primary balance has undershot its target by 3bn.

A breakdown shows that the shortfall was due mainly to the underperformance of State budget net revenues, which came in at 51bn against about 55bn expected.

The final figures for January 2015 show that the underperformance has carried on in 2015. The primary balance was 443 millions in January against 1.4bn expected, with revenues still 935 millions short of the target. 1.4bn may look a very large value, but figure 2 shows that in 2014 a large part of the final primary surplus was built up in the first two months of the years, with January being one of the most important months for the collection of tax revenues.

Source: Greek Central Government


According to the Ministry of Finance, the underperformance in January 2015 was mainly due to the extension of a VAT payment deadline until the end of February 2015 and to the underperformance of the expected revenues from the settlement of arrears.  Therefore, data released in February will be key to watch, for two reasons.

First, it has been previously been pointed out that March is one of the heaviest months for Greece in terms of financing needs, with 4.3bn of T-bills to roll over and 1.5 bn coming due to the IMF. After last Friday’s agreement, which includes the returning of the 11bn left over in the Hellenic Financial Stability Fund (HFSF) to the EFSF, the short term funding options for the Greek government have narrowed.

Second, it might be an important indicator for the negotiations over the target primary surplus for 2015, which is still not set. According to the European Commission forecasts released this month, the primary surplus in 2014 was expected to be 1.7% on an accrual basis, although the  weaker end-2014 data suggest the actual figure might be lower. 1.7% is not far from the 1.5% target that Syriza would like the Eurogroup to agree to for 2015. Leaving aside the political considerations on this, budget data show that revenues in January 2015 were 17% lower than they were in January 2014, suggesting that if this trend does not revert, even 1.5% primary surplus may be hard to achieve.






Thu, 26 Feb 2015 15:34:53 +0000
<![CDATA[The gender pay gap]]> http://www.bruegel.org/nc/blog/detail/article/1582-the-gender-pay-gap/ blog1582

Blogs review: Actress Patricia Arquette’s plea to address wage disparity between women and men during the Oscar ceremony has lead to interesting discussions in the blogosphere about the measurement, causes and evolution of the gender pay gap.

The evolution of the gender pay gap

Claudia Goldin writes that the mantra of the women’s movement in the 1970s was “59 cents on the dollar” and a more recent crusade for pay equality has adopted “77 cents on the dollar.”

Claudia Goldin writes that of the many advances in society and the economy in the last century, the converging roles of men and women are among the grandest. A narrowing has occurred between men and women in labor force participation, paid hours of work, hours of work at home, life-time labor force experience, occupations, college majors, and education, where there has been an overtaking by females.

Sandra Black and Alexandra Spitz-Oener write that when investigating possible explanations for the narrowing of the gender wage gap, most research has focused on factors such as education and experience, for which changes have been more favorable for women than for men. Francine Blau and Lawrence Kahn write that the narrowing in the U.S. gender pay gap decelerated in the 1990s and gender-specific factors seem to be the source of this slowing convergence. It is difficult to say whether this represents merely a pause in the continued closing of the gender pay gap or a more long-term stalling of this trend.

The residual portion and discrimination

Claudia Goldin writes that the explained portion of the gender wage gap decreased over time as human capital investments between men and women converged. In consequence, the residual portion of the gap rose relative to the explained portion.

Daniel Kuehn writes that it’s very misleading and a mistake to use conditional mean differences in a regression to argue that the gap is mythical. My frustration with the empirics of the wage gap come in whenever – following something like the Arquette statement, or a mention of "77 cents on the dollar" in the State of the Union – people get up and assert that the wage gap is a "myth" or a "fallacy" simply because there are explanations for different contributions to the gap. Some people are tempted to perform the following exercise:

1. Add a bunch of controls in a wage regression.

2. Note that the difference in conditional means between men and women shrinks when you do that.

3. Call the gap a "myth" or a "fallacy".

In another post, Daniel Kuehn writes that you can't simply control for occupation and major and call it a day because people select into occupations and majors based on expected wages, and that selection process influences the observed wage distribution. If any of you are familiar with it, this is the basic point of the Roy model, and it has a variety of applications in labor economics. It is also analogous to the Lucas Critique and the need for some understanding and identification of the structural model in macroeconomics. The short point here that anyone who's gone through an econometrics class should get right away is that occupational choice is endogenous in the wage regression. Controlling for it also controls away part of the wage differential.

Some explanations for the residual portion

Claudia Goldin writes, for some, that earnings differences for the same position are due to actual discrimination. To others it is due to women’s lower ability to bargain and their lesser desire to compete. Others blame it on differential employer promotion standards due to gender differences in the probability of leaving. Wonkblog also points to research showing that women may also be more likely to accept non-monetary compensation for jobs, like healthcare.

Claudia Goldin’s preferred explanation is that the gap exists because hours of work in many occupations are worth more when given at particular moments and when the hours are more continuous. That is, in many occupations earnings have a nonlinear relationship with respect to hours. A flexible schedule often comes at a high price, particularly in the corporate, financial, and legal worlds.

The 2015 Economic Report of the President chapter on the economics of family-friendly workplace policies writes that workplaces have been slower to adapt to changing family dynamics. Two of the most important policies that firms can offer to allow workers to better balance work and family are access to paid leave and workplace flexibility. Paid leave includes access to family leave, sick leave, and other leave that allow workers to take paid time off to care for themselves or a family member. Workplace flexibility generally refers to arrangements that allow workers to shift the time or location of their work through flexible or alternative hours, telecommuting policies, or alternative work locations. It can also include partial employment options such as job sharing and phased retirement of older workers.

Jordan Weissmann writes that the US is one of three countries in the world, along with Papua New Guinea and Oman, that doesn't guarantee paid leave for new mothers. We also offer few protections for part-time workers, which makes it harder for women to keep a foot in the workforce after children. A study by economists Francine Blau and Lawrence Kahn of Cornell University found that, if U.S. family policy looked more like Europe's, employment among U.S. women would have been 7.2 percentage points higher in 2010.









Thu, 26 Feb 2015 10:00:58 +0000
<![CDATA[Welcome to the dark side: GDP revision and the non-observed economy]]> http://www.bruegel.org/nc/blog/detail/article/1581-welcome-to-the-dark-side-gdp-revision-and-the-non-observed-economy/ blog1581

Back in 2009, the United Nations Statistical Commission endorsed a revision to the System of National Accounts (SNA), which sets the international standards for the compilation of national accounts. As a consequence, Eurostat has amended the European equivalent of the SNA, the European System of Accounts (ESA) leading to a revision of GDP figures.

The changes come from the accounting treatment of some items. Research & Development (R&D) purchases and military weapon systems have been reclassified from intermediate consumption to investments, which increases value added (the difference between output and intermediate consumption), and thus GDP. Additional changes have been introduced in the accounting of pension entitlements, directly affecting the computation of compensation of employees and households’ savings rate. Other measures, such as changes in measurement of financial services, and the classification of head offices, holding companies and Special Purpose Entities, have little or no impact on the GDP numbers.


The reclassification has had a positive effect on GDP, increasing it on average by 3.5 percentage points for the EU and the Euro area as whole.

Figure 1 shows the average difference between GDP computed with the new and the old standard, retrospectively over the period 2000-2013. The reclassification has had a positive effect on GDP, increasing it on average by 3.5 percentage points for the EU and the Euro area as whole. Country variation is however significant; the impact of the reclassification ranges from 0.3 percentage points in Luxembourg to 9.3 percentage points in Cyprus. Although the revision may have had a visible impact on GDP levels, growth rates are generally less affected.

Unfortunately, Eurostat does not provide a breakdown of how the different accounting changes contribute to the final number. However, the OECD published this month a report disentangling the effect of the different factors for all OECD countries in year 2010 (Figure 2).

Having a breakdown is important because most countries have used the opportunity of the changeover in standards to also introduce a new statistical benchmark estimate, introducing new sources and methods. The OECD report shows that in some countries this has an important impact, most notably in the Netherlands and the UK (see the light red bar in Figure 2).

Other than that, R&D reclassifications tend to be the item with the largest impact on GDP recalculation, whereas reclassification of military weapon systems has very limited impact, with the exception of Greece. In Europe, the impact of R&D reclassification on 2010 GDP ranges between 0.5 percentage points and 4 percentage points, compared to an OECD average of 2.2.  The effect of the change is highest in Finland and Sweden - which have among the highest gross spending levels on R&D in EU - and lowest in Poland, the Slovak Republic, Luxembourg and Greece (Figure 3).                      


The impact of including illegal activities varies across countries. Both the new and the old standards for the compilation of national accounts stated that illegal activities should be included in GDP, but many countries did not explicitly include estimates for these activities, also because the definition of illegal activities was only streamlined by the decision in September 2014. In contrast with the previous system, EU States are now required to comply with common methodological guidelines how to account for prostitution, the production and trafficking of drugs and alcohol and tobacco

This decision was expected to have a differentiated impact across countries, and the OECD breakdown of GDP change between the old and new system make clear the extent of this divergence.

The inclusion of estimated illegal activities results in an increase in 2010 GDP by 1 percentage point in Italy and 0.9 percentage points in Spain. 

In Figure 3, Italy and Spain stand out as two special cases. The inclusion of estimated illegal activities results in an increase in 2010 GDP by 1 percentage point in Italy and 0.9 percentage points in Spain. This is about five times the average for the OECD as a whole, which was 0.2 in 2010. Perhaps even more striking is the fact that in these two countries the impact of including illegal activities is only slightly smaller than the impact of reclassifying R&D (which increased 2010 GDP by 1.3 pp in Italy and 1.2 pp in Spain).

Apart from illegal activities, GDP numbers can also be influenced by the share of countries’ ‘legal’ shadow economies, defined as all market-based legal production of goods and services which are deliberately concealed from public authorities.

A report on the shadow economy in Europe shows that its size reached a 10-year low in 2013. Several reasons might explain this development: improving economic conditions, the dramatic contraction of the construction-sector in several crisis-hit countries (which is historically a sector with a large shadow economy), a crack-down on tax evasion in recent years and generally stricter law enforcement.



Interesting to note is the comparatively small size of the shadow economy in Western Europe, with Southern and Eastern Europe exhibiting substantially higher shadow economy activities in % of GDP. The euro area is characterized by a great heterogeneity, with the size of the shadow economy in % of GDP in 2013 varying from just 7.5% in Austria to 27.6% in Estonia. In absolute numbers, the shadow economies in Italy and Germany were as large as Austrian GDP in 2013. Statistical offices make adjustments to account for shadow economy in order to arrive at exhaustive estimates of GDP and national accounts (see OECD)

A report on the shadow economy in Europe shows that its size reached a 10-year low in 2013.

The rationale for streamlining guidelines for both the inclusion of legal and illegal activities in the national accounting - which has been extensively debated in the media - is that GDP is supposed to be comparable across countries, independently of differences in national law. As recently pointed out by the OECD, international comparability has become even more important, as contributions to international organisations (including e.g. the European Union) are based on levels of Gross National Income, which is linked to GDP. 



Thu, 26 Feb 2015 08:51:29 +0000
<![CDATA[Should other Eurozone programme countries worry about a reduced Greek primary surplus target?]]> http://www.bruegel.org/nc/blog/detail/article/1580-should-other-eurozone-programme-countries-worry-about-a-reduced-greek-primary-surplus-target/ blog1580

Policymakers in other Eurozone countries that received financial assistance are concerned about giving concessions to Greece. They fear that their domestic audiences will question the fiscal and structural adjustments they implemented under the pressure of the Troika, and that thereby the popularity of anti-austerity parties may increase.

In this post I do not assess what should be the primary surplus target for Greece: this will be the result of a bargaining between Greece and its official lenders and the decision will be ultimately political. While I see a case for a somewhat lowered primary surplus (see my earlier posts on this issue here and here), in my view a proper long-term solution to the Greek problem should include a new ESM loan (with appropriate conditionality and safeguards). However a lowered primary budget surplus target would necessitate a larger ESM loan and the willingness of euro-area partners to agree to that.

In this post I assess the possible reaction of other Eurozone programme countries to a reduction in the Greek primary surplus target from the current 4.5% of GDP to a lower value, say to somewhere in the range of 2-4% of GDP.

I show the following points:

·  Even after a reasonable lowering of the Greek primary surplus target,

o   the primary surplus will be still higher in Greece than in other Eurozone programme countries;

o   total fiscal adjustment in 2009-15 will continue to be much larger in Greece than in other Eurozone programme countries;

·  Other Eurozone programme countries also underperformed relative to their programme targets and therefore Greece is not an exception in this regard.


Table 1 shows that from 2009-2014, the change in the headline primary balance (as % of GDP) was about the same in Greece and Ireland and much lower in Portugal, Spain and Cyprus. Yet the headline primary balance is not a good indicator for measuring fiscal effort, because it is impacted by one-off measures, like bank recapitalisation costs and one-off revenues (privatisation and the exceptional Eurosystem profit transfer to Greece may also be recorded among one-offs). It is also affected by the economic cycle (in a recession tax revenues fall and unemployment benefit payments increase). Excluding one-off measures (the middle data panel of the table) and both one-off measures and the impacts of the economic cycle (i.e. the structural balance, the right data panel of the table), Greece has clearly implemented the largest fiscal adjustment among Eurozone programme countries.

For 2014, I use the European Commission’s February 2015 estimate, which may be imprecise, especially since more recent data suggests that fiscal revenues fell towards the end of the 2014.  Yet even if the Commission’s estimate overstates the primary surplus in 2014, my main conclusions remain valid as Greece has undergone so much more fiscal adjustment than other Eurozone programme countries.

Table 1: Primary budget balance of the general government (% GDP)

In terms of the structural primary balance, in 2009-14 fiscal adjustment in Greece was about twice as large as in Ireland, Portugal and Spain and three times as large as in Cyprus. Nicolas Carnot and Francisco de Castro developed a more suitable measure of fiscal adjustment that they call “discretionary fiscal effort”, which suggests the same picture.

Certainly, Greece had more public debt and a larger structural deficit in 2009 than the other four countries, so it had to adjust more. But if the primary balance target of Greece is reduced somewhat, total fiscal adjustment will still remain much larger in Greece than in other Eurozone programme countries and its new target primary surpluses in 2015 and later years will also likely remain larger than in other programme countries, where the primary balance is expected to be in the range from -1.3% (Spain) to 1.6% (Portugal); see the Annex.

Finally, Table 2 demonstrates that other programme countries also underperformed relative to their programme targets in terms of their primary budget balances, so Greece is not an exception in this regard. Portugal and Spain consistently underperformed relative to the programme requirements in 2011-2015 (Troika programme for Portugal, national stability programme for Spain), while Ireland was on track only in 2012-13 but underperformed in 2011 and 2014-15.

Table 2: Ireland, Portugal and Spain: primary balance targets and actual outcomes (% GDP)

Therefore, if Greece’s  primary surplus target were lowered somewhat, I would suggest that policymakers in other Eurozone programme countries  justify this to their electorates by explaining that fiscal adjustment and the level of primary surplus would  remain higher in Greece.   They should also admit that they missed their own fiscal targets. Furthermore, Greece is clearly a special case: form peak to trough, Greek GDP collapsed by 26%, while the fall in output was much smaller in the other countries: 9% in Ireland, 7% in Portugal and Spain and 10% in Cyprus.





Annex: Annual fiscal data (% of GDP)

The following tables include annual data from the European Commission’s February 2015 forecast. The structural primary balance is available only from 2010 onwards in this forecast. For 2007-09, we use the May 2014 forecast adjusted by the average difference in 2010-11 between the estimates of the February 2015 and the May 2014 forecasts.

Wed, 25 Feb 2015 14:39:19 +0000
<![CDATA[The “Plucking Model” of Recessions and Recoveries]]> http://www.bruegel.org/nc/blog/detail/article/1579-the-plucking-model-of-recessions-and-recoveries/ blog1579

European GDP first estimates for Q4 2014 were published on February 13.  They reveal that some countries that were severely hit by the crisis are now growing at a rate near or even higher than 2% yoy (Estonia 2.6%, Latvia 1.9%, Spain 2.0%, the UK 2.7%).

Since the crisis, growth rates in recovering European countries have been extremely uneven as can be seen in the right hand side of Figure 1. The recovery in certain economies (particularly in the Baltics and more recently in the UK or Spain) is often attributed to decisive economic policies (e.g. quick structural adjustment in Latvia, quantitative easing in the UK or labour market reforms more recently in Spain). While this view may be true, a theory suggested by Milton Friedman in 1964 (and revisited in 1993) proposes a complementary hypothesis: these strong recoveries are just natural after particularly deep recessions (that can be observed on the left hand side of Figure 1 below). 

If it’s true that Estonia and Latvia stand out today in terms of real GDP growth, achieving much higher rates in the years since 2010 (5% per year on average in both cases) than other European countries, Friedman’s “plucking model” predicts exactly this kind of recovery – the harsher the recession, the swifter the revival of growth during the recovery (when it eventually comes) – irrespective of the policies followed.

The plucking model theory vs. the natural rate theory

Milton Friedman’s 1964 “plucking model” is a simple story about how economies fluctuate, and the nature of recessions. It provides an alternative theory to the natural rate theory, which is by far the dominant view of how the economy works among macroeconomists today.

According to the natural rate theory, output fluctuates around an equilibrium trend. This equilibrium or natural level (the blue line on the left hand side of Figure 2 below) is consistent with an inflation rate that is neither collapsing nor exploding. An overheating economy producing more than its natural level (when the red line is above the blue line) will experience inflation, and conversely persistent spare capacity will start to push prices in the other direction (blue below red).

On the contrary, Friedman’s model assumes that output can only move along a ceiling value (the blue line on the right hand side of Figure 2 below), corresponding more or less to the full utilization of capital and labour, or be plucked downwards. Plucking shocks are temporary demand shocks, whereas fluctuations of the ceiling itself are determined by supply shocks (technologic, demographic, regulatory, etc.).

The two theories make some interesting and more importantly testable predictions:

If the natural rate view is correct, the bust should be directly proportional to the boom that preceded it, as it should bring output back towards its natural level. In the natural rate world, the size of the boom predicts the size of the bust.

The plucking model, on the other hand, says that recessions are not dependent on the size of the preceding booms but are mainly the result of infrequent events (such as financial crises). Moreover, it suggests that, like a guitar string, the harder the string is plucked down, the faster it should come back up. Bigger recessions should lead to faster growth rates during the recoveries, to get the economy back to the pre-recession level of activity. In the plucking model world, the size of the recession predicts the growth rate in the recovery.

Friedman never explained precisely what he had in mind concerning the mechanism at work behind the plucking model. However, Simon Wren-Lewis’s simple example about shutting down half of the economy for a year, and then turning it back on again, therefore generating a 100% growth rate illustrates how growth rates can be misleading after large collapses in GDP.

In addition, given that the previous boom does not predict the size of the bust, the plucking model says nothing about when growth comes back. The contraction is not a mere correction of previous imbalances but can be self-perpetuating (because the economy may be stuck in a bad equilibrium for instance).  The plucking model only foresees that when growth comes back it should be proportional to the previous contraction. In the case of Greece for example, the plucking model does not really help us in forecasting when the return of growth will take place. Nevertheless, it has the optimistic prediction that growth rates could be quite strong when the economy starts recovering (even if after such a long depression the ceiling itself may have been affected by years of underinvestment and an immense loss of human capital).

Can the plucking model explain the last European boom-bust-recovery cycle? 

Let’s take a look at all European countries that entered recession around 2007-2009, and have made some gains towards recovery since then. Our sample contains all EU countries except the ones that didn’t experience a recession (Poland) or a recovery (Croatia and Greece), using annual GDP data from the AMECO database.

As can be seen in Figure 3a above, our very simple regressions suggest that the size of the contraction is predictive of growth rates during the recovery (the P-value is 0.000). On the other hand, the size of the boom that precedes the recession – Figure 3b – is not predictive of the yearly average GDP contraction in a way that is statistically different from zero (P-value of 0.598).

These results appear to validate the plucking theory predictions made by Friedman. In other words, the strong recoveries observed in European countries like Latvia and Estonia seem to be directly proportional to the size of their GDP-losses during the crisis. If these quick recoveries are the natural counterpart of the previous recessions, it makes it difficult to infer anything on the success or failure of the policies implemented since the beginning of the crisis, and therefore to use these countries as role model in order to recommend similar policies to other European countries. 

Tue, 24 Feb 2015 10:26:27 +0000
<![CDATA[Fact of the week - The tiny balance sheet impact of the TLTRO (charted)]]> http://www.bruegel.org/nc/blog/detail/article/1578-fact-of-the-week-the-tiny-balance-sheet-impact-of-the-tltro-charted/ blog1578

While waiting for the ECB to start QE purchases in March, an update of our Eurosystem liquidity database allows capturing the (non)-impact of the TLTRO announced by the ECB in June 2014.

TLTRO potential initial amount for the first two operations was in the order of 400 billion, i.e. 7% of the outstanding banks’ loans to non-financial private sector borrowers, excluding mortgages as of 30th April 2014. Take-up was 82.6 billion in September and 130 billion in December, bringing the total to 212 billion, i.e. slightly more than half the potential total amount (see here and here for previous assessments).

The ECB’s optimistic presentation of this measure notwithstanding, the updated numbers on use of ECB liquidity suggest that it has had almost no impact on the ECB balance sheet size. By the end of 2014 there has been no increase in the use of Eurosystem liquidity (figure 1), only a slight stabilisation of levels can be observed. The minutes of the Governing Council meeting on 22nd January, which were published yesterday, suggest that internally the ECB was in fact worries that “the total estimated take-up over all eight TLTRO operations was significantly lower than envisaged in September 2014”, and that this was one of the reason prompting the ECB to announce the additional asset purchases. 

Figure 1 Country use of Eurosystem Main and Longer-Term Refinancing Operations (01/2003-12/1214, in EUR bn)

Source: National central banks. Note: Due to missing data for several countries, the figure does not include all 18 Euro area countries

More light can be shed on this issue when decomposing the Eurosystem liquidity by maturity. As can be seen in Figure 2, the stabilisation in levels from September to December 2014 was due to the newly injected TLTRO liquidity making up for ever falling LTRO liquidity. Only the December TLTRO auction actually led to a net increase in the stock of Eurosystem liquidity. The fact that this increase is tiny is not particularly surprising, as we had documented already that the potential net additional liquidity would have been small.

Figure 2 Eurosystem refinancing operations by maturity (01/2007-01/2015, in EUR bn)

Source: Bruegel calculations based on ECB

Despite the recent spike, early repayments of previously borrowed LTRO funds - which had accelerated before the TLTRO auctions - have been contributing to a continuous decrease in   the ECB balance sheet and looking ahead (as repayments continue), further downward pressure on excess liquidity[1] can be expected. The EONIA has not increased - it has turned into slightly negative territory in fact - but this is mostly the result of the negative interest rate on the deposit facility. Before the crisis, in fact, the ECB’s main refinancing rate would steer short-term money market rates, resulting in a close alignment of the EONIA and the MRO rate. The increase in the amount of excess liquidity in the system pushed the EONIA to the bottom of the interest rate corridor, i.e. just a few basis points above the rate on the ECB deposit facility, which is the lowest possible bound for the EONIA, as banks are unlikely to lend money on the money market at a cheaper rate. This means that since the introduction of the full allotment, the rate on the ECB deposit facility has become the main driver of money market rates and the EONIA.

Figure 3 Excess Liquidity and EONIA

Source: ECB and BUBA. Note: Excess liquidity is computed following the ECB definition as deposit facility net of the use of marginal lending facility plus current account in excess of the minimum reserve requirement.

There are a number of factors possibly playing a role in the low take up of the TLTRO operation. As pointed out earlier, the ECB itself might have modified the reaction function of banks, with its announcement of an ABS programme and the growing expectations of QE in December. Knowing that the ECB was going to start buying ABS soon, and knowing that the ECB would hardly buy ABS that it would not accept as collateral, banks might have preferred to wait and sell those ABS to the ECB rather than just pledge them in the TLTRO in September. A similar reasoning might have been at play in December, when they had become overwhelmingly convinced that the ECB had to act.

The TLTRO, however, was not only aimed at increasing the balance sheet size, but also (and most importantly) at spurring fresh credit to the real economy. And indeed, from March 2015 onwards, the TLTRO is entering into its second phase - the one that should allow “leveraging” the measure beyond the initial allowances and at the same time impose incentives for banks to actually use the funds for lending to the economy. And as previously highlighted, expectations in this regard might not be too high after all.

[1] Excess liquidity is computed following the ECB definition as deposit facility net of the use of marginal lending facility plus current account in excess of the minimum reserve requirement. In other words, it is the amount of liquidity held in excess by banks at the ECB.

Fri, 20 Feb 2015 09:00:04 +0000
<![CDATA[Europe needs a lasting solution for the Greek problem]]> http://www.bruegel.org/nc/blog/detail/article/1577-europe-needs-a-lasting-solution-for-the-greek-problem/ blog1577

The talks between the new Greek government and Eurozone partners turned out to be as hectic and as tough as expected. Greece wants to get debt relief and fiscal space to spend more, revise structural reforms, stop privatisations and declare a political victory in turning down the previous bail-outs, while Eurozone partners want to stick to the terms of the bail-out agreements and keep a hard line position to prevent populist movements gaining more strength in other Eurozone countries. Not an easy circle to square.

There is a more important issue than surviving the next few months: finding a lasting solution

At the time of writing this article, talks between Greece and its partners had again broken down. While some form of agreement on filling the short-term funding gap will likely be reached, there is a more important issue than surviving the next few months: finding a lasting solution. All previous attempts to address Greece’s pressing problems since 2010 have been short-lived and the spectre of a Greek exit from the euro area has recurrently returned.

The Greek bail-out programmes so far have failed. In the first bail-out agreed in May 2010, an output fall of only 7 percent was promised, a figure which was doubled in the second bail-out agreed in March 2012. However the actual collapse of the economy was about 25 percent. The ultimate aim of the bail-outs, ensuring sustainable market borrowing at the end of the programme, has not been achieved – and not just because of the current deadlock between the new Greek government and its official lenders. If there had not been snap elections in January, Greece would not have been able to borrow from the market at affordable rates. Even if an agreement is reached by the new government and its lenders and thereby the current very high market yields fall, market borrowing rates for Greece will likely remain too high.

The responsibility for the bail-out failures is shared between Greece and its official lenders

In my view, the responsibility for the bail-out failures is shared between Greece and its official lenders, so all stakeholders have to consider options for finding a reasonable deal ensuring public debt sustainability, growth and social fairness. Given that about 80 percent of Greek public debt is in the hands of official creditors and sustainable market borrowing is not on the horizon, there are three options to address the debt conundrum: (1) much larger primary budget surpluses than the currently planned 4.5 percent of GDP and speedier privatisation in order to be able to repay maturing debt, (2) default or haircut on near-term expected debt redemptions (of which the maturing ECB-held bonds and IMF loans stand out in the next few years), or (3) new non-market financing.  The only reasonable option I see for such financing is the use of the euro-area’s permanent rescue fund, the European Stability Mechanism (ESM).

Given that one of the principal demands of the new Greek government is a much smaller primary surplus than the currently-planned 4.5 percent of GDP,, one does not need a crystal ball to rule out option 1 above. Option 2 is clearly a no-go for euro-area partners and may not be necessary either. Any level of debt is sustainable if it has a very low interest rate and a long maturity; Japan is a prime example in this regard. Like it or not, Eurozone partners have socialised most Greek public debt with very long-maturity and low-interest rate loans. If they do not wish to suffer from a haircut (both in nominal and net present value terms), then they can extend the maturities and grace periods of current loans further and provide new loans to fill the funding gaps, according to the third option above.

I do not see any reasonable alternative to a new long-term ESM programme for Greece. The big questions are the modalities and politics. A lowered primary budget surplus would necessitate a larger ESM loan. The negotiations for the conditionality (including structural reforms and privatisation) bode to be a nightmare. And even if an agreement is reached by the negotiators, unanimity of all euro-area partners is needed to turn the agreement into a new contract, which will also require the approval of some national parliaments, which could be tough to achieve.

In the absence of a reasonable long-term agreement between Greece and euro-area partners, the new Greek government could either default on some of its obligations, which would have damaging consequences and may lead to a Greek exit from the euro, or the government could fail. A new election could easily lead to political paralysis, which could again lead to a Greek default and possible wide-ranging consequences.

Strong leadership and wisdom is needed to find a lasting solution.

I expect that fear of Grexit will prompt an agreement between Greece and euro-area partners. But my concern is that the agreement will be only a short-term fix and the various constraints will prevent reaching a lasting solution, thereby just postponing the problems. That would be the next stage in the Greek tragedy, as debt sustainability problems would likely return in a few years. In the meantime the resulting uncertainty would hold back economic activity, to the detriment of both Greece and its official lenders. Strong leadership and wisdom is needed to find a lasting solution.

The article was written for Government Gazette.

Thu, 19 Feb 2015 17:13:16 +0000
<![CDATA[Greece and the André Szász Axiom]]> http://www.bruegel.org/nc/blog/detail/article/1575-greece-and-the-andre-szasz-axiom/ blog1575

A most unusual thing happened at the February 11 meeting of Eurozone finance ministers. The leaked draft agreement between the official creditors and Greek authorities had gentle words to satisfy all. The creditors drew their softest redline: the Greek authorities would, they said, “explore the possibilities of extending the programme.” For the Greeks, who hate the word “programme,” the phrase “explore the possibilities” seemed a reasonable qualifier. Also as a concession to the scarred Greek psyche, the diabolical “troika”—the International Monetary Fund, the European Commission and the European Central Bank—was not even mentioned. The Greeks, in turn, sought “bridge” (interim) financing until a new deal could be worked out. The phrase “bridge the time” seemed suitable. 

It was bit of a shock when the Greeks walked away. The consternation deepened after the February 16 failure to agree on yet another piece of paper.

Thus the officials and financial press celebrated after the Friday, February 20 agreement. The word “programme” was replaced by the acronym “MFFA,” or the “arrangement;” the “troika” will be called “institutions;” and “bridge the time” survived. But faced with a bank run—fostered, in part, by threats from euro area authorities—Greece conceded much ground. 

The Italian Finance Minister Pier Carlo Padoan celebrated: "We are all winners. I say this without rhetoric: it is a great step forward for Europe.” Words were found to satisfy all. But, make no mistake, the central issues of debt relief and reduced austerity must be revisited. One more time, the history of the euro area is being replayed.

It all started in October 1970 with the Werner Report, the blueprint of the incomplete monetary union within which the Eurozone now operates. Commenting on that Report, Hans Tietmeyer, a former president of the Deutsche Bundesbank, stated the obvious. It was, he said, “an attempt to reconcile the irreconcilable.” The glaring economic and political incongruity of the incomplete union—and the risks that entailed—stared at the reader of the Werner Report, but clever words were found that worked for all.

André Szász, a former senior Dutch central banker, brilliantly explained this phenomenon. In his amazingly insightful history of Europe’s incomplete monetary union, Szász, who was present at the inner deliberations from the Werner Report right up to the euro launch, postulated the following axiom. The report, he said, was:

“[…] a compromise not in the sense that member states resolved their differences by meeting each other on intermediate positions, but rather they agreed on documents which they felt left them free to continue to push for their own preference.”'(1)  

Such has been the recurring history: words and documents that carry completely different meanings for the different parties. But safe within the rhetorical trap, the process keeps going. The incongruities keep piling up.

All international agreements are fuzzy, some might rightly point out. And, indeed, the fuzziness is needed to ultimately achieve progress.

This approach, however, does not work for the euro. Embedded in its construction is a fundamental conflict of interests among the member nations. No nation is willing to pay for the “mistakes” of others. The process may keep going but convergence of interests is not achieved. Instead, although temporarily hidden, the economic and political pressures accumulate, only to forcefully reveal themselves at moments of crisis. 

Many congratulated each other when words papered over the differences to launch the euro. The Szász axiom was a warning not heeded.  

The February 20 agreement has the classic European imprint. The Greek authorities, it says, must make the 'best use of the given flexibility'

The February 20 agreement has the classic European imprint. The Greek authorities, it says, must make the: “[…] best use of the given flexibility …”

Ah! That wonderful word “flexibility.” It is—with apologies—so flexible. When Italian Prime Minister Mateo Renzi called for “flexibility” in the application of fiscal rules, German Chancellor Angela Merkel was puzzled. There was, she insisted, flexibility in the rules. They just came with “guard rails” to prevent disorder. 

Renzi complained for days. And then, lo and behold, the European Commission issued new, “simple” instructions with matrices of criteria folded into other matrices. Italy won a modest concession on austerity. The Eurozone authorities, after days of threatening Italy with fearsome sanctions, declared victory. The never-before-used sanctions were again stashed away for future empty threats.

Greece is important not just because the Greeks urgently need relief, but because the Greek government is insisting on changing the way Europe conducts business. 

Since October 2009, Greece has done Europe’s bidding. But no good has come out of that process. The debt burden has grown and youth unemployment has soared to nearly 60%. 

In summer 2012, a Greek government came to power with a mandate to ease the unrelenting austerity. But disregarding its democratic mandate was the grown-up thing to do.

Europe has long been run on a self-avowed “benign despotism” of enlightened leaders. This idea comes directly from Jean Monnet himself, the intellectual founder of Europe’s post-19th century state:

“I thought it wrong to consult the peoples of Europe about the structure of a community of which they had no practical experience.

Today, those who subscribe to the Monnet doctrine are bewildered by the Greek government’s insistence on sticking to its election promises. Why, the commentators ask, is the government reluctant to tell the Greeks that the hopes raised were unreasonable after all?  

For this reason, it is easy to sympathize with German Finance Minister Wolfgang Schauble, a veteran of European negotiations and a senior member of German governments that have consciously bypassed the German citizen on matters related to the euro. For him this was all quite improper. He understandably exclaimed:

“None of my colleagues have understood so far what Greece really wants in the end. Whether Greece itself knows is also the question.”

It is also easy to sympathize with German citizens who have been repeatedly told that the euro conveys no costs to them. A 1999 pamphlet from Schauble’s Christian Democratic Union asks: “What does the euro cost us? Does Germany have to pay for the debts of other countries?” Its reply: “A very clear no!”

Now we come to these crossroads. The sharpest decline in public support for the European Union has come from among the youngest. For long, the young, although far removed from the shadow of the war, regarded Europe as a natural extension of their identity. The crisis has been harsh to them. Many are fleeing. 

Renzi and the Greek Prime Minister Alexis Tsipras share the same cause: unrelenting austerity is politically unacceptable. They both represent a generational change in leadership. Both were born well after the Szász axiom came to govern Europe, well after it became customary to make compromises in documents that meant different things to different people. They are more willing to challenge the perpetual austerity and loss of national dignity required in the incomplete monetary union. 

If Tsipras undermines the Szász axiom to achieve meaningful relief and Greek sovereignty, that will be the real victory for Europe

In his more dire condition, if Tsipras undermines the Szász axiom to achieve meaningful relief and Greek sovereignty, that will be the real victory for Europe. If he does not, bogus driblets of relief to Greece will come with more austerity. And, as U.S. President Barack Obama recently warned, “You cannot keep on squeezing countries that are in the midst of depression.” The stalemate will be escalated, with future resolutions increasingly more costly. The Greek tragedy will spread wider beyond its borders, and Europe’s Greek test will be repeated until the right answers are given.

Thu, 19 Feb 2015 15:57:39 +0000
<![CDATA[The Google antitrust investigation and the case for internet platform regulation in Europe]]> http://www.bruegel.org/nc/events/event-detail/event/511-the-google-antitrust-investigation-and-the-case-for-internet-platform-regulation-in-europe/ even511

The alleged abuse of dominance by Google is one of the European Commission’s highest profile ongoing antitrust cases. The investigation started in 2010. Concerns have been raised that Google manipulates its search algorithm to suppress the results of its competitors, while unfairly promoting its own services – a practice known as “search bias.” Google and the European Commission are currently working on a settlement entailing remedies that could address the Commission’s concerns.

Ms Vestager, the new EU Competition Commissioner is expected to take a decision soon. In parallel, a general discussion around the need to regulate internet platforms such as Google, Ebay, Facebook, Apple, Linkdln, Amazon, Uber, Airbnb etc. developed in Europe. In November 2014, the European Parliament adopted a resolution calling the Commission to closely monitor the competitive conditions of online search market and to consider proposals “aimed at unbundling search engines from other commercial services”. Calls for action at EU level to ensure ‘platform neutrality’ is also coming from a number of concerned Member States and European companies.

The purpose of this lunch talk is to have a thorough discussion of the substance of the potential problems and to suggest ways to address them, both in the specific case of Google alleged antitrust abuse and in the general case of internet platforms. Questions such the below ones will be addressed:

  • Is Google infringing EU antitrust laws?
  • If yes, what remedies can be envisaged to address those antitrust concerns?
  • More generally, is there a need for regulating internet platforms in Europe?
  • If yes, how can regulation guarantee higher user protection while maintaining incentives to innovate?

Speakers from the European Parliament, academia and business will bring their different perspectives to the table. A substantial part of the debate will be dedicated to Q&A with the floor.


  • Adam Cohen, Google
  • Ramon Tremosa, European Parliament
  • Paul Seabright, Toulouse University
  • Chris Sherwood, Allegro Group
  • Chair: Mario Mariniello, Bruegel

Relevant resources

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday 15 April 2015, 12:00-14:00
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Thu, 19 Feb 2015 13:14:56 +0000
<![CDATA[Growth Strategies in the MENA Region and Implications for Europe]]> http://www.bruegel.org/nc/events/event-detail/event/510-growth-strategies-in-the-mena-region-and-implications-for-europe/ even510

A number of economies currently face the risk of becoming caught between rapidly-growing low-income countries with abundant and cheap labor, and middle-income countries that are able to innovate quickly. These dynamics could lead to a "moderate growth trap," characterized by job creation that is insufficient to absorb the expansion of the workforce. The evolving international environment requires a rethinking and reformulation of the growth strategy in order for countries to better position themselves in global value chains and prepare to compete in international markets for goods and services with high-skill-intensive labor and more sophisticated technological inputs.

Two leading scholars from OCP Policy Center in Morocco will present a new publication “Morocco: Growth Strategy for 2025 in an Evolving International Environment” which includes a quantitative model providing a framework that can be generalized to other middle-income countries. The policy issues and related challenges facing Morocco are similar to those of most of the middle-income countries in the MENA region, and elsewhere. The implications in terms of the nature and the scope of interactions with EU economic developments and policies will also be discussed.

Link to the book (in French)


  • Karim El Aynaoui, Managing Director, OCP Policy Center and Advisor to the Chairman and CEO, OCP Group, Morocco
  • Pierre-Richard Agénor, Senior Fellow at OCP Policy Center, Morocco and Hallsworth Professor of International Macroeconomics and Development Economics, University of Manchester, U.K.
  • Alvaro Ortiz Vidal, Chief Economist, Emerging Markets Analysis Division, BBVA Group
  • Heliodoro Temprano Arroyo, Head of the Unit, Neighbourhood Countries and Macro-Financial Assistance, European Commission's Directorate General for Economic and Financial Affairs (DG ECFIN)
  • Alia Moubayed, Director, Head of Research, MENA region, Barclays Bank (TBC)
  • Chair: Karen Wilson, Senior Fellow, Bruegel

About the speakers

Karim El Aynaoui is currently Managing Director of OCP Policy Center and advisor to the CEO and Chairman of OCP, a global leader in the phosphate sector. OCP Policy Center is an autonomous Moroccan think thank created by OCP Foundation to further objective policy debate and analysis of key social, economic, and geopolitical issues that affect the future of the private sector and the country. From 2005 to 2012 he worked at Bank Al-Maghrib, the Central Bank of Morocco. He was the Director of Economics and International Relations, where he provided strategic leadership in defining and supporting monetary policy analysis and strategy. He was also in charge of the Statistical and International Relations Divisions of the Central Bank, led the research division and was a member of the Governor’s Cabinet. Before joining Bank Al-Maghrib, Karim El Aynaoui worked for eight years at the World Bank, both in is Middle Eastern and North Africa, and Africa regions as an economist. He holds a PhD in economics from the University of Bordeaux, where he taught for three years. He has published articles in scientific journals on macroeconomic issues in developing countries.

Pierre‐Richard Agénor is Hallsworth Professor of International Macroeconomics and Development Economics, University of Manchester, and co‐Director, Centre for Growth and Business Cycle Research. He is also Principal Investigator, ESRC‐DFID Growth Research Programme; International Research Fellow, Kiel Institute of the World Economy; Senior Fellow, FERDI; Research Associate, CAMA; and Senior Fellow, OCP Policy Center. He has published widely in leading professional journals and made contributions to a wide range of fields in economics, including international macroeconomics, development economics, growth theory, labor economics, and poverty reduction. He is the author of The Economics of Adjustment and Growth (Harvard University Press), Development Macroeconomics (with P. J. Montiel, Princeton University Press), and more recently Public Capital, Growth and Welfare (Princeton University Press). He has taught and lectured in many universities and research.

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Thursday, 5 March 2015, 12:00 - 14:00
  • Contact: Matilda Sevón, Events Coordinator - matilda.sevon@bruegel.org

Wed, 18 Feb 2015 15:07:32 +0000
<![CDATA[Limits to the Greek bank run?]]> http://www.bruegel.org/nc/blog/detail/article/1574-limits-to-the-greek-bank-run/ blog1574

An important question has emerged this week as regards the role of the ECB as a lender of last resort to banks in Greece. The press has widely reported Greeks withdrawing cash from their deposits as well as shifting deposits to other countries. The ECB therefore increased its amount of Emergency Liquidity Assistance (ELA) from 60 billion to 65 billion. This has triggered negative reactions from conservative German economists, among them Hans-Werner Sinn in the FT, arguing that ELA should be much more limited than that. 

The Greek banking system has a pretty large deposit base of 243.8 billion

So what are the theoretical and political limits to liquidity provisioning by the ECB? In a normal bank-run, a central bank needs to provide unlimited liquidity to allow all depositors to withdraw their cash if they wish to. For the Greek banking system, the theoretical limit would be the size of all deposits. The graph below shows the deposits in billion and in percent of total assets. The Greek banking system has a pretty large deposit base of 243.8 billion (December 2014) which is 61% of the total size of the balance sheet of 397. billion. This deposit base has come down since January 2012, when it was still above 75%.

Source:  European Cental Bank, Aggregated balance sheet of euro area monetary financial institutions, excluding the Eurosystem: Greece and Bruegel calculations

If no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding.

So could the ECB go ahead and just fund the 243.8 billion with ELA? This is a tough call and my answer would clearly be "it depends". If there is certainty that Greece stays in the euro, its banks remain solvent and a political compromise is reached, then the answer is an unambiguous "yes". More problematically, if there is a clear political consensus that no agreement between euro area partners can be found, then the ECB cannot provide unlimited funding. The reason is simply that the ECB would know that in the case of a certain exit, the Greek banks would be insolvent as the economy is collapsing and therefore the value of the assets of the banks would be inferior to the liquidity provided. And even if Grexit wasn't certain but government default was, parts of the banking system would be insolvent requiring limits on ELA.

The ECB is caught in extremely difficult political discussions.

In between, there is a "grey" zone, in which the ECB has to provide liquidity as they are doing it now, but where fully replacing capital outflows can be problematic as it materially changes the terms of the political discussion between the different parties. Unavoidably and nolens volens, the ECB is caught in extremely difficult political discussions. These political discussions are difficult also because the costs of Greece leaving the euro are very high (as shown here and here). It is a tough call what the limits to liquidity provisioning are in such a situation but the limits should be set politically, not by the ECB. Overall, the limits on political union define the limits on monetary union.

Tue, 17 Feb 2015 16:40:05 +0000
<![CDATA[Bruegel’s commitment to transparency: the think tank as fish tank, not gas tank]]> http://www.bruegel.org/nc/blog/detail/article/1573-bruegels-commitment-to-transparency-the-think-tank-as-fish-tank-not-gas-tank/ blog1573

Once again Bruegel has been awarded Five Stars by Transparify for the transparency of its funding (which is available to the public through our website and Annual Report). Since Transparify’s assessment last year, there has been a significant overall improvement in the global think tank sector towards sharing funding sources with the public. We welcome this development, as the level of transparency in our sector affects the reputation of us all.

Bruegel has been awarded Five Stars by Transparify for the transparency of its funding

Understanding who funds think tanks, and to what end, is an important part of maintaining the reputation our sector has for independence. Even think tanks motivated by a particular political stance, doctrine or dogma benefit from transparency and the opportunity to demonstrate sufficient independence from their funders. After all, they also want to be able to present evidence-based policy suggestions and instigate legitimate and productive debate. It is, therefore, appropriate to mention that there is so much more than can and should be done to increase transparency in our sector and thereby demonstrating sufficient independence to take a legitimate role in the policy-making process.

Understanding where funding comes from is a good start, but only a start. It is also just as important to know what that funding is intended to achieve. Being transparent about governance structures and funding arrangements directed at anything other than core funding should also be disclosed to the public. As a voter and a member of the public, I would naturally want to know for what certain funders were paying, should I be at all skeptical of their motivation. If funder or think tank is unwilling to share this information, both should reflect on why – the public certainly will!

Understanding where funding comes from is a good start, but only a start.

Whilst money ‘makes the world go around’ we should also recognise that it’s not the only motivation in life. Being transparent about funding and spending is not sufficient to be convincing in one’s aspiration to be a public good. We must also be transparent about what motivates our researchers: their own political leanings, their nationalities, the other parties they work with and any other relevant motivating factors. It’s no longer enough for think tanks to say “Trust me, I’m smart”. We must allow the public to make the judgment of how trustworthy we are and indeed, how smart! (Bruegel has researchers and managers make annual public declarations of outside interests covering a number of areas, as well as having them agree to a statement of integrity.)

In Bruegel’s approach to transparency, we accompany these declarations with a more sophisticated conversation on independence. When we are transparent about who funds us, for what and to what extent; when we are transparent about what motivates us as a group and individuals, we can begin a conversation about independence that acknowledges we cannot remain in an ivory tower and expect to produce ideas that will work. We should (and do) converse with funders and other stakeholders. We should engage with policy makers, academics, markets and civil society. We can also, in the digital world, more easily enter dialogues with the public. But all that should be done from the exposure of a fish tank, rather than the gas tank, so you, our consumer, can see everything that’s going on.

Tue, 17 Feb 2015 14:22:57 +0000
<![CDATA[The aging dollar peg: time for the PBC to bid it farewell]]> http://www.bruegel.org/nc/blog/detail/article/1572-the-aging-dollar-peg-time-for-the-pbc-to-bid-it-farewell/ blog1572

The Chinese renminbi (RMB) depreciated 2.5 percent against the US dollar in 2014. This was the first depreciation since 2005, when Beijing timidly started loosening its tight dollar peg. Recently, the RMB has repeatedly tested the weak side of its daily trading band, despite attempts by the People’s Bank of China (PBC) to signal its preference for a steadier bilateral RMB-USD rate via its daily fixing (Figure 1, left panel). What has led to the changing fortunes of the RMB? What lies ahead for the currency in 2015?

I can think of several possible factors leading to the most recent bout of weakness in the bilateral RMB-USD exchange rate. 

The most obvious culprit is the broad strength of the US dollar (Figure 1, right panel). For instance, since start-2014, the euro and yen have weakened by 15 percent against the dollar, respectively. Consequently, the Chinese ‘redback’ has also weakened slightly against the almighty American ‘greenback’, though the RMB is still outperforming most other major and emerging market currencies. According to BIS statistics, the RMB gained some 7 percent in effective terms in 2014 and has remained one of the few strong currencies globally. 

The second and related factor is the monetary policy divergence between China and the US. Whereas the US Fed is expected to start raising its policy rate and has already stopped further unconventional (net) bond buying, the PBC has embarked on a cycle of monetary easing. Hence the anticipated interest rate differential between the two currencies is narrowing. 

There are now questions about whether the RMB is already fairly valued or even somewhat overvalued.

The third factor concerns the underlying currency valuation. Over the past decade, the RMB has gained 50 percent on a broad real effective basis, a strength few major advanced or emerging market currencies can match. Even allowing for fast Chinese productivity growth, there are now questions about whether the RMB is already fairly valued or even somewhat overvalued. Simply put, the once broad-based market consensus of an undervalued RMB is gone, after its massive cumulative appreciation. 

Fourth, more market participants are becoming worried about signs of increased stress in the Chinese financial system. As the exchange rate is one of the most important financial asset prices, how can one expect an ever-stronger RMB on top of a more fragile Chinese financial sector? It makes little sense to dread Chinese shadow banking and to preach meaningful RMB appreciation at the same time.

Finally, the PBC appears to have taken a more hands-off approach towards managing the RMB. Since early 2014, it has intervened less in the FX market and widened the daily trading band. But it has also occasionally stepped in to restore market functioning, disrupting carry trade and successfully injecting some 2-way volatility. A growing offshore RMB market in Hong Kong also adds to its interactions with the onshore RMB market, with risk sentiment possibly playing a bigger role in RMB exchange rate dynamics. We estimate the offshore RMB turnover to have more than doubled in the past two years. 

The PBC appears to have taken a more hands-off approach towards managing the RMB.

Hence a mighty US dollar, monetary policy divergence, currency valuation concerns, and less PBC intervention all combine to sway currency expectations, raise volatility and narrow interest rate differentials. Thus the implied Sharpe ratio declines, prompting an increase in Chinese corporate hedging of dollar liabilities, with rising dollar deposits and a more rapid extinguishing of Chinese corporate dollar debts, estimated at more than US$1trillion in 2014. Added to Chinese demand for US dollars have been the growing overseas acquisitions by Chinese companies. 

In balance-of-payments terms, the fourth quarter of 2014 saw the largest Chinese capital outflow in 16 years, and official foreign exchange reserves have fallen steadily since mid-2014, though this is in part due to valuation effects. In short, demand for US dollars by Chinese residents has risen, weakening the RMB-USD exchange rate.

What will happen next? It depends a lot on how the PBC will respond to Chinese corporate dollar buying. I envision three possibilities. 

First, the PBC could cling more tightly to the dollar peg in ‘stormy weather’, just like it did in the 2008 Global Financial Crisis and the 1998 Asian Financial Crisis. The result will be a heavy deflationary blow to the Chinese economy in an environment of persistent dollar strength, a PBC put on the RMB firmly instilled into market expectations and some brief sense of stability. In this case, the looser dollar peg could tighten again. 

Second, the PBC could take a ‘laissez faire’ approach, completely stepping back from the currency market to let it clear itself, perhaps in a wider trading band. This would result in sharp volatility and even some corporate stress unless capital controls were tightened considerably. In this case, the loose dollar peg could vanish fast. 

A third and more likely scenario would be for the PBC to let the RMB move more freely against the dollar but prepare to lean against the wind by selling dollars out of its official reserves from time to time while keeping a watchful eye on cross-border capital flows. In this case, the loose dollar peg would start fading gradually.

This last approach makes sense for a number of reasons. In the short term, it would help deliver a warranted Chinese monetary easing by helping stabilise the effective exchange rate and an orderly unwinding of the Chinese corporate carry trade. In the longer term, it would help enhance two-way currency flexibility ahead of fuller interest rate deregulation and greater capital account liberalisation. 

The 20-year old but increasingly loose dollar peg has served the Chinese economy well as a simple nominal anchor, but its time is up.

This 20-year old but increasingly loose dollar peg has served the Chinese economy well as a simple nominal anchor, but its time is up. First, as the biggest trading nation and second largest economy on earth, China is simply too big to be anchored to any single currency, even in a loose fashion. Second, a much more flexible RMB is needed before full interest rate liberalisation and substantial capital opening. Third, a dollar peg has often amplified external shocks to the Chinese economy rather than absorbing them, in part because of the dollar’s safe haven role. Finally, the US no longer welcomes a renewed Chinese peg to its currency and yet demands nothing but ‘one-direction flexibility’.

It's high time the PBC starts seriously letting the aging dollar peg go.

Tue, 17 Feb 2015 12:12:11 +0000
<![CDATA[Are Italy’s stars of reform aligning?]]> http://www.bruegel.org/nc/blog/detail/article/1571-are-italys-stars-of-reform-aligning/ blog1571

Two interesting institutional documents were released over the past 10 days: the Going for Growth 2015 of the OECD and the Winter Economic Forecast of the European Commission. A combined reading suggests that a) there is (ample) scope for Italy to step up its reform efforts, and b) the time might be ripe to do so.

The leitmotif underpinning this year’s OECD report is the concern that following a “facilitating effect of crises”[1], which seems to have pushed advanced economies into enacting painful competitiveness-enhancing measures, the pace and breadth of reform is now slowing down. In order to illustrate the point, the Paris-based organisation put together a Reform responsiveness rate indicator[2], which estimates the share of OECD country-specific recommendations on which “significant action” was taken by a government. In a nutshell, a value of 0.5 indicates that significant actions were taken on half of the reform priorities identified by the OECD in the previous year.

Figure 1. Reform responsiveness rates, 2011-12 and 2013-14

Note 1: Reform responsiveness value indicates the percentage of OECD reform proprieties on which significant action was taken. 

Note 2: Going for Growth identifies five reform priorities for each OECD country every two years.

Figure 1 above benchmarks this reform effort indicator in the midst of the crisis (x-axis), with its latest value (y-axis).

Programme countries were leading the reform effort spectrum in the midst of the crisis (2011-12), together with Estonia and Spain. Since then, reform drive has slowed down sharply, tugging most of them in line with (or below) the EU average. Greece was, and confirms to be, a reform leader by OECD standards, in line with what I argued recently here.

In the last 2 years, Italy has reduced its reform efforts more than any other OECD EU country.

When compared to other stressed countries, Italy was less of a reform leader during times of crisis, exerting levels of reform aligned with the UK and Denmark. The latter two, however, were among the most competitive economies in the world already at that time. Moreover, in the last two years, as financial instability waned but political instability mounted[3], Italy has reduced its reform efforts more than any other OECD EU country except Ireland and Estonia.

As a result, Italy’s competitiveness is slipping with respect to its European partners. Figure 2 below shows the change in the World Bank Ease of Doing Business ranking over the same period of time as the OECD data presented above. As expected, Italy has been improving its non-price competitiveness somewhat, but less so than Greece and Spain. Ireland and Portugal were already faring quite well in terms of this indicator in 2011-12. Consequentially, Italy is now among the places in Europe with the largest number of obstacles for new businesses.

Italy is now among the places in Europe with the largest number of obstacles for new businesses.

Figure 2. Ease of Doing Business Ranking, 2011-12 and 2013-14

This is not a peculiarity of the Doing Business data. The trend is confirmed also by other competitiveness indicators.

For the sub-sample of euro area countries presented above, the World Economic Forum places Italy’s competitiveness levels just ahead of Greece and below Portugal and Spain. This is true also when looking at the OECD’s indicator of Barriers to Trade and Investment, strictness of Employment Protection Legislation, and strictness of Retail Trade Regulation to boot. 

A first line of conclusions can hence be drawn: Italy might have partially stepped up its reform efforts in the darkest stage of the euro area crisis, but starting from low levels and less so than countries in a similar need of an economic overhaul. Since then, this moderate reform drive has partially faded, resulting in slipping competitiveness with respect to other stressed countries. Further efforts are surely warranted, as Italy is now faring poorly vis-à-vis its European partners according to several competitiveness indicators.

Hints of why a reform window might be opening for Italy is to be found in the Commission’s latest forecast report. As can be seen in Figure 3 below, for the first time since the financial crisis hit, Italy is forecast to grow from 2015Q1 in a sustained fashion for 8 consecutive quarters. These positive prints, which are echoed by private forecasters, the IMF, and the Bank of Italy, come off the back of two main elements: a) lower oil prices, which my colleague Jim O’Neill has recently paralleled to a sharp tax cut for consumers, and b) the strong effects of a weak euro on an exporting country like Italy, as discussed inter alia by finance minister Padoan in Istanbul earlier last week.

Figure 3. Quarterly and yearly real GDP, Italy

In other words, Italy (like other European countries) is entering a period of loose monetary policy and something that resembles an expansionary fiscal policy shock. These, OECD (2009) analysis suggests, are the best conditions to implement structural reforms, as their short-term negative impact will be cushioned by an expanding aggregate demand.

Political economy considerations might also corroborate a call for reforms. Discussing broad-based reform episodes in Europe, Dani Rodrik (1994) underlined the “importance of demonstrating early success in some key dimensions of reform” in order to endow “the broader reform programmes with legitimacy”. Extrapolating this principle to the Italian situation, Prime Minister Matteo Renzi should take full advantage of this mild economic rebound, which could suggest reforms are working. This will also make it harder for the oppositions to contrast the reform agenda, Rodrik suggests.

Up until now, the government has focused its economic reform efforts on liberalising the Italian labour market through the so-called Jobs Act. On this, the jury is still out, as its implementing decrees are still being drafted. Moreover, the Renzi government seems now set to restructure the banking sector, whose weaknesses have been exposed by the ECB’s asset quality review.

More can be done to tackle precisely those areas where Italy compares particularly poorly by international standards

However, more can be done to tackle precisely those areas where Italy compares particularly poorly by international standards: 1) shifting taxation away from labour, as Italy’s tax wedge is currently the 5th highest in Europe and 12 p.p. above the OECD average; 2) abridging the length of judicial procedure, for which Italy is 147th worldwide in the World Bank ranking; 3) simplifying the tax system, which is estimated to take start-ups 296 hour/year to comply with (in France it’s 132); 4) easing the entry/exit of firms, particularly in retail trade; 5) restructuring and privatising state-owned enterprises, for which Italy ranks 3rd in the OECD[4] in terms of number of employees (289’329 considering only SOEs controlled by the central government).

After three years of negative growth, cyclical indicators suggest Italy’s economy might be slowly re-starting. However, this is rooted in external factors and a monetary boost to aggregate demand, which was needed to shore off against deflationary tendencies in the euro area. The challenge for Renzi’s government will be to take full advantage of these positive temporary factors to lay the foundations of more durable growth.

[1] An effect already identified by Duval (2008).

[2] The reform responsiveness rate indicator is based on a scoring system in which recommendations set in the previous year’s issue of Going for Growth take a value of one if “significant” action is taken and zero if not. An action is considered as “significant” if the associated reform addresses the underlying policy recommendation and if it is actually legislated: announced reforms are not taken into account (OECD, 2015).

[3] Over the period 2012-14, Italy has had three different governments, led my Mario Monti (529 days), Enrico Letta (300 days), and Matteo Renzi (almost a year to date).

[4] Christiansen, H. (2011)

Tue, 17 Feb 2015 10:11:01 +0000
<![CDATA[Demographic changes and structural deflation]]> http://www.bruegel.org/nc/blog/detail/article/1570-demographic-changes-and-structural-deflation/ blog1570

What’s at stake: A view has appeared arguing that the low-inflation environment experienced by advanced economies may be structural, rather than cyclical. Although this view remains based on thin empirical evidence and still needs to be fully articulated, it is gaining support among monetary pessimists.

Motivation and empirical link

Derek Anderson, Dennis Botman, Ben Hunt write that a view appears to have emerged that exiting deflation has become more challenging due to aging. Edward Hugh writes that if deflation is a product of lower potential GDP that comes with lower population growth, all the ongoing attempts to reflate economies may be simply working against history.

In their Population History of England, Wrigley and Schofield (chapter 10) write that when Malthus wrote his Essay on the principle of population he made the tension between population growth and food production (and prices) the central thesis of the work. 'An increase of population without a proportional increase food [...] The food must necessarily be distributed in smaller quantities, and consequently a day's labour will purchase a smaller quantity of provisions. An increase in the price of provisions would arise, either from an increase of population faster than the means of subsistence; or from a different distribution of the money of society.’ The population and price dynamics of the 250 years preceding the appearance of his Essay in 1798 provides suggestive evidence about that link: population doubled while prices more than tripled (suggesting an elasticity of prices to population growth is 1.5).

Former Bank of Japan governor Masaaki Shirakawa writes that, seemingly, there should be no linkage between demography and deflation. But it may not be the case. A cross-country comparison among advanced economies reveals intriguing evidence: Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24 advanced economies. That finding shows a sharp contrast with the recently waning correlation between money growth and inflation.

Edward Hugh writes that the correlation may be just an odd coincidence, but it is striking.


The BIS (HT Blog-Illusio) writes that Governor Shirakawa (2011a, 2011b, 2012 and 2013) has argued that population ageing can lead to deflationary pressures by lowering expectations of future economic growth. The resulting loss of demand and investment might not be easily offset by monetary policy, especially if inflation is already low and policy rates are close to the zero lower bound. President Bullard of the St Louis Federal Reserve Bank has suggested a different explanation focusing on the political economy of central banking. Bullard et al (2012) argue that the old might prefer lower inflation than the young due to the redistributive effects of inflation. Thus, to the degree their policies reflect voter preference, central banks might engineer lower inflation when populations age.

Patrick Imam writes that a declining and aging population could put deflationary pressures on the economy through lower aggregate demand, a negative wealth effect from falling asset prices, and changes in relative prices reflecting different consumption preferences. Katagiri (2012) investigated the effects of changes in demand structure caused by population aging on the Japanese economy and found that population aging—modeled as unexpected shocks to its demand structure— caused about 0.3 percentage point deflationary pressure using a multi-sector new Keynesian model.

Derek Anderson, Dennis Botman, Ben Hunt use the IMF’s Global Integrated Fiscal and Monetary Model (GIMF) and find substantial deflationary pressures from aging, mainly from declining growth and falling land prices. Dissaving by the elderly makes matters worse as it leads to real exchange rate appreciation from the repatriation of foreign assets. The deflationary effects from aging are magnified by the large fiscal consolidation need.

Monetary pessimism or aggressiveness

Edward Hugh writes that it’s hard not to draw the conclusion that something structural and more long-term is taking place and that this something is only tangentially related to the recent global financial crisis. One plausible explanation is that Japan’s long-lasting malaise is not simply a debt deflationary hangover from the bursting of a property bubble in 1992, but rather with the rapid population ageing the country has experienced.

Derek Anderson, Dennis Botman, Ben Hunt write that the scant theoretical and empirical work on the potential relationship between these factors – with most research on aging focusing on the effects on growth and fiscal sustainability – may be due to the monetarist doctrine: whether or not aging exerts downward pressure on prices is irrelevant as a central bank committed to do whatever it takes should remain capable of anchoring inflation expectations at the target. ECB Board member Benoit Coeure recently repeated the long-held view that inflation is and remains a monetary phenomenon. And that, as such, doubts about the ability of central banks to deliver on their inflation targets in the medium run are just misplaced.

The BIS writes that, though unconventional, if right, a link between demography and inflation may have significant implications for monetary policy. Christina Romer and David Romer write that such arguments were already made in the 1970s when economists of the Federal Reserve “regard[ed] continuing cost increases as a structural problem not amenable to macroeconomic measures”. These views led monetary policymakers to advocate nonmonetary steps to combat inflation.

Derek Anderson, Dennis Botman, Ben Hunt argue, indeed, that that deflation risk from aging is not inevitable as ambitious structural reforms and an aggressive monetary policy reaction can provide the offset. Calibrating monetary policy appropriately may, however, de difficult. Jong-Won Yoon, Jinill Kim, and Jungjin Lee write that there is little empirical evidence to date on whether, and to what extent, monetary policy changes have different effects on various cohorts and, therefore, on whether monetary policy effectiveness changes in an ageing society.

Tue, 17 Feb 2015 08:42:46 +0000
<![CDATA[Global fiscal developments and risks]]> http://www.bruegel.org/nc/events/event-detail/event/509-global-fiscal-developments-and-risks/ even509

On 26 February Bruegel will host a small and closed discussion on the topic "Global Fiscal Developments and Risks" with Vitor Gaspar, former Portuguese Finance Minister, and currently Director of the Fiscal Affairs Department in the IMF.

The meeting is envisaged to trigger a frank and open debate within a closed circle of Bruegel scholars and members.

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Thursday 26 February 2015, 12.30-14.30 (Lunch will be served at 12.30 after which the event begins at 13.00)

Mon, 16 Feb 2015 11:20:07 +0000
<![CDATA[A Fresh Start for T-TIP: Strategies for moving forward]]> http://www.bruegel.org/nc/events/event-detail/event/508-a-fresh-start-for-t-tip-strategies-for-moving-forward/ even508

Since the start of the negotiations in 2013, negotiators have already met eight times in Brussels and in Washington. Despite important progress a number of crucial questions remain open which will be addressed during the workshop: Is TTIP too big for one bite? If so, what are sensible ways to divide the menu to ensure the overall success of the project? What mechanisms could help making each course balanced and that courses postponed for later negotiation will get addressed? Would it help or hurt for each side to declare its red-line subjects that simply cannot be addressed in the TTIP talks? What are practical means of achieving, even if gradually, regulatory convergence -- given the formidable turf issues, given the different regulatory environments on both sides of the Atlantic and given the reality that there are few agreed methods for balancing the safety and convenience of consumers against the costs and anti-competitive effects of regulation? Will it help or hurt to publish negotiating drafts, complete with brackets, as talks proceed, giving interested publics more time to analyze the provisional agreements and register their support or opposition?


15.00 Welcome & Introduction

  • Guntram Wolff and André Sapir, Bruegel

15.05-16.00& T-TIP Negotiations in a Changing Global Landscape

  • Cecilia Malmström, EU Commissioner for Trade
  • Anthony Gardner, US Ambassador to the EU

16.00-18.00 Panel discussion

  • Carl B. Hamilton, Professor of International Economics, and former MP, Stockholm
  • Gary C. Hufbauer, Reginald Jones Senior Fellow, Peterson Institute for International Economics, Washington, DC
  • Bernard Hoekman, Professor, European University Institute, Florence
  • Denis Redonnet, Head, Strategy Unit, DG Trade, European Commission
  • André Sapir, Senior Fellow, Bruegel, and University Professor, Université libre de Bruxelles (ULB)

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Thursday 12 March, 15.00-18.00
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Mon, 16 Feb 2015 09:37:55 +0000
<![CDATA[Debt Restructuring & Greece]]> http://www.bruegel.org/videos/detail/video/146-debt-restructuring-and-greece/ vide146

Is Greece's debt unsustainable? Do the negotiations among eurozone finance ministers beg for a re-think of a need for a globally recognised, legal framework for debt restructuring?

Fri, 13 Feb 2015 14:39:54 +0000
<![CDATA[Mapping competitiveness with European data]]> http://www.bruegel.org/nc/events/event-detail/event/506-mapping-competitiveness-with-european-data/ even506

Since competitiveness is at the heart of policy making at the Union level, the definition and availability of new indicators of competitiveness and assessment of data requirements needed to compute such indicators is an essential task, and it is the topic of the Blueprint “Mapping competitiveness with European data”.

MAPCOMPETE, a support action for the European Commission carried out by a consortium of European research institutes (see www.mapcompete.eu), has been designed to address the challenges discussed above, with special reference to providing an assessment of data opportunities and requirements for the comparative analysis of competitiveness in European countries, both at the macro and the micro level.

This Blueprint picks up some of the main issues of the MAPCOMPETE project and provides an inventory and an assessment of the data related to the measurement of competitiveness in Europe. This Report, and the associated meta-database available at www.mapcompete.eu – which provides detailed information on data accessibility and computability of more than 150 indicators – can be a key handbook for a researcher interested in measuring competiveness, or for policymakers interested in the feasibility and in the quality of alternative competitiveness measures.

This Blueprint also identifies the opportunities emerging from recent progress made in scientific research and facilitated by different data providers who increasingly make their data available to research. Finally, this inventory allows us to identify the main issues that need to be addressed by policy makers in order to improve data accessibility for the economic analysis of competitiveness in Europe.


  • Davide Castellani, Professor of Applied Economics at the University of Perugia and a research fellow of CIRCLE (Sweden) and LdA (Italy)
  • Andreas Koch, Research Fellow at the Institute for Applied Economic Research –IAW (Germany)
  • Isabel Grilo, Head of Unit B2 “Structural reforms, competitiveness and innovation”, DG ECFIN, European Commission
  • Ani Todorova, Head of Unit, Unit C2 "National and Regional Accounts Production. Balance of Payments", Eurostat
  • Chair: Guntram Wolff, Director of Bruegel

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Friday 6 March 2015, 12:30-14:30. Lunch will be served at 12:30 after which the event begins at 13:00.
  • Contact: Matilda Sevón, Events Coordinator - matilda.sevon@bruegel.org

The MAPCOMPETE Project is funded by the European Commission

Thu, 12 Feb 2015 14:41:21 +0000
<![CDATA[A new start for Greece]]> http://www.bruegel.org/nc/blog/detail/article/1569-a-new-start-for-greece/ blog1569

Greece's new government under prime minister Alexis Tsipras – in power for not even two weeks – has had a rollercoaster ride. In the face of crisis, it has exercised brinkmanship. It unilaterally declared that it would not respect the agreement between Greece's previous government and the country's creditors, and would increase government spending and be insolvent at the same time. The response has been predictable: the rest of the euro area and in particular the European Central Bank and Germany, felt blackmailed and called its bluff. The ECB made access to ECB liquidity more difficult for Greek banks, while Merkel’s administration has signalled that a Greek exit from the euro area is considered manageable.

a monetary system cannot function credibly if a small part of the union can hold the core of the system to ransom

Arguably, this was a necessary but insufficient response. It was necessary, because a monetary system cannot function credibly if a small part of the union can hold the core of the system to ransom. A country cannot unilaterally decide to increase expenditure at the expense of other parts of the union and hope to receive ECB funding for it. It can also not unilaterally refute agreements between its previous government and the European partners. 

However, the response has so far been insufficient. The new Greek government has been voted into office with a strong mandate to change course both with domestic economic policy and in terms of relationships with its partners. Ignoring this vote is not an option. Greeks need a realistic perspective that their daily lives will improve. This perspective cannot be the result of gambling, unilateral action or blackmail. Instead, it needs to be the result of serious domestic action and an agreement between the partners of the Eurogroup. So what are the essential elements of a deal?

 the fight against tax evasion and corruption is crucial

First, the new Greek government must get serious with its promises to address the domestic problems. As the new finance minister put it eloquently at the press conference in Berlin, the fight against tax evasion and corruption is crucial and was not properly prioritised by the previous government. A concrete plan and its successful implementation would provide a huge boost to the credibility to the new government – both at home and abroad.

The second element is a programme to meet Greece's funding needs in the next couple of months. Such a programme is necessary because otherwise the Greek government will not be in a position to repay the International Monetary Fund and the ECB in due time nor cover for all expenditures. It is also necessary to close the revenue gap that has opened up in the last few months because of a collapse in tax payments. Greece will have to fulfil conditions to get this programme or else stay within its budget constraint. However, the conditions could come without a formal Troika.

Third, the partners will need to discuss the requested primary surplus. A much lower primary surplus would increase the burden on taxpayers elsewhere. But a primary surplus of more than 4% is unrealistic. At the same time, the social situation is appalling in some parts of Greece and other crisis countries. The EU could therefore agree on a dedicated programme to alleviate social hardship where most needed. 

Fourth, the debt burden needs attention. Greece currently does not pay much interest on its debt. The 2 percent of GDP interest payment compares with 1.8 percent in Germany and 2.3 percent in France. This low current interest burden is only possible because official creditors have allowed Greece an eight year respite before interest becomes payable. It is thus not possible to reduce the burden of the debt on the current Greek budget.

A deal may still be possible but the Greek side will have to move most

It is possible, however, to remove the uncertainty of the repayment of Greece's debt mountain of 175 percent of GDP. In a positive baseline scenario, Greece will be able to successful overcome its structural weaknesses, growth would pick up and the debt-to-GDP ratio would fall thanks to an increasing GDP level. Yet, GDP could grow less. This uncertainty itself is a burden for Greece because investors shy away from countries whose solvency is uncertain. A solution would be to index the official loans to the development of GDP. The finance ministers of euro-area countries should seriously consider this. It would not only remove a major uncertainty for Greece. It would also remove a major uncertainty for all of Europe. A deal may still be possible but the Greek side will have to move most.

Wed, 11 Feb 2015 06:49:17 +0000
<![CDATA[The maths behind an amended Greek plan]]> http://www.bruegel.org/nc/blog/detail/article/1568-the-maths-behind-an-amended-greek-plan/ blog1568

Last week I published my assessment of Greek Finance Minister Yanis Varoufakis’ draft plan, and promised to do some calculations to illustrate its impacts. Mr Varoufakis abandoned the earlier haircut demand of Syriza that I welcomed as a major step towards a Greek compromise, but noted that some elements of his plan are not feasible and instead I proposed some alternative measures, like a new ESM programme. While Mr Varoufakis’s plan was received coldly by euro-area partners, recent media reports suggest that a compromise is in the making (see for example a Eurointelligence report here).

In this post I present some numerical simulations of a possible plan.

I compare the impact of various measures with an updated version of the benchmark scenario of a model I used in a blog post with Pia Hüttl recently and in a paper with André Sapir and Guntram Wolff a year ago.

I considered the following options:


  1. Indexing loans to GDP: it is not known at the moment what kind of GDP-indexing the Greek government has in mind. If it is ‘neutral’ in the sense of not leading to an expected gain for Greece, then it could serve as a useful insurance against future GDP shocks, but would not change the expected debt/GDP trajectory. A ‘non-neutral’ indexing (which would lead to an expected gain for Greece) would be seen as a non-transparent haircut by creditors and will likely be rejected. Therefore, in my calculations below I do not consider any impact of a possible GDP-indexing on the expected debt /GDP trajectory.

  2. Swapping Greek bond holdings of the ECB and NCBs to perpetual bonds: as I argued, this will likely be found equivalent to monetary financing and therefore illegal. Instead, I suggested introducing a new ESM programme for Greece with a very long maturity loan and using this loan to buy back ECB/NCB holdings (or repay them when they mature). In my calculations below I consider results up to 2030, and assume no principal repayment of this new ESM loan by this date. Therefore, for my calculations it does not matter if the ESM loan has an infinite maturity (corresponding to the “perpetual bond” proposal of Mr Varoufakis) or a long but finite maturity with a grace period at least till 2030 (similar to some of the existing loans to Greece).

  3. The new ESM programme could have a larger volume in order to pay back the more expensive IMF loans early.

  4. Extending the maturities of existing euro-area loans (EFSF and Greek Loan Facility) by 10 years and eliminating the 50 basis points spread of the Greek Loan Facility can also be considered.



  • Mr Varoufakis proposed a 1-1.5 % of GDP primary surplus, well below the targets of the Troika programme. In my simulations I consider two options: 1.5% and 3% of GDP.


The key questions:


  1. Are elements 2, 3 and 4 above sufficient to counterweight the impact of the smaller primary surplus on the debt/GDP ratio?

  2. How much would these options delay the repayment of Eurozone loans?


The biggest difficulty in answering these questions is the quantification of the growth impact of a smaller primary surplus. Recent research suggests that the so-called fiscal multiplier is high in recessions (see for example Dell'Erba et al, 2014), and according to the Winter 2015 forecast published by the European Commission last week, the Greek output gap is expected to be -6% of potential GDP in 2015 (despite the expected 2.5% real GDP growth). A lower primary surplus may impact expectations in various ways (for example positively, if the lower surplus is seen as a lower drain on the economy, or negatively, if it is seen as a threat to public debt sustainability) with feedback on future GDP growth.

The overall impact is pretty uncertain. In my simulation I use a “net” fiscal multiplier (i.e. a multiplier that takes into account the revenue-generating impact of the fiscal expansion) as calculated by Dell'Erba et al (2014): they found that during protracted recessions, the five-year cumulative multiplier is 2. Their charts suggest that there are some later impacts too, so I assume that by the 10th year, the cumulative multiplier is 2.5. The multiplier estimate of Dell'Erba et al (2014) considers real GDP and a faster real growth may have an impact on inflation, so the overall impact on nominal growth can be larger. Yet I do not consider this effect, because Greece has high unemployment and should improve its price-competitiveness. In the annex I plot the implied nominal GDP growth rates.  

Let me also note that since most of Greek public debt is owned by non-residents, a lower primary budget surplus and thereby a slower repayment of external debt would mean that Greece need to have a smaller trade surplus to keep its balance of payments under control.

The figures below show my results. Let’s start with the case when the primary budget surplus is lowered but there is no further official support to Greece: the current official loans are repaid as scheduled and the financing gap is fulfilled by borrowing from the market at an interest rate of about 5% (see annex). According to Figure 1, a 3% primary surplus would not make a major difference relative to the baseline scenario in terms of the debt/GDP ratio, but a 1.5% primary surplus would lead to a much higher debt/GDP ratio. Yet in both cases Greece would need to borrow more from the markets: instead of the already quite large €45 billon market borrowing need by 2020 as in our baseline scenario, Greece would need to borrow €66 billion if the primary surplus is reduced to 3% and €87 billion if it is reduced to 1.5%. I do not think it very likely that markets would fund Greece in such amounts (and even more after 2020) at affordable rates.


Figure 1: Debt/GDP scenarios for Greece: Lower primary surplus, no change in official loans


Let me continue with the various possibilities of official lending support to Greece under the assumption that the primary surplus targets are not lowered (Figure 2). One possible measure would be to extend the maturities of current euro-area loans (EFSF and bilateral) to Greece by 10 years and eliminate the 50 basis points spread on bilateral loans. Another option is to take a new and long maturity ESM loan to repay the Greek bond holdings of the ECB and national central banks when they mature. A further option is to repay the IMF in one go in 2015 from a new ESM loan. Individually, these measures would not change the debt/GDP ratio significantly relative to the baseline, but their combined effect would be sizeable, by reducing the debt ratio to 121 in 2020 and 74 by 2030 from the baseline numbers of 124 and 85, respectively. 


Figure 2: Debt/GDP scenarios for Greece: Same (baseline) primary surplus, various euro-area measures to help financing

Extended loan maturities and new ESM loans imply that the exposure of Eurozone lenders to Greece is prolonged and/or increased.  Table 1 shows that in the current scenario, Eurozone’s exposure would decline to €139 billion by 2030, while if all three financing measures are adopted, it would increase to €246 billion.


Table 1: Total Eurozone exposure to Greece under alternative official financing scenarios (€ billions)

Note: total exposure is the sum of bilateral loans (the Greek Loan Facility), EFSF loans, ECB and NCB holdings, 22.88% of IMF loans and possible new ESM loans. 22.88% is the share of euro-area members (excluding Greece) in IMF’s quotas.


Finally, Figure 3 looks at the combined impact of the three financing options and a lowered primary surplus. The financing measures I considered would not able to counterweight the impact of the lowering of the primary surplus to 1.5% of GDP, but they would more than offset the impact of a lowering to 3%. If the 3% primary surplus is combined with only one of the three main financing supports, the resulting debt/GDP scenario becomes very similar to the baseline. As an illustration, Figure 3 shows the case when the primary surplus is 3% and among the financing support measures only a new ESM loan is granted to repay the IMF loans early.


Figure 3: Debt/GDP scenarios for Greece: Lower primary surplus and additional euro-area financing support



Key questions related to this plan






What is the essence of this deal?


  • Beyond the short-term funding gap, which may be filled with a “bridge agreement”, there is a more fundamental medium to long-term problem: market borrowing rates for Greece will likely remain too high, even if an agreement is reached and thereby current market yields fall. If Greece only gets a short-term fix, debt sustainability problems may return in a few years and in the meantime the resulting uncertainty could hold back economic activity.

  • The ESM is able to offer loans at a much cheaper rate than the market. One may regard a new ESM programme as “throwing good money after bad”, but this is not true: without providing a new loan, the previous loans may indeed turn to bad, but a new loan could shield the previous loans.

  • The difficult choice euro-area partners face is whether to help Greece with new cheap loans in order to improve the sustainability of Greek public debt and to hope that the current and future Greek governments will meet the country’s commitments in the next decades, or do not offer any new help, which would significantly increase the risk of losses on current loans. The choice will likely be political.


Why would Greece request a new ESM programme which would have new conditions attached?

The reality is that Greece will not be able to repay its maturing debts without new financing. Its options are limited:


  • Relying on markets would be simply too expensive and an eventual increase in short-term treasury bill issuances would not be a lasting solution.

  • As I noted, swapping ECB-held Greek government bonds for perpetual bonds will not work.

  • After Greece’s clumsy attempt last week to threaten Eurozone partners by asking for assistance from Russia, the Greek government has probably realised that this is a bad idea which would have far-reaching consequences.

  • The only reasonable option is to get more funding from euro-area partners.


If Greece pays back the IMF from a new ESM loan, then the government can declare its success in turning down the ill-famed Troika. A new ESM programme would come with new conditions which could involve some of the government plans, and so could be better sold to Greek voters.

What if there is no agreement?

In the absence of an agreement between Greece and euro-area partners, two scenarios could emerge:


  1. the Syriza government could default on some of its obligations, which would have damaging consequences and may lead to a Grexit (see our earlier blogpost on this issue here);

  2. the Syriza government could fail, forcing new elections, which would have uncertain results. A possible victory of the New Democracy party may lead to an agreement with euro-area partners, but a new election could easily lead to political paralysis, which could again lead to a Greek default and possible wide-ranging consequences.


Many of Syriza’s election pledges have to be reconsidered, and they have already given up a number of them. But they will not give up all their promises. It is clearly in the common interests of euro-area partners and the new Greek government to find a reasonable compromise.



Annex: The model and the main scenario assumptions

The annex of a blogpost we wrote with Pia Hüttl last month presents the essence of our model. Here I only compare our baseline scenario with the projections of the European Commission and the IMF, and specify the primary balance, growth and market interest rate assumptions.

Our baseline scenario for the public debt/GDP ratio is practically equal to the European Commission’s February forecast for 2015-16, and slightly more optimistic than the IMF’s October 2014 projection for these years. This difference may be explained by the lowering of the interest rates and their expected future values from October 2014 to February 2015.


Figure 4: Our baseline scenario in comparison with the February 2015 Commission and October 2014 IMF debt projections

The baseline primary balance scenario was designed as follows:


  • 2015-16: European Commission’s February 2015 forecast;
  • 2017-19: IMF’s October 2014 forecast;
  • 2020-22: we assumed that the primary surplus is gradually reduced to 3.1% of GDP, which the average primary surplus for successful consolidations in advanced economies as calculated by Abbas et al (2013);
  • 2026-2030: we assumed a gradual reduction to 2% of GDP.


We considered the alternative 3% and 1.5% of GDP primary surplus scenarios as indicated on the chart below.


Figure 5: Primary balance (% GDP) in the baseline and alternative scenarios

The baseline nominal GDP growth scenario was designed as follows:


  • 2015-16: European Commission’s February 2015 forecast;
  • 2017-19: IMF’s October 2014 forecast;
  • 2020-22: we assumed that nominal growth is gradually reduced to 3.7% of GDP, which is the Consensus Economics long-term forecast for Spanish growth.


Figure 6 shows annual growth scenarios of the baseline scenario and the scenarios with the reduced primary surpluses.


Figure 6: Nominal GDP growth rate (% per year) in the baseline and alternative scenarios

Since current and market-based expectations for Greek yields are heavily influenced by the current financial market tensions, I do not use current Greek yields. In our previous work we calibrated the interest rate at which Greece would be able to borrow from the market on the basis of expected Portuguese interest rates (plus an assumed spread). Unfortunately Portuguese yields are not available for maturities over 10 years and therefore I chose to base the Greek market interest rate on expected German interest rates. Specifically, I assumed that if an agreement is reached between euro-area lenders and Greece, in 2015 the 6-year maturity Greek borrowing rate will be 500 basis points above the German 6-year interest rate, which spread gradually declines to 300 basis points by 2030. The chart below shows the expected interest rates for Germany, Italy and Portugal and our assumption for Greece. Our assumption implies an approximately 5 percent interest rate on new market borrowing in the next few years, which may be too optimistic. If so, the benefit of obtaining an ESM programme would be larger than the benefit I have calculated.


Figure 7: Expected 6-year government bond yields of Germany, Italy and Portugal and our assumption for Greece

Note: “implied” means market expectations for future interest rates, as derived from the term structure of interest rates using data of 6 February 2015.

Wed, 11 Feb 2015 06:16:15 +0000
<![CDATA[Obama joins the Greek chorus]]> http://www.bruegel.org/nc/blog/detail/article/1567-obama-joins-the-greek-chorus/ blog1567

US President Barack Obama’s recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors. Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs. While scholars in the United States have frequently denounced the policies of Europe’s monetary union, their government has looked the other way.

Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs

Those who criticize the euro or how it is managed have long run the risk of being dismissed as Anglo-Saxons or, worse, anti-Europeans. British Prime Minister Margaret Thatcher accurately foresaw the folly of a European monetary union. Gordon Brown, as British Chancellor of the Exchequer, followed in Thatcher’s footsteps. When his staff presented carefully researched reasons for not joining the euro, many Europeans sneered.

And that is why Obama’s statement was such a breath of fresh air. It came a day after German Chancellor Angela Merkel said that Greece should not expect more debt relief and must maintain austerity. Meanwhile, after days of not-so-veiled threats, the European Central Bank is on the verge of cutting funding to Greek banks. The guardians of financial stability are amplifying a destabilizing bank run.

The guardians of financial stability are amplifying a destabilizing bank run

Obama’s breach of Europe’s intellectual insularity is all the more remarkable because even the International Monetary Fund has acquiesced in German-imposed orthodoxy. As IMF Managing Director Christine Lagarde told the Irish Times: “A debt is a debt, and it is a contract. Defaulting, restructuring, changing the terms has consequences.”

The Fund stood by in the 1990s, when the eurozone misadventure was concocted. In 2002, the director of the IMF’s European Department described the fiscal rules that institutionalized the culture of persistent austerity as a “sound framework.” And, in May 2010, the IMF endorsed the European authorities’ decision not to impose losses on Greece’s private creditors – a move that was reversed only after unprecedented fiscal belt-tightening sent the Greek economy into a tailspin.

The delays and errors in managing the Greek crisis started early. In July 2010, Lagarde, who was France’s finance minister at the time, recognized the damage incurred by those initial delays, “If we had been able to address [Greece’s debt] right from the start, say in February, I think we would have been able to prevent it from snowballing the way that it did.” Even the IMF acknowledged that it had been a mistake not to impose losses on private creditors preemptively; it finally did so only in June 2013, when the damage had already been done.

There is plenty of blame to go around. Former US Treasury Secretary Timothy Geithner championed a hardline stance against debt restructuring during a crisis. As a result, despite warnings by several IMF Directors in May 2010 that restructuring was inevitable, the US supported the European position that private creditors needed to be paid in full.  

Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable

Lee Buchheit, a leading sovereign-debt attorney and the man who managed the eventual Greek debt restructuring in 2012, was harshly critical of the authorities’ failure to face up to reality. As he put it, “I find it hard to imagine they will now man up to the proposition that they delayed – at appalling cost to Greece, its creditors, and its official-sector sponsors – an essential debt restructuring.”

Obama may have arrived late to the right conclusion, but he expressed what should be an obvious truth: “You cannot keep on squeezing countries that are in the midst of depression.”

If Obama’s words are to count, he must continue to push for the kind of deal Greece needs – one that errs on the side of too much debt forgiveness, rather than too little. Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable, as another bogus deal will keep the Greek economy depressed, ensuring that the problem soon recurs. If European sensitivities must be assuaged, Greece’s debt repayment could be drawn out over 100 years.

Debt forgiveness benefits creditors as much as it helps debtors.

At the end of the day, debt forgiveness benefits creditors as much as it helps debtors. Creditors have known this since at least the sixteenth century, when Spain’s King Philip II became the world’s first known serial sovereign defaulter. As Jesus put it, “It is more blessed to give than to receive.”

European authorities must come to understand that the next act of the Greek tragedy will not be confined to Greece. If relief fails to materialize, political discontent will spread, extremist forces will gain strength, and the survival of the European Union itself could be endangered.

Tue, 10 Feb 2015 21:47:32 +0000
<![CDATA[The 2015 Greek redemptions’ path]]> http://www.bruegel.org/nc/blog/detail/article/1566-the-2015-greek-redemptions-path/ blog1566

Tomorrow, the Eurogroup meets to discuss the Greek government’s plan to reach an agreement with the Country’s public creditors. The sense of urgency has certainly increased over the last weeks, as Eurogroup Jeroen Dijsselbloem rejected a short-term financing arrangement until June, saying February the 16th is a hard deadline for asking a programme extension. Moreover, the year ahead is one of heavy debt redemptions, for Greece.

The Country’s financing needs for 2015 come mostly from repayments to official creditors. Summer will be especially challenging, as 6.7 billion of ECB’s SMP bonds come to maturity before September. Repayments to the IMF amount to 9.8 billion for the whole year, with the largest tranches coming in March, June and September (see tables for details).

Between now and the end of March, Greece has to repay around 2.3 billion to the IMF and to roll over about 5.7 billion of Treasury Bills. T-Bills - which amount to 14.5 billion in total for 2015 - are mostly held by domestic banks. A fraction had reportedly been acquired in previous months by foreigners, who appear unwilling to roll it over, at least until the Greek political situation becomes clearer.




detailed schedule of repayments and roll-over



TABLE 1 - Outstanding T-Bills and Bonds redemptions

Source: Datastream


TABLE 2 - Repayment schedule to IMF 

Source: IMF

Tue, 10 Feb 2015 20:33:48 +0000
<![CDATA[Two cheers for the new normal]]> http://www.bruegel.org/nc/blog/detail/article/1565-two-cheers-for-the-new-normal/ blog1565

The conventional wisdom about the state of the world economy goes something like this: Since the start of the 2007-2008 financial crisis, the developed world has struggled to recover, with only the United States able to adjust. Emerging countries have fared better, but they, too, have started to flounder lately. In a bleak economic climate, the argument goes, the only winners have been the wealthy, resulting in skyrocketing inequality.

That scenario sounds entirely right – until, on closer examination, it turns out to be completely wrong.

Start with economic growth. According to the International Monetary Fund, during the first decade of this century, annual global growth averaged 3.7%, compared to 3.3% in the 1980s and 1990s. In the last four years, growth has averaged 3.4%. This is far lower than what many had hoped; in 2010, I predicted that in the coming decade, the world could grow at a 4.1% annual rate. But 3.4% is hardly disastrous by historical standards.

it is only the eurozone that has badly disappointed in recent years

To be sure, all of the large, developed economies are growing more slowly than they did when their economic engines were roaring. But it is only the eurozone that has badly disappointed in recent years. I had assumed, when I made my projections in 2010, that the region’s poor demographics and weak productivity would prevent it from growing at more than 1.5% a year. Instead, it has managed only a meager 0.3%.

For Japan, the US, and the United Kingdom, the prospects are brighter. It should be relatively straightforward for them to grow at an average rate that outpaces that of the last decade – a period that includes the peak of the financial crisis. In addition, the dramatic drop in the price of crude oil will serve as the equivalent of a large tax cut for consumers. Indeed, I am rather baffled by the IMF’s decision to downgrade its growth forecast for much of the world. If anything, with oil prices falling, an upward revision seems warranted.

Another factor supporting a more positive outlook is the rebalancing that has occurred between the US and China, the world’s two largest economies. Each entered the financial crisis with huge current-account imbalances. The US was running a deficit of more than 6.5% of its GDP, and China had a surplus of close to 10% of its GDP. Today, the US deficit has fallen to about 2%, and the Chinese surplus is less than 3%. Given that their intertwined imbalances were key drivers of the financial crisis, this is a welcome development.

It has recently become fashionable to disparage the economic performance of the large emerging countries, particularly China and the other BRIC economies (Brazil, Russia, and India). But it is hardly a surprise that these countries are no longer growing as fast as they once did. In 2010, I predicted that China’s annual growth would slow to 7.5%. It has since averaged 8%. India’s performance has been more discouraging, though growth has picked up since early 2014.

The only real disappointments are Brazil and Russia, both of which have struggled (again, not surprisingly) with much lower commodity prices. Their lethargic performance, together with the eurozone’s, is the main reason why the world economy has not managed the 4.1% growth that optimists like me thought was feasible.

The conventional wisdom on wealth and inequality is mistaken

The conventional wisdom on wealth and inequality is similarly mistaken. From 2000 to 2014, global GDP more than doubled, from $31.8 trillion to over $75 trillion. Over the same period, China’s nominal GDP soared from $1.2 trillion to more than $10 trillion – growing at more than four times the global rate.

In 2000, the BRIC economies’ combined size was about a quarter of US GDP. Today, they have nearly caught up, with a combined GDP of more than $16 trillion, just short of America’s $17.4 trillion. Indeed, since 2000, the BRICs have been responsible for nearly a third of the rise in nominal global GDP. And other emerging countries have performed similarly well. Nigeria’s economy has grown 11-fold since 2000, and Indonesia’s has more than quintupled. Since 2008, these two developing giants have contributed more to global GDP growth than the EU has.

Statistics like these utterly disprove the idea that global inequality is growing. Gaps in income and wealth may be shooting up within individual countries, but per capita income in developing countries is rising much faster than in the advanced economies. Indeed, that is why one of the key targets of the United Nations Millennium Development Goals – to halve the number of people living in absolute poverty – was achieved five years ahead of the deadline.

Economically, at least, the world is continuing to become a better place.

None of this is meant to deny that we are living in challenging and uncertain times. But one thing is clear: economically, at least, the world is continuing to become a better place.

Tue, 10 Feb 2015 09:26:32 +0000
<![CDATA[It’s not just Russia: Currency crisis in the Commonwealth of independent states ]]> http://www.bruegel.org/publications/publication-detail/publication/869-its-not-just-russia-currency-crisis-in-the-commonwealth-of-independent-states/ publ869

• The currency crisis that started in Russia and Ukraine during 2014 has spread to neighbouring countries in the Commonwealth of Independent States (CIS). The collapse of the Russian ruble, expected recession in Russia, the stronger US dollar and lower commodity prices have negatively affected the entire region, with the consequence that the European Union's entire eastern neighbourhood faces serious economic, social and political challenges because of weaker currencies, higher inflation, decreasing export revenues and labour remittances, net capital outflows and stagnating or declining GDP.

• The crisis requires a proper policy response from CIS governments, the International Monetary Fund and the EU. The Russian-Ukrainian conflict in Donbass requires rapid resolution, as the first step to return Russia to the mainstream of global economic and political cooperation. Beyond that, both Russia and Ukraine need deep structural and institutional reforms. The EU should deepen economic ties with those CIS countries that are interested in a closer relationship with Europe. The IMF should provide additional assistance to those CIS countries that have become victims of a new regional contagion, while preparing for the possibility of more emerging-market crises arising from slower growth, the stronger dollar and lower commodity pric

It’s not just Russia: Currency crisis in the Commonwealth of independent states (English)
Mon, 09 Feb 2015 10:54:22 +0000
<![CDATA[The four unions “PIE” on the Monetary Union “CHERRY”]]> http://www.bruegel.org/publications/publication-detail/publication/868-the-four-unions-pie-on-the-monetary-union-cherry/ publ868


This paper presents a European Index of Regional Institutional Integration (EURII), which maps developments in European integration from 1958 to 2014 on the basis of a monthly dataset.

EURII captures what we call: (i) the “Common Market Era”, which lasted from 1958 until 1993; and (ii) the first twenty years of the “Union Era” that started in 1994, but gained new impetus in response to the euro area crisis.

The paper complements the economic narratives of the crisis with an institutional approach highlighting the remedies to the flaws in the initial design of Economic and Monetary Union (EMU)

Download the Annex - Stages in the process of regional integration, selected events and related scoring

The four unions “PIE” on the Monetary Union “CHERRY” (English)
Mon, 09 Feb 2015 09:54:19 +0000
<![CDATA[Is blogging dead?]]> http://www.bruegel.org/nc/blog/detail/article/1564-is-blogging-dead/ blog1564

What’s at stake: Andrew Sullivan’s decision to shut down his blog has sparkled a conversation about the future of blogging. While most authors recognize that the conversational nature of blogs has decreased over the years, there is less agreement on the fundamental cause behind this trend and what this means for the future of blogging.

The golden age of blogs

Jason Kottke writes that blogs are for 40-somethings with kids. In the past few years, the blog died. Sure, blogs still exist, many of them are excellent, and they will go on existing and being excellent for many years to come. But the function of the blog is increasingly being handled by a growing number of disparate media forms that are blog-like but also decidedly not blogs. The primary mode for the distribution of links has moved from the loosely connected network of blogs to tightly integrated services like Facebook and Twitter. 

Ben Smith writes since 2008 that ecosystem of links and blogs decayed and, in many places, collapsed. Few blogs drive the traffic they once did, and reporters hope their stories will be widely tweeted, rather than linked — though that doesn’t drive the same kind of traffic. In retrospect, the golden era of political blogs stretched from 2004 to 2008. The tech blog golden era started earlier and ended later. While the blogosphere has now been dying for as long as it was alive, Andrew Sullivan’s decision to shut down marks a kind of final punctuation to the era.

Ben Thompson writes that a big problem with this entire discussion is that there really isn’t a widely agreed-upon definition of what a blog is. For Thompson, a “blog” is a regularly-updated site that is owned-and-operated by an individual (there is, of course, the “group blog,” but it too has a clearly-defined set of authors). And there, in that definition, is the reason why, despite the great unbundling, the blog has not and will not die: it is the only communications tool, in contrast to every other social service, that is owned by the author; to say someone follows a blog is to say someone follows a person.


Noah Smith writes that what is dying is the idea of the blog as a news source. In the old days, as a reader, you would have a favorite blogger, who would write many frequent posts throughout the day. That would be your main news source, your portal to current events. Often the post would have a slight bit of commentary or reaction. Basically, you got to hear the world narrated through the voice of someone you liked. Blogging 2.0 will be more focused on longer posts, high-level discussions and specialized expertise, while retaining the focus on distinctive voice and free-wheeling subject matter that made Blogging 1.0 so fun.

Noah Smith writes that blog posts are not just news articles freed from the tyranny of professional editors. With blogs, you can do something that news can’t easily do – you can carry on a conversation. In the field of economics, in fact, these discussions provide some of the debate that used to happen through comments submitted to academic journals. Mathematicians have gone even further – discussions on math blogs such as Terence Tao’s often involve real, cutting-edge technical insights that have the potential to influence new research.

Social media and the conversational web

Ezra Klein writes that the incentives of the social web make it a threat to the conversational web. At this moment in the media, scale means social traffic. Links from other bloggers — the original currency of the blogosphere, and the one that drove its collaborative, conversational nature — just don't deliver the numbers that Facebook does. But blogging is a conversation, and conversations don't go viral. People share things their friends will understand, not things that you need to have read six other posts to understand. Blogging encourages interjections into conversations, and it thrives off of familiarity. Social media encourages content that can travel all on its own. 

Paul Krugman writes that there is a tension between maintaining a conversational feel and producing pieces that can be read on their own. But it’s a tension, not a contradiction: you can, with effort, maintain a blogging style that makes regular readers feel that they’re part of an ongoing conversation yet makes individual posts meaningful to people who aren’t reading everything you write.

Kevin Drum writes that the conversational nature of blogging is also dying because of multi-person blogs – which began taking over the blogosphere in the mid-aughts – make conversation harder. Most people simply don't follow all the content in multi-person blogs, and don't always pay attention to who wrote which post, so conversation becomes choppier and harder to follow. And partly it's because conversation has moved on: first to comment sections, then to Twitter and other social media. Drum also argues that the rise of professional and expert bloggers led to blogs becoming less conversational in tone and sparking less conversation, namely because professional blogs prefer to link to their own content, rather than other people's because that's the best way to promote their own stuff. There's nothing wrong with that. It makes perfect sense. But it's definitely a conversation killer. 

Mon, 09 Feb 2015 08:39:56 +0000