Economic Policy


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27 April 2010

In his latest Commentary, Daniel Gros raises the fundamental question of what would happen if the proposed €45 billion aid package can't bring the Greek tragedy to a happy ending. While acknowledging that the Greek economy would collapse, he finds that the impact on the rest of the single currency zone should be minor and that the institutions of the euro area would probably be strengthened as a result of increase intolerance towards deficit violations and reduced inaccurate reporting.

This Commentary was updated 7 May 2010.

27 April 2010

 In this Commentary, CEPS Director Daniel Gros takes a look at the quality of Greece’s official fiscal adjustment programme and concludes that a substantial part of the projected revenue increases are unlikely to materialise and that the hard choices and unavoidable cuts have been postponed. In his view, it is not a credible instrument in the longer-run perspective, which is what is needed given that the required long-term adjustment is a reduction in the deficit worth over 10% of GDP.

 

 

19 April 2010

This Commentary finds that the recent adjustment measures taken by the Greek government in combination with the financial support proffered by the Eurogroup may not be sufficient to deal with the risk of instability in EMU in the longer term. The author argues that other imbalances, most notably the current account imbalances within EMU, need to be addressed to avoid a deflation spiral that would aggravate sustainability problems in highly indebted countries. The Greek crisis highlights the need to take steps to strengthen the economic governance of the euro area.

16 April 2010

On March 24th the members of ASEAN plus three other major Asian economies (China, Japan and Korea) began operations of a fund from which member countries can swap their national currencies for US dollars within a pre-determined limit. This so-called “Chiang Mai Initiative Multilateralization” or CMIM will essentially become an Asian Monetary Fund, once its institutional structure is in place. This paper draws lessons from the Asian experience for the recent debate in Europe over the feasibility and desirability of creating a European stability fund.

15 April 2010

After two months of heated debate, the basic conditions for the joint IMF/EU rescue operation for Greece have now been decided. In this latest Commentary, CEPS Director Daniel Gros takes a closer look at the figures and shows that the magnitude of the funds under discussion can at best tide the country through a rough patch. The key issue that will remain for years to come is whether Greece is willing to undertake the huge domestic effort required to achieve a sustainable fiscal position.

24 March 2010

The stand-off among the members of the eurozone over whether to come to the aid of fellow member Greece has prompted a lot of speculation that Greece might turn to the IMF for support, an approach that now seems to be favoured by the German government. This Commentary by CEPS Director Daniel Gros finds, however, that while the IMF may have fewer political constraints in giving cheap money, it is unable to provide enough to make a lasting difference to Greece.

09 March 2010

Senior Associate Research Fellow Paul De Grauwe argues in this CEPS Commentary that the Greek debt crisis has exposed a structural problem of the eurozone as a whole created by the fact that the monetary union is not embedded in a political union. This imbalance leads to a dynamics of creeping divergencies between member states and there is no mechanism to correct or alleviate it. These divergencies in turn are at the core of budgetary divergencies and crises.

05 March 2010

Economics of Monetary Union enables students to gain a firm understanding of the theories and policies relating to monetary unions. The author analyses the costs and benefits associated with having one currency, as well as the practical workings and current issues involved with the Euro.

05 March 2010

This paper describes the key economic variables and mechanisms that will determine the adjustment process in those euro area countries now under financial market pressure. (Greece, Ireland, Portugal, Spain and ItalY = GIPSY). The key finding is that the adjustment will be particularly difficult for Greece (and Portugal) because these are two relatively closed economies with low savings rates. Both of these countries are facing a solvency problem because they combine high debt levels with low growth and high interest rates.

04 February 2010

As a rule, multinational enterprises (MNEs) are taxed separately by the countries in which they operate on the basis of the income produced in each jurisdiction. While being in operation for several decades, the system has never worked satisfactorily. Integration is only serving to amplify these difficulties, since intra-firm transactions take on increasing importance in the operations of MNEs, and financial market integration is expanding the opportunities for tax-planning in profit allocation and the debt-financing of capital spending.

01 February 2010

This Commentary by Daniel Gros looks at the acronym recently coined by financial markets to sum up troubled eurozone states – ‘Pigs’, for Portugal, Ireland, Greece and Spain – and finds it misleading, given its preoccupation with fiscal policy. In determining the sustainability of public debt, he argues that one should not look only, perhaps not even mainly, at today’s fiscal accounts, but at the resource balance for the entire country.

29 January 2010

Did allowing financial institutions to become ‘too big’ play a role in the financial crisis? This Commentary by CEPS Director Daniel Gros argues that being ‘too interconnected’ is also a factor, and that US accounting standards should recognise exposure of gross derivatives on the balance sheet to make this interconnectedness, and the resulting exposure, clear.

21 January 2010

Present-day central banks did not repeat the mistakes of the 1930s by tightening money in the face of a banking crisis, or by desperately trying to balance their books when the economy crashed. Yet there is one area of policy-making where authorities may not have learned the lessons of history, and are in the process of repeating the same mistakes, argues Paul De Grauwe, Senior Research Fellow at CEPS. Ultimately a central bank has to make choices.

18 January 2010

The recent financial crisis was caused by a combination of asset price bubbles, mainly in the real estate sector, and a credit bubble that led to excessive leverage. A recurrent theme of this paper is that an appropriate assessment of the crisis should be made in light of the bubble that preceded it. Accordingly, the current situation should be compared to a ‘no-bubble’ benchmark rather than the pre-crisis period.

05 December 2009

In March 2009, CEPS formed a Task Force under the chairmanship of Anders Wijkman, former MEP, Vice Chairman of the Taellberg Foundation and Vice President of the Club of Rome, to examine the impacts of climate change and the extent to which the EU budget can effectively assist in addressing them.

26 November 2009

Even more spectacular than the recent decline of the dollar against major world currencies has been the long-run decline of the US currency: since 1960 the dollar has lost two-thirds of its value against the Japanese yen, the Swiss franc and the German mark (since 1999, the euro). At the same time, however, at least since the early 1990s, the US has been seen to produce superior economic results, i.e. a higher productivity growth than most of Europe and Japan with more or less the same rates of inflation.

13 November 2009

To mark the 20th anniversary of the fall of the Berlin wall, CEPS Director Daniel Gros offers his views on the economic consequences of German unification for Europe’s economy. He argues that the way in which unification was handled led not only a boom in Germany, but also to upheaval in the European Monetary System, which essentially fell apart between 1992 and 1995.

05 November 2009

This study attempts to assess the extent to which the financial crisis has damaged citizens’ trust in public institutions, especially the confidence that European citizens invest in the European institutions. The results of major public opinion surveys show a severe decrease in citizens’ trust in the immediate aftermath of the financial crisis with a slight recovery nine month later. In particular, citizens’ net trust in the European Central Bank hit an historical low point in the aftermath of the financial crisis with a majority of people distrusting that institution.

07 October 2009

A key question confronting the G20 leaders is the desirability of coordinating exit strategies. Empirical research suggests that demand spillovers from fiscal policy are sufficiently small that uncoordinated exits from fiscal stimulus programmes are unlikely to threaten global demand. This Commentary by Paul De Grauwe argues that that research is flawed as it was based on data and theory for economies near full employment – not today’s situation. He concludes that G20 leaders need to address fiscal and monetary stimulus coordination exit strategies.

15 September 2009

Many commentators have recently argued that Germany should rethink its export-led growth model because it did not prevent a fall in its GDP, which was even larger than that experienced in the US or France. In this Commentary, CEPS Director Daniel Gros explores whether this model is truly so bad if it has allowed Germany to carry on consuming while consumers elsewhere have had to tighten their belt considerably.

12 August 2009

Since August 2007, the world economy has fallen into recession and been confronted by a severe financial crisis. In the midst of this global recession, what hope can we place in the fiscal stimulus plans that have been announced? This Working Paper evaluates whether the measures implemented in the euro area and the US will be adequate responses. It indicates that while these measures will undoubtedly prove useful in limiting the scale and duration of the downturn, they will not be sufficient by themselves to prevent a lengthy recession followed by a tepid recovery.

23 July 2009

The basic error of modern macroeconomics is the belief that the economy is simply the sum of microeconomic decisions of rational agents. But the economy is more than that. The interactions of these decisions create collective movements that are not visible at the micro level.

06 July 2009

Just as Europe once exported its own state system of international relations to the rest of the world, so too are Asian countries now reshaping the international system. The conditions for international relations are changing to the advantage of large countries with a strong state, and China plays an important role in this process. If the European Union wants to remain an influential player in the international order, it needs to make clear political-strategic choices.

30 June 2009

This paper explores the question of whether there is a trade-off between maintaining price stability and financial stability (much in the same way as there can be a trade-off between price stability and output stability when supply shocks occur) and if so, which of the two objectives should take precedence. The authors analyse how such a trade-off can arise and further examine the issue of how to define and monitor financial stability and assess which policy instruments the ECB could deploy to maintain financial stability.

24 June 2009

There is no doubt that government deficits are unsustainable, but that does not imply that they are undesirable today. The uncomfortable truth is that in order for private debt levels to become sustainable again, government debt must temporarily become unsustainable.

12 June 2009

In his latest Policy Brief, Daniel Gros gives a new angle on why the existence of current account ‘imbalances’ should provoke the greatest financial crisis in living history if the raison d’être of a financial system is to deal with imbalances (between savers and investors). He argues that one has to take into account the way current account deficits are financed and how flow imbalances accumulated into large stock disequilibria.

18 March 2009

The latest in the series of European Security Forum papers brings together the presentations given at a Forum on the The Strategic Consequences of the Global Financial and Economic Crisis held at CEPS in February 2009. Five distinguished speakers from the US, Russia, China and Europe consider the implications of the crisis for their countries and the rest of the world.

25 February 2009

In this new commentary, CEPS Director Daniel Gros looks at the threat posed to EU banks by their exposure to capital flights and currency attacks in Eastern Europe, recommending the creation of a large scale, temporary European Financial Stability Fund to deal with the crisis.

23 February 2009

In this thought-provoking commentary, CEPS Associate Fellow Paul De Grauwe explains why, contrary to conventional wisdom, rigidities in wages, employment and social security may enable countries to better deal with the debt deflation dynamics brough about by the crisis.

09 February 2009

Europe’s growth outlook has weakened notably in the wake of the global financial crisis, and policy-makers are understandably preoccupied with achieving a near-term rebound. But sustained growth can only be achieved by also addressing the structural causes of low growth. One such element is Europe’s relatively low spending on research and development (R&D), which hampers innovation and productivity growth. This study sheds light on this shortfall by decomposing R&D spending along different dimensions.