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Policy Area Papers on Currency union

Understanding the Greek Crisis: Unlocking the puzzle of Greek banks’ deteriorating performance
Michael Mitsopoulos & Theodore Pelagidis, World Economics, March 2011
This paper focuses on the distortions that the Greek public debt has imposed on the Greek banking system, and suggests how these can be unwound. The low level of competitiveness of the Greek economy, which is well below the competitiveness of the developed countries, poses a great challenge for the Greek banks. At the same time it puts at risk Greece’s economy ability to service both the private and public debt, which, as an aggregate, are comparable to the indebtedness of the developed nations. An adjustment of economic activity to match the current low level of competitiveness will increase the risks faced by the financial system and make an orderly servicing of the debt of the economy very challenging. It follows that only one reasonable policy option remains: to increase the competitiveness of the economy through an aggressive reform agenda, so that it will match its level of indebtedness, and through the resulting growth shift the excessive debt of the public sector to the private sector.
The Euro Crisis: It isn’t just fiscal and it doesn’t just involve Greece
Clas Wihlborg, Thomas D. Willett & Nan Zhang, World Economics, December 2010
The crisis in Greece and other mainly southern Eurozone countries has been discussed primarily as a fiscal issue. Current account deficits of the same countries have received less attention in spite of the relatedness of current account and fiscal deficits. We argue that the failure of many countries within the Eurozone to develop adequate internal adjustment mechanisms is also an important factor behind the crisis. After reviewing the major perspectives that have been offered on the crisis, we present data that support our argument by demonstrating the lack of price and cost convergence in the Eurozone since 1999. Ironically, it seems that the surplus countries have carried out more of the adjustment pointed to by the endogenous optimum currency area (OCA) theory than the deficit countries. We recommend that the responsibility of a ‘European Debt Surveillance Authority’ should include surveillance of intra-euro payment flows, imbalances and adjustment in labour and goods markets, and setting benchmarks for the Eurozone guarantees of sovereign debt based on ability to adjust internally. Thereby, a potential moral hazard problem of an implicit Eurozone guarantee of countries’ sovereign debt could be avoided.
The Eurozone: What Now?
Graham Bird, World Economics, September 2010
The financial and economic crisis in Greece in 2009/2010 has reawakened interest in the future of the euro and the eurozone. After briefly explaining its sources, this article focuses on the longer-term issues to which the crisis gives rise. It explores the underlying weaknesses of current eurozone arrangements, and assesses whether the crisis will stimulate reforms designed to remedy them. The analysis suggests that, as with many crises, the one in the eurozone will lead to only relatively modest changes; these are unlikely to go much beyond the fairly ad hoc provision of emergency finance. Fundamental reform based on closer fiscal coordination, orderly insolvency arrangements or the establishment of a European Monetary Fund are unlikely. The break-up of the eurozone also seems unlikely. Indeed the crisis may catalyse structural reforms that in the long term increase the eurozone’s durability. The crisis also has important implications for the IMF.
Greek Economic Statistics: A Decade of Deceit: So how come the rating agencies missed it again?
Brian Sturgess, World Economics, June 2010
This paper looks at the recent problems in official Greek economic data on public finances, whose reliability has been impaired by inappropriate accounting methods, the application of poor statistical methods and deliberate misreporting. Data on deficits and debt have been misleading from before Greece’s eurozone entry, but despite a regular supply of public information about the problems, the rating agencies did not respond by downgrading Greek public debt until it was too late. These agencies reacted to, rather than leading, market tends that were already under way. The issue casts doubt on the fitness for purpose of the European Statistical System where the powers of Eurostat, the statistics arm of the European Commission have been inadequate to effectively monitor the fiscal status of eurozone countries. These powers, at present limited by the principle of subsidiarity to administering a Code of Practice, must be strengthened closer to approximating a power of audit.
Greece and the State: Prometheus Bound?
Michael Massourakis, World Economics, June 2010
Pervasive state intervention in Greece has mired the economy with large-scale inefficiencies and an uneven playing field, protecting insiders and rent-seekers to the detriment of its underlying growth potential, with the political class at the same time failing miserably to address the aspirations of the people. Fiscal consolidation and structural reform, currently pursued under the EU–IMF stabilisation programme, if vigorously implemented, are expected to strengthen the Greek economy and to contribute towards the withering away of the Greek state in its present form. The Greeks are resourceful people and will not capitulate in the face of a daunting adjustment, which may prove easier than generally expected if structural weaknesses are adequately and swiftly addressed. Greece’s future lies with rebalancing the economy towards net exports, with tourism and real estate being the primary development motors.
Dollarisation in Theory and Practice
John C. B. Cooper, World Economics, December 2004
Dollarisation involves the replacement of a soft domestic currency with a hard foreign alternative. This paper explains the different forms that dollarisation can take, its consequences for an economy, and concludes by exploring the experience of Panama, a country dollarised since 1904.
European Financial Market Integration: Distant dream or nascent reality?
Patrice Muller, World Economics, September 2004
European Monetary Union and a vigorous legislative agenda have profoundly changed the environment in which the European financial services industry operates. These developments should have contributed to a deepening of financial market integration in the European Union, especially within the Eurozone. However, actual progress has been very uneven. Eurozone money markets and bonds markets have achieved full or a very high level of integration. Eurozone equity markets show increasing signs of integration, although substantial barriers to cross-border trading remain. Bank credit markets, with the exception of inter-bank lending, and insurance and funds industries, remain still largely fragmented along national lines.
Beyond the Ivory Tower: Stanley Fischer on the economics of contemporary global issues
An interview with introduction by Brian Snowdon
World Economics, March 2004
Stanley Fischer had a long and distinguished career as an academic economist at MIT, and was Vice President, Development Economics and Chief Economist at the World Bank, before becoming First Deputy Managing Director of the International Monetary Fund in 1994. He is now President of Citigroup International and Vice Chairman of Citigroup. In this interview, Brian Snowdon discusses with Stanley Fischer several important issues relating to the contemporary world economy, including problems of stabilisation, inflation and growth, the economics and politics of transition, exchange rate regimes, the IMF, the East Asian crisis, and globalisation and economic development.
Some Lessons from a Single Currency
Alan J. Brown, World Economics, March 2003
This article looks at the early experience of the Euro and argues that both the original rules established for the European Central Bank and the Stability and Growth pact need to be reconsidered. Failure to do so will result in the whole European economy delivering less growth and prosperity. Without a selfcorrecting mechanism like transfer payments, a single monetary policy is procyclical and destabilizing. Countries growing fast and in danger of over-heating face low or negative real interest rates. Countries in recession face too high real interest rates and are pushed further into sub-potential growth. The Stability and Growth pact further restricts policy options.
Why The Five Economic Tests?: The decision about British membership of a single European currency in historical context
Ed Balls, World Economics, March 2003
Chief Economic Adviser to the Treasury, Ed Balls, sets out the government’s approach to making the decision about British membership of a single European currency in an historical context. The basis for deciding whether there is a clear and unambiguous economic case to join the single currency is the Treasury’s detailed assessment of the ‘five economic tests’. The tests are designed to avoid past failures of politicians and policymakers who paid insufficient attention to the economics in making key decisions affecting the national interest. Balls reflects upon historical examples of such failures and lessons to be learned, with a particular historical focus on 1925 and the decision to re-enter the Gold Standard.
Ready to Join the EU?: On the status of reform in the candidate countries
Federico Foders, Daniel Piazolo & Rainer Schweickert, World Economics, December 2002
This paper presents a new set of indicators concerning the status of economic reform in the candidate countries for the enlargement of the European Union which is scheduled for 2004. After an overview of indicators of institutional development, macroeconomic policy and trade policy, a composite index is derived. It turns out that the ranking of the candidate countries according to the composite index diverges from the ranking provided in the progress reports of the European Commission.
Does the Eurozone Face 50 Years of Economic Stagnation?
Tim Congdon, World Economics, June 2002
The newly-formed European currency will compete with the dollar to become the world’s leading currency in the 21st century. Its prospects in this competition will depend partly on the size of the European economy compared with the US economy. This article argues that unprecedented demographic trends will reduce employment and curb output growth in Europe, and so cause the European economy to lose ground relative to the USA. The demographic problems are more serious in Germany and Italy, where a falling population of working age may lead to declining employment and stagnating output over periods of 20 or 30 years. Against this background the euro will fail to supplant the dollar as the world’s leading currency.
Is Dollarisation a Viable Option for Latin America?
Graham Bird, World Economics, March 2001
In the aftermath of the East Asian financial crisis there has been much discussion of exchange rate policy in developing countries. Some observers have suggested that they should opt either for flexible exchange rates or for firmly fixed rates. Adopting the US dollar as legal tender and abandoning the domestic currency is one possibility. In conditions of economic crisis Ecuador dollarised in early 2000. Will other Latin American economies follow or will Ecuador live to regret the decision? This article assesses the arguments.
The International Economic System in the Twentieth Century: An interview with Barry Eichengreen
Brian Snowdon, World Economics, September 2000
This wide-ranging discussion takes in globalisation, the causes of the Great Depression (and the likelihood of future recurrences), the Marshall Plan and post-war European recovery, growth in the 1950s and 60s followed by the problems of the 70s, and the strengths and weaknesses of the current international financial system, among other subjects. It provides a stimulating introduction to factors underlying important events in the history of the twentieth century and prospects for the century we have just entered.