Category Archives: Euro Crisis

Presentation on Macro Imbalances to European Parliament ECON Committee: April 24, 2012

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The slides from my presentation of macroeconomic imbalances to the European Parliament’s ECON Committee are available here as a PowerPoint slideshow and here in PDF.

I stressed the need to boost aggregate demand in the core countries as a key requirement for solving the debt problems facing the periphery. It is interesting to see the developments over the past few days in which many senior European politicians have begun to stress the need for pro-growth policies. As I stressed in this Vox-EU article from February, it is still not too late to make the Fiscal Compact less restrictive.

Monetary Dialogue Briefing Papers: April 2012

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I’m off to Brussels in the morning to present my latest briefing paper to the Economic and Monetary Affairs committee of the European Parliament. You can see the full list of briefing papers here.  There are four papers (including one by me) on macroeconomic imbalances and four on non-standard monetary policy measures. I’m afraid the plastering of the word DRAFT on the pages of each of the papers is a recent piece of technological regress but I always find these papers really interesting.

 

 

Richard Koo’s Euro Crisis Non-Solution

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I’d like to endorse Felix Salmon’s comments on Richard Koo’s idea that banning Euro area governments from selling sovereign bonds to anyone other than their own citizens represents a solution to the Euro crisis. A colleague asked me about this in January and I sent them the following reply:

Hi X,

Richard Koo is an interesting guy but this is an odd suggestion. First, yes this is inconsistent with treaty provisions related to free movement of capital.  And it would be almost impossible to enforce – bonds can be sold to anyone on the secondary market and I can’t imagine US or Swiss banks or hedge funds refusing to allow a German investor buy Spanish bonds as part of his investment fund.

Also, it’s a funny suggestion from a simple supply and demand angle. Normally, when we want the price of something to go up, we suggest increasing the demand for it.  He’s suggesting the yield on Spanish bonds will go down, and thus the price up, if we ban a load of people that used to be able to purchase these bonds from doing so.

He would still allow Spanish banks to purchase non-Spanish private bonds or shares, so it is possible that they would transfer their purchases of non-Spanish government bonds to other non-Spanish assets.

In fact, there are arguments for the exact opposite position, i.e. for limiting the exposure of individual financial institutions to the bonds issued by their own government. I’ve argued this e.g. page 14 here

http://www.ucd.ie/t4cms/wp10_27.pdf

on the grounds that these purchases are a very bad “hedge” for these banks and they mean that a sovereign debt crisis automatically transfers to become a banking crisis.

At a more general level, there is no doubt that more severe forms of “financial repression” have been successful in the past in allowing governments to cope with high debt levels but I don’t think this small change to EU freedom of capital laws would do it.  What would be required would be a more draconian regime imposing capital controls.  But that would most likely mean the end of the euro.

Karl

New Briefing Paper: Macroeconomic Imbalances in the Euro Area

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Earlier today, I completed my latest briefing paper (titled “Macroeconomic Imbalances in the Euro Area”) for the European Parliament’s Committee on Economic and Monetary Affairs.

I write these papers as a member of the “Monetary Experts Panel” that provides the committee with papers prior to their “Monetary Dialogue” meetings with the ECB President. The way the process operates is that staff from the Parliament contact the members of the panel and ask us to write a paper on a topic they have chosen. Here‘s the committee’s website including links to past briefing papers from the panel. You can also find my previous papers by clicking on the Monetary Dialogue tab at the top of the page.

In this case, I was asked to write a paper on the new Macroeconomic Imbalances Procedure (MIP) which was part of the “six-pack” legislation and is now being operated by the Commission. Here‘s a link to the webpage describing the MIP including the recent Alert Mechanism Report designed to operate as a leading indicator for macroeconomic imbalances and an Occasional Paper from the Commission describing the “scoreboard” for macroeconomic imbalances that is Alert Mechanism is based on.

Here’s the abstract from my paper:

The Euro crisis has been most profoundly felt in countries such as Portugal, Greece, Ireland and Spain that have large private and public sector debt burdens. These can only be reduced if these countries move towards large and persistent current account surpluses. With an average inflation target of two percent for the Euro area, the pace of progress for these countries towards the size of current account surpluses required is going to be slow and the adjustment extremely painful. The Commission’s Macroeconomic Imbalance Procedure provides an important opportunity for the EU to acknowledge that imbalances have two sides, that policies to actively reduce surpluses in countries like Germany are just as effective in restoring balance as policies aimed at increasing competitiveness in the European periphery. However, the new alert mechanism scorecard has an asymmetric focus on reducing deficits at the almost-complete expense of any focus on steps to affect large surpluses. It represents a missed opportunity to deal with the Euro area’s problems in a balanced manner.

I usually wait until the Parliament officials have put up my paper on their website (usually takes a week or so) before putting on my own site. However, I have just read Martin Wolf’s latest column and it fits so well with my own thoughts on this issue (which of course partly reflect having read many of Martin’s previous columns) that I thought it might be a good idea to back them up with a more extended version of this argument.