Global Economic Watch


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  • Planet Money: Greece's Economy May Stop Shrinking

    Greece's economy has a had a bad six years. At times, very very bad. But it may be getting better. The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast. If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking."
  • IMF: 'More Fiscal Integration to Boost Euro Area Resilience'

    In a new paper out this week, IMF researchers call for "deeper fiscal integration" among euro area countries. In reading the paper, it appears IMF researchers view the euro experiment as incomplete. Despite struggles during the global economic crisis and global recession, there is confidence in the euro area, but no so much in its current "architecture." From the paper: Large country-specific shocks. While it was recognized that countries joining the euro area had significant structural differences, the launch of the common currency was expected to create the conditions for further real convergence among member countries. The benefits of the single market were to be reinforced by growing trade, and financial, links—making economies more similar and subject to more common shocks over time (Frankel and Rose, 1998). In that context, these common shocks would be best addressed through a common monetary policy. Instead, country-specific shocks have remained frequent and substantial (Pisani-Ferry, 2012; and Figure 1). Some countries experienced a specific shock through a dramatic decline in their borrowing costs at the launch of the euro, which created the conditions for localized credit booms and busts. The impact of globalization was also felt differently across the euro area, reflecting diverse trade specialization patterns and competitiveness levels (Carvalho, forthcoming). These country-specific shocks have had lasting effects on activity. And divergences in growth rates across countries have remained as sizeable after the creation of the euro as before (Figure 2). Deeper into the paper we start to see some proposed solutions: Long-term options for the euro area. Cooperative approaches to foster fiscal discipline have shown their limits in the first decade of EMU. On that basis, and in light of international experience, two options emerge to foster fiscal discipline in the euro area in the longer term. One could be to aim to restore the credibility of the no bailout clause, including through clear rules for the involvement of private creditors when support facilities are activated. But the transition to such a regime would have to be carefully managed and implemented in a gradual and coordinated fashion, so as to not trigger sharp readjustments in investors’ portfolios and abrupt moves in bond prices. Another option would be to rely extensively on a center-based approach and less on market price signals. This would, however, have to come at the expense of a permanent loss of fiscal sovereignty for euro area members. In practice, the steady state regime might have to embed elements of both options, with market discipline complementing stronger governance. Read a summary of the paper, and download the full paper, here .
  • Don't Call it a Comeback...or a Black Swan: Lagarde on the EU Recovery

    IMF Director Christine Lagarde visited the Brookings Institution yesterday and spoke about the outlook for the global economy. She was, as she tends to be, deliberate and clear, and while she was anything but glowing in her assessment of the state of the global economy, she was not in any way pessimistic. Here is a brief excerpt in which she discusses the "slow and deliberate" recovery of the EU: Watch the full conversation here .
  • A New Model for Fighting Debt: Treating Greece as a Charity Case

    Peter Nomikos is a very, very wealthy Greek businessman, and he believes he has a solution to his country's debt crisis. Nomikos, heir to a shipping fortune, has set up a charitable organization and is asking all Greeks to donate and pay down the countr's debt. We're not convinced this will work, but it is worth watching, and Nomikos deserves credit for at least trying another path. Der Spiegel interviewed Nomikos about Greece Debt Free , and asked him why his plan is better than just getting all Greeks to pay their taxes: Nomikos : The difference is that with taxes, you don't know what they are being used for. There is a lack of trust in the state, and I am not going to pretend that I can solve this cultural problem. But Greeks are also great patriots, and I think we should harness this feeling. A euro for "Debt-free Greece" is not a euro in taxes lost. It is complementary. SPIEGEL ONLINE : What is the reaction from the Greek government? Nomikos : Many people in the government and the diplomatic community find our campaign very encouraging. But remember, we are non-political and non-governmental. It is the first real show of a private Greek citizen to organize other Greeks to address our biggest problem. It shows to the world that we are taking initiative. SPIEGEL ONLINE : You established the foundation in the US state of Delaware. Why not in Greece? Nomikos : In Greece, I couldn't be sure the money would remain untouched. Also, being a US charitable foundation means that American taxpayers can deduct any donation from their taxes. It is an incentive for the wealthy Greek diaspora in the US. SPIEGEL ONLINE : And for other nationalities as well? Nomikos : Any friend of Greece is welcome. Originally, I thought mainly diaspora Greeks would participate. But there has been a huge amount of interest from the business community within Greece. Some companies are marketing their products with our slogan "Debt-free Greece" and pay part of the profits into our campaign. Read the full interview here .
  • Planet Money: My Big Austere Greek Wedding

    The Planet Money team has a knack for asking the right questions. This week, they are taking an issue that everybody is talking about--Greece's debt crisis--and exploring it in a way that gets at some core dilemmas. What if Greece does what Angela Merkel and others want and in exchange goes through decades of pain? Is that a wise economic policy for Greeks? For Europe? And what does it mean for a couple that is getting married this week?
  • Jeff Frankel's Proposal for Long Term Answer to the Euro Crisis: Eurobonds

    European bankers and policy makers remain focused on the debt crisis. Jeff Frankel points out that they have a big challenge. It is hard to " commit today to fiscal rectitude in the future," Frankel says, while successfully fixing the urgent crises in Greece and Spain. One solution might very well be setting up bonds that are EU bonds instead of separate member-nation bonds. Frankel: The creation of a standardized Eurobond market would bring a boost to help a reform plan come together, badly needed in light of the damage that years of failed euro summits have done to official credibility. Even when the euro was at the height of its success five years ago, it suffered from lack of a counterpart to the US Treasury bill market. Bonds are issued by the 17 member governments. This fragmentation has hindered European financial integration and impeded any bid by the euro to rival the US dollar as international reserve currency. Central banks in China and other big developing countries are still desperate for an alternative form in which to hold their foreign exchange reserves, an alternative to holding US government securities, that is. US Treasury bills pay extremely low interest rates, and the value of the dollar has been on a negative downward trend for 40 years (even since President Richard Nixon took the dollar off gold and devalued in 1971). Despite all of Europe’s problems, a Eurobond would be attractive to central bankers and other portfolio investors around the world, both to achieve higher expected returns than on US treasury bills and to diversify risk. But that latent global demand for Eurobonds will not come to the table unless they are by design backed up with solid economic and political fundamentals. An interesting proposal. And one that faces many hurdles in the political arena. Frankel goes on to suggest a particular type of bond that he thinks is most likely to work: The version of Eurobonds that might work is almost the reverse of the Germans’ Redemption Fund proposal. It goes under the more colorful name of “blue bonds,” originally proposed two years ago by Jacques Delpla and Jakob von Weizäcker at the think tank Bruegel . Under this plan, only debt issued by national authorities below the 60% criteria could receive eurozone backing, be declared senior, and effectively become Eurobonds. These are the “blue bonds” that would be viewed as safe by investors. When a country issued debt above the 60% threshold, the resulting junior “red bonds” would lose eurozone backing. The individual member state would be liable for them. This proposal structures the incentives “right side up.” The blue bonds proposa l has been extensively debated in Europe. As usual in such controversies, many participants in the euro debate fixate on one evil or the other –moral hazard or austerity — and fail to grapple with practical proposals to balance the two. As I see the plan, the private markets could make the judgment as to whether a country was in the process of crossing the threshold, even before the final statistics were available, and therefore whether default risk on the new red bonds required an interest rate premium. If private investors judged that the new debt had genuinely been incurred in temporary circumstances beyond the government’s control (say a weather disaster), then they would not impose a large interest rate penalty. Otherwise, the sovereign risk premium mechanism would operate on the red bonds, much as it does among American states, and much as it did in Italy, Greece and the others before they joined the euro. Similarly, if the ECB after 2000 had operated under a rule prohibiting it from accepting as collateral the debt of SGP-noncompliant countries, the entire euro sovereign debt problem might have been headed off early in the decade. Read the full post here .
  • The Euro on the Block: Schumpeterian Theory and the Eurozone

    The week begins with a lot of dire talk of the future of Greece, the EU, and the Euro. CNN International's Richard Quest likens a Greek exit from the euro to the Lehman Brothers collapse of 2008 , only worse. The Guardian 's Larry Elliott echoes that sentiment. Elliott writes today that, despite assurances to the contrary, Europe's leaders are not equipped to protect the euro. And he argues that "monetary union" is an outdated model. Despite this monetary chaos, there are still some in Brussels or Frankfurt who argue that the euro has been a success and will go from strength to strength. They sound suspiciously like the members of the politburo who in the 1980s said the Soviet Union was working and would last for ever. The undoubted political commitment to the euro means that there are now calls for a fast-track approach to full political union, but this means repeating the top-down approach used for monetary union and - at a time when the markets are talking about a Greek exit within weeks or months - would take years to finesse. Instead, the realistic options for the euro are that it breaks up or staggers on in a zombie-like condition, with low growth, high unemployment, growing public disenchantment and widely divergent views in Europe's capitals about what needs to be done. As a company, the euro would have gone bust by now. It had a duff business plan, which has been poorly executed. The experiment survived in the benign conditions of the early 2000s but only the core business, Germany, has been able to cope with the much tougher climate of the past five years. There is boardroom squabbling, the workforce is in open revolt and there are no new product lines. The euro, in short, is ripe for what Joseph Schumpeter called creative destruction. Capitalism, according to Schumpeter, was the story of constant, normally gut-wrenching change, in which innovation put established firms out of business and made whole sectors obsolete. Anybody working in the music industry, publishing or newspapers in the past decade understands what Schumpeter was talking about. Read The euro is ripe for creative destruction here .
  • Christine Lagarde on Progress in Greece

    International Monetary Fund Managing Director Christine Lagarde tells Charlie Rose that, while a lot of hard work has been done by Greece's politicians and citizens, and Europe's policy leaders, there is much work to be done. And to avoid a deepening crisis the European partners, the private sector, and the Greek authorities have to work together. Here is an excerpt of Rose's interview with Lagarde: Watch the full interview here .
  • Rogoff on Greece's Future in the EU

    Following the announcement of the €130 billion ($171 billion) bailout of Greece, Der Spiegel interviewed Harvard economist Kenneth Rogoff . Like many economists, Rogoff believes Greece's leaders have a lot of work still to do. And he is firmly in the more austerity camp. He told Der Spiegel that he would recommend "The government in Athens should be granted a kind of sabbatical from the euro." In Rogoff's plan, Greece would still be in the EU, but out of the monetary union--at least until the country can lower its debt burden. Otherwise, he is not particularly optimistic that Greece will be able to remain in the EU. SPIEGEL: If Greece were to leave the euro zone, a wave of panic might engulf other countries struggling with debt, such as Portugal. How can we prevent the contagion from spreading? Rogoff: If Greece leaves the euro, the markets will demand sensible answers to two questions. First, which countries should definitely keep the euro? And second, what price is Europe prepared to pay for that? The problem is that the Europeans don't have convincing answers to those questions. SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart? Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s. SPIEGEL: Does that mean the whole idea of the euro was a mistake? Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically. SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled. Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union. Read the full interview here .
  • Terence Roth on the Bailout of Greece

    After twelve hours of meetings in Brussels, European Union leaders have agreed to a 130 billion euro ($170 billion) bailout of Greece . This was seen as a last minute deal to stave off Greek default. But there is much work to be done. As Dow Jones 's Terence Roth tells his colleague Nick Hastings , this agreement was essential because it gives Greece's leadership just enough time to do all it must do to avoid collapse.
  • OECD: German Economy Sound, but Future Growth Depends on Structural Fixes

    While Greece is the center of European concerns at the moment, it is Germany that seems to be leading economic policy. So the OECD 's release today of its Economic Survey of Germany is welcome. The big takeaway is that the German economy is indeed relatively stable. Part of the reason for that is that nation's public deficit is well below the OECD average. Take a look: But the OECD's survey warns that the Germany does have some fixes to make in order to maintain its current growth rate, as the economy makes the inevitable transition to a knowledge based workforce. From the survey summary: In a long-term perspective, Germany needs to transform its growth model to thrive as a knowledge-based economy. This transition requires policy efforts, investment and reforms in education, skills and innovation and continued leadership in green growth. But it also needs to work towards less burdensome regulations of services, increased labour participation of women and older workers and, thus, strengthening domestic demand. Germany should also compare itself with other economies in the emerging world, and be ready to compete with countries that have been growing at higher rates for quite some time now. Germany’s recent economic performance has been exceptional, with low unemployment and solid growth. Many other countries are looking at the German mix of labour market reforms, social partners’ constructive flexibility and sound fiscal policy,” Mr. Gurría said. “But moving ahead towards a knowledge based economy will require further policy reform. With the population ageing rapidly, more needs to be done to raise the medium- and long-term growth potential, notably through reforms that boost domestic demand, increase productivity growth and expand the labour force.” Access the survey here .
  • Feldstein on Europe's Reluctance to Let Greece Default

    Martin Feldstein calls Greece's mix of overwhelming government debt and a free-falling economy an "otherwise impossible situation." Greece will default, as Feldstein argues that is the only way out. But after it defaults, will it leave the euro zone? Having its own currency just might open more options. Feldstein argues there are two reasons that the key influencers in the Euro zone (Germany and France) do not want Greece to leave. At least not just yet. From Project Syndicate : First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks. Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank. The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy. This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard & Poor’s. A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany. The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets. So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks. Read Europe’s High-Risk Gamble here .
  • EU/IMF Panel: Greece's Reform Effort Off to a 'Strong Start'

    Some rare good news out of Greece today, as a review panel made up of staffers from the IMF , the EU , and the European Central Bank gave a tentative thumbs-up to the country's economic reform efforts. As part of the IMF/EU relief program, Greece will be going through quarterly review processes. The panel's visit was the first such review, and, according to the IMF press release, "the overall assessment is that the program has made a strong start." In the fiscal area , the authorities have kept spending significantly below budget limits at the state level. This has offset slippages caused by problems in controlling expenditures at the sub-national level (local governments, hospitals, social security funds), and the overall deficit target for end-June was met. Going forward, to address potential risks to fiscal targets, it is critical to tighten expenditure control and monitoring, in particular at sub-national levels. Another key challenge is to further strengthen tax administration, including to reduce tax evasion by high-income and wealthy individuals. This is essential to secure tax revenues and to promote the overall fairness of the adjustment program. In the financial sector , there has been a moderate deterioration in capital adequacy as nonperforming loans have increased in line with expectations. Recently, the CEBS stress tests covered more than 90 percent of Greek banking system assets and all but one state-owned bank passed, thus helping to reduce market volatility. We welcome that the government has commissioned a strategic review for the banking sector and a due diligence for state banks. The Financial Stability Fund (FSF), which is soon to become operational, will provide an important backstop to deal with potential capital shortfalls. In our view, the 10 billion euro earmarked for the FSF under the program remains adequate. Continued close monitoring of the financial sector will be important in the period ahead. Impressive progress is being made on structural reforms . The mission welcomes Parliament's approval of the landmark pension reform, which is far-reaching by international standards. Substantive labor market reform is also well underway. Implementation of recent tax reform and budget reform is key in order to consolidate fiscal consolidation. Other reforms that are scheduled for early implementation are transportation, where important progress has already been made with liberalization of road haulage, and energy. Restoring competitiveness and boosting potential growth remains critical to the program's success. The challenge facing the government in this regard will be to overcome resistance from entrenched vested interests to opening-up of closed professions, deregulation, implementation of the services directive, and elimination of barriers to development of tourism and retail. Read the release here .
  • Krugman: European Nations Adopted the Euro Before They Were Ready

    Paul Krugman is tired of reports on the financial mess of Greece and other European nations that only cover the problems of debt and fiscal discipline. He thinks, as he writes in his New York Times column, that we should use this opportunity to look more closely at the Euro. Did countries like Greece and Spain adopt the currency before they were ready? Krugman argues they did, and that the problems of their debt are harder to fight as a result. Consider Spain. Krugman writes: The nation’s core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation. Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks. But Spain isn’t an American state, and as a result it’s in deep trouble. Greece, of course, is in even deeper trouble, because the Greeks, unlike the Spaniards, actually were fiscally irresponsible. Greece, however, has a small economy, whose troubles matter mainly because they’re spilling over to much bigger economies, like Spain’s. So the inflexibility of the euro, not deficit spending, lies at the heart of the crisis. Read The Making of a Euromess here .
  • Marketplace's Paddy Hirsch on Why We Need to Worry About PIGS

    European Union leaders today announced that they have a plan to aid Greece with that country's serious debt problems . We are still awaiting details of the bailout plan, and we are curious to know the reaction from the other European Union nations with debt problems. The PIGS, as they are now not-so-lovingly referred to, are Portugal, Ireland, Greece and Spain. Italy is also often tied in with the group. Marketplace 's Paddy Hirsch explains why the problems of these European nations matter to the US economy: PIIGS from Marketplace on Vimeo .