Blog Post

At last a behavioural change

With the Fiscal Compact and other institutional innovations, Europe is attempting to remedy some of the weaknesses revealed by the crisis in the governance of the euro area. Important as it is, one cannot be sure that the new institutional set-up will guarantee the avoidance of the macroeconomic mistakes that fed the crisis. It is […]

By: Date: October 25, 2012 Topic: European Macroeconomics & Governance

With the Fiscal Compact and other institutional innovations, Europe is attempting to remedy some of the weaknesses revealed by the crisis in the governance of the euro area. Important as it is, one cannot be sure that the new institutional set-up will guarantee the avoidance of the macroeconomic mistakes that fed the crisis. It is therefore useful to see whether there are prospective behavioural changes that could complement the institutional innovations.

One interpretation of one factor behind the problems revealed by the crisis in Southern European countries is that, after decades with high and variables rates of inflation, economic agents had difficulty in adapting to the low and stable inflation achieved by the ECB. While in places like Germany this was more a continuation of the pre-euro experience, even if the record of price stability achieved with the euro was even better than that achieved with the Deutsche-Mark, in southern European countries this was a genuine regime change and behaviour did not swiftly adjust to it. This could help explain three developments. First, nominal wages well exceeding productivity gains were asked and granted, with the still lingering expectation that future inflation, possibly generated by devaluation, would then bring real wages down. This led to a cumulative loss of competitiveness and therefore to trade and current account deficits. At the same time perceived real rates of interest were too low, as the expected inflation component of nominal interest rates was too high, and this stimulated investment, particularly in real estate, also because houses were considered a protection towards anticipated inflation. As far as public finance is concerned, governments may have been affected by the same inertia as households, firms and banks and may have thought that they could indulge into larger deficits because inflation would, as in the past, eat into the real value of government debt, thus limiting the growth of the debt to income ratio. With this hypothesis one could help explain five weaknesses of what are now stressed economies: first, a loss of competitiveness, second, large trade and current account deficits, third, excessive investment in real estate bringing with it, over time, as fourth characteristic, bad loans for banks and therefore bank losses and, finally, excessive deficits and debt.

The rest of the story has a much more positive tone. This is that the crisis should have made it clear in the most forceful way that wage, investment, lending and fiscal behaviour were not consistent, in stressed countries, with the price stability brought about by the ECB and that, therefore, large vulnerabilities accumulated, which resulted, when the crisis struck, in great economic and social costs. Behaviour has to change going forward to avoid permanent damages to the economies involved and this gives the hope that the lesson has been learned and that the same mistakes will not be made again.

While it is too early to be confident that the lesson has been learnt and that the positive effect of past mistakes are now indeed apparent, a favourable omen in this respect is that, in stressed jurisdictions, albeit with difficulties and even acute ones in Greece, the policy lines that common wisdom had deemed necessary are actually being implemented


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Mehreen Khan and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis and Alicia García-Herrero Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts