Papiers / Papers

An ocean apart? Comparing transatlantic responses to the financial crisis

Has the EU-US relationship become a sideshow or is it still central to the global economy? Conflicting signals have been sent out since the outbreak of the global crisis. The creation of the g20 and its designation as ‘the premier forum for international cooperation’ suggest that attention and priorities have moved away from the traditional g7 focus on the transatlantic economy. But most of the key policy debates of the last two years have retained a characteristically transatlantic
flavour. This applies to the controversy about the pace of consolidation which resulted in an open uS-german rift at the Toronto summit in June 2010; to the discussion on the new bank capital ratios which again was essentially a euro-American affair; and to the broader conversation on the priorities of financial regulatory reform, for which the big action agendas have been the uS Dodd-Frank Act and the european endorsement of a blueprint for coordinated supervision and a single european macroprudential body. True, other issues – the global rebalancing, or the creation of global financial safety nets – have had a distinctive g20 scope. But at least a fair share of the international debate has been transatlantic.

There are reasons for this state of affairs. To start with, what is known as the global crisis has been first and foremost a transatlantic crisis. As discussed in several contributions in this volume, the wake of the crisis financial integration through portfolio diversification essentially remained an eu-uS phenomenon. Accordingly the subsequent financial turmoil primarily affected the european and American financial systems, and other economies indirectly only, through trade or capital outflows. It is therefore natural to see the same two regions take the lead in setting the agenda for financial reform. Second, the problems they are facing in the aftermath of the shock – the travails of deleveraging, unemployment, the need for unconventional policy responses, the lowering of the growth potential, the rise of public debt, political pressures for protection – are largely common. Third, while they are not themain contributors to world growth, the eu and the uS still constitute
the bulk of the global economy, and what happens to them matters considerably for all.

The US and the EU however are not responding to the same shock in the same way and this is what makes the comparison interesting. It is telling that the sovereign debt crises developed in europe in the first half of 2010 and triggered a move towards consolidation while the uS fiscal situation is by most standards worse than the aggregate european situation. It is telling also that the priorities of
financial reform have not been the same. Clearly neither the policy space nor the policy traditions are identical and this portends significant divergence across the Atlantic. How far this divergence will go and whether policymakers on the two continents will disagree or agree to disagree is one of the key questions for the future of the global economy in the years to come.

All this justifies a revival of the transatlantic economic conversation. The joint Banca d’Italia-Bruegel-Peterson Institute conference, held in rome on 10-11 September 2009with the support of the european Commission, aimed to contribute to the conversation through research and policy discussions. We hope that the papers collected in this volume will help foster a fact-based, analytically sound discussion.

Jean Pisani-Ferry
Bruegel

Adam Posen
Peterson Institute for International economics

and Fabrizio Saccomanni
Banca d’Italia

 

Download the complete paper.

 

From convoy to parting ways? Post-crisis divergence between European and US macroeconomic policies

A Bruegel Working paper written jointly with Adam S. Posen (Peterson Institute for International Economics). This is a revised version of a paper prepared for the Bruegel-PIIE conference 'The transatlantic relationship in an era of growing economic multipolarity', held in Washington DC on 8 October 2010.

Highlights

• The response in 2008-09 to the global financial crisis was in many ways a high water mark for transatlantic policy coordination. The major economies of the EU and the US rapidly agreed on a series of measures to limit the crisis. However, the common approach has since unraveled. This paper explores why the ‘London consensus’ has not survived for much more than a year.
• We identify four non-competing explanations: (a) divergence in economic developments, especially the productivity response to the recession; (b) domestic political economy factors, notably the pressure to act against unemployment in the US; (c) differences in beliefs as regards the nature of the recovery from the common shock, about which there is much more supply-side optimism in the US ; (d) institutional factors such as the lack of a central fiscal authority in the EU.
• In response to this situation we suggest a critical quantum of coordination. Key measures include a commitment to avoiding deliberate currency depreciation and unilateral intervention; agreement to give the IMF an enhanced monitoring role; the adoption by parliaments of medium-term fiscal plans ; and cooperation on the issue of Chinese undervaluation.

 

You can download this paper here.

La longue marche vers un régime monétaire multipolaire

Après deux décennies d’éclipse, la réforme du système monétaire international figure de nouveau à l’ordre du jour. Une évolution vers un système monétaire multipolaire reposant sur le dollar, le renminbi et l’euro serait cohérente avec la transformation en cours de l’économie mondiale. Elle pourrait gommer certaines imperfections du (non-) système monétaire international actuel, comme la rigidité de certains taux de change clés, l’asymétrie des ajustements de balances de paiements ou ce qu’il reste du dilemme de Triffin. Elle pourrait cependant en exacerber d’autres, tels que la volatilité des taux de change ou le risque de "guerres des monnaies". Enfin, certaines questions, comme la fourniture de liquidité mondiale, resteraient non résolues. Ainsi, un régime multipolaire pourrait-il s’avérer le meilleur comme le pire des systèmes, selon le degré de flexibilité des taux de change et le degré de coordination multilatérale qui l’accompagneraient.

 

papier pour la Lettre du CEPII de février 2011 et écrit avec Agnès Bénassy-Quéré. 

Vous pouvez télécharger le texte intégral ici.

A comprehensive approach to the euro-erea debt crisis

In this Bruegel Policy Brief, Zsolt Darvas, André Sapir and Jean Pisani-Ferry, propose a comprehensive solution to the current European crisis based in three pillars: a plan to restore banking sector soundness, a resolution of sovereign debt crisis -including a reduction of the Greek public debt- and a strategy to foster growth and competitiveness. The paper provides novel estimates and analysis focusing on the current situation of Greece, Ireland, Portugal and Spain. 

 

The issue - The euro area’s sovereign debt crisis continues though significant steps have been taken to resolve it. European Union and euro-area crisis mechanisms have been set up, and financial assistance has been provided to Greece and Ireland. Governments have implemented severe austerity measures and started to put in place structural reform programmes. And the European Central Bank has embarked on a (controversial) peripheral sovereign debt purchase programme, while continuing to provide liquidity to euro-area banks. But these measures have not restored calm to markets. In early February 2011, spreads on 10-year government bonds issued by Greece, Ireland, Portugal and Spain were all higher than they were in April 2010, before rescue measures started to be implemented.

Policy challenge - EU policies have been insufficient to solve the problem for three reasons: they have failed to recognise the possibility of insolvency and have addressed all crises as if they were pure liquidity crises; they have failed to address systemically the interdependence between banking and sovereign crises and cross-country interdependence; and they have been reactive rather than proactive, squandering credibility because of inadequate responses. A swift, radical and comprehensive solution is now needed comprising a plan to restore banking-sector soundness; revising EU assistance facilities and restructuring of public debt where needed; and fostering adjustment and growth by promoting budgetary consolidation and competitiveness-enhancing domestic reforms in peripheral countries.

 

You can download this paper here and here the technical backgdound paper.

The long march towards a multipolar monetary regime

Written jointly with Agnès Bénassy-Quéré. This Letter is based on research prepared by Bruegel and CEPII for DG ECFIN of the European Commission and on a forthcoming report for the French Conseil d’Analyse Economique (A. Bénassy-Quéré & J. Pisani-Ferry, (2011), “Quel système monétaire international pour une économie mondiale en mutation rapide ?”).

International monetary reform is back on the agenda after two decades during which it has been hardly discussed. Controversies about the macroeconomic and monetary factors at the root of the financial crisis, China’s exchange rate regime, the reasons why emerging countries accumulated about five trillion dollars of international reserves over the last ten years, and more recently the risk of currency wars all explain this renewed attention. Yet the key question is what monetary regime will best suit the world economy in the XXIst century. An evolution towards a multipolar system, with the dollar, the renminbi and the euro as its key likely pillars may mitigate some flaws of the present regime, such as the rigidity of key exchange rates, the asymmetry of balance-of-payments adjustments or what remains of the Triffin dilemma. However it may exacerbate other problems, such as short-run exchange rate volatility or the scope for ‘currency wars’, while leaving key questions unresolved, such as the response to global liquidity provision. Hence, in itself, a multipolar regime can be both the best and the worst of all regimes, depending on the degree of cooperation within a multilateral framework. In the short term, policymakers should concentrate on feasible reforms, while opening the way for more fundamental changes.

Après deux décennies d'éclipse, la réforme du système monétaire international figure de nouveau à l'ordre du jour. Une évolution vers un système monétaire multipolaire reposant sur le dollar, le renminbi et l'euro serait cohérente avec la transformation en cours de l'économie mondiale. Elle pourrait gommer certaines imperfections du (non-) système monétaire international actuel, comme la rigidité de certains taux de change clés, l'asymétrie des ajustements de balances de paiements ou ce qu'il reste du dilemme de Triffin. Elle pourrait cependant en exacerber d'autres, telles que la volatilité des taux de change ou le risque de "guerres des monnaies". Enfin, certaines questions, comme la fourniture de liquidité mondiale, resteraient non résolues. Ainsi, un régime multipolaire pourrait-il s'avérer le meilleur comme le pire des systèmes, selon le degré de flexibilité des taux de change et le degré de coordination multilatérale qui l'accompagneraient.

Un papier co-écrit avec Agnès Bénassy-Quéré (CEPII).

 

You can download the summary note of this paper for the Finance-G20 deputies meeting here.

or you can download the complete paper in English here.

ou télécharger la version complète en français ici.

The threat of 'currency wars': a European perspective

This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs Committee’s Monetary Dialogue, entitled ‘The threat of ‘currency wars’: global imbalances and their effect on currencies’, held on November 30, 2010. Bruegel Fellows Jean Pisani-Ferry and Zsolt Darvas argue the so-called ‘currency war’ is manifested in three ways:

1) the inflexible pegs of undervalued currencies;

2) attempts by floating exchange-rate countries to resist currency appreciation;

3) quantitative easing.

Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a ‘beggar-thy-neighbour’ policy as long as the Fed’s policy is geared towards price stability. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures, as current US inflationary expectations are at historically low levels. Finally, the exchange rate of the Euro has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.

 

You can download this paper here

 

Whither growth in central and eastern Europe? Policy lessons for an integrated Europe

In this paper, Bruegel Resident Fellows Zsolt Darvas, Jean Pisani-Ferry, Andre Sapir and their co-authors Torbjörn Becker, Daniel Daianu, Vladimir Gligorov, Michael A Landesmann, Pavle Petrovic, Dariusz K. Rosati and Beatrice Weder di Mauro argue that in view of the depth of integration in Europe, the development model of the central, eastern and south-eastern Europe (CESEE) region, despite its shortcomings, should be preserved. But it should be reformed, with major implications for policymaking both at national and EU levels. If so, what are the required changes? Bruegel and The Vienna Institute for International Economic Studies (wiiw) cooperated to form this expert group of economists from various European countries to research these issues.

 

You can download this paper here

A European mechanism for sovereign debt crisis resolution: a proposal

by Francois Gianviti, Jürgen von Hagen, Anne O. Krueger, Jean Pisani-Ferry, André Sapir on 09 November 2010

This Bruegel Blueprint argues that Europe should take the lead in defining a solution to the problem of excessive public debts and create a European Crisis Resolution Mechanism (ECRM). The authors, Francois Gianviti, Anne O. Krueger, Jean Pisani-Ferry, Andre Sapir and Jürgen von Hagen, present the rationale for such a mechanism in the euro area and details of how an ECRM would work. The ECRM would be a permanent tool to deal with sovereign debt crises in an effective and predictable way.

 

You can download this paper here 

 

Banking crisis management in the EU: An early assessment

Economic Policy, April 2010. Pre-publication version available here

For well over a decade many observers had warned that the European Union was ill-prepared in case of a financial storm. This situation was well known to policy-makers but it was hoped that financial crises would wait until policy integration occurred.

In this paper with André Sapir, we assess the management of the 2007–2009 banking crisis within the EU against this backdrop. In a nutshell, we find that Europe has done better than could have been expected on the basis of existing arrangements. The two federal institutions acted swiftly, the European Central Bank by providing ample liquidity and the European Commission by enforcing competition discipline flexibly.

However, there was no institutional innovation. Supervisory responsibilities remained entirely with individual countries and coordination problems were managed through a combination of ad-hoc, discretionary cooperation and reliance on EU rules and procedures. It is not possible to determine whether this relatively satisfactory situation is due to the fact that ad-hoc coordination was fundamentally sufficient or because no complex case of crossborder bank failure occurred.

L'économie mondiale 2011 - Le retour des controverses monétaires internationales

Ecrit conjointement avec Agnès Bénassy-Quéré

Les controverses monétaires internationales n’ont pratiquement pas cessé depuis les lendemains de la Première Guerre mondiale. Mais après les grands débats sur le régime de change des années 1980, elles avaient perdu en acuité, et se focalisaient plus sur les choix offerts à chacun des pays pris individuellement – jouer les changes fixes ou les changes flottants, adhérer ou pas à l’euro – que sur le système pris dans son ensemble. Depuis 2008, cependant, la question du système monétaire international a fait retour dans les discussions multilatérales. Critiqué par de nombreux observateurs pour avoir créé des conditions favorables à la crise [de Larosière, 2009], le SMI a été mis en cause par le gouverneur de la banque centrale de Chine, Zhou Xiaochuan, dans un discours remarqué de mars 2009 qui a relancé la discussion internationale. Dans ce contexte, le Fonds monétaire [2010] s’interroge sur la réforme de l’organisation monétaire et financière internationale, et la Corée, comme la France, ont annoncé leurs intentions de faire des réformes du SMI l’une des priorités de leurs présidences du G20, en 2010 et 2011...

 

Ce papier constitue le chapitre IV de L'Economie Mondiale 2011, publié par le CEPII dans la collection "Repères" des Editions de la Découverte en septembre 2010