Contenu du sommaire : La zone euro en crise / The euro area in crisis

Currrency misalignments within the euro area
In spite of completely pegged parities inside the euro area, real effective exchange rates have continued to evolve differently across member countries due to inflation discrepancies. In this paper, we assess real exchange rate misalignments for the euro area countries over the period 1980-2010 by adopting a Behavioral Equilibrium Exchange Rate (BEER) approach. The results show that real exchange rates have been overvalued in peripheral countries since the mid-2000s, because their real appreciation has not matched an improvement in their economic fundamentals. Moreover, currency misalignments have widened for all member countries on average since the monetary union, while becoming more persistent. We also highlight that misalignments have been larger and more persistent in the peripheral countries than in the core countries. JEL Classification codes: F31, C23.

Exchange Rate Misalignments, Fiscal Federalism and Redistribution
The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetaryunion characterized by a large heterogeneity. Firstly, the paper gives an evaluationof exchange rate misalignments inside the euro zone, using a FEER approach(Jeong et ali., 2010). Usingpanel econometric techniques over the period 1994-2010, we confirm that the exchange ratemisalignments in the euro zone have diverged, reflecting unsustainable evolutions. Secondly, we use a “stock-flow consistent” modelof a monetary union with two countries along the lines of Godley and Lavoie (2007) and Duwicquet and Mazier (2010). A federal budget is introduced with federal expenditures andsocial transfers financed by federal taxes and euro-bonds issuing. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or thenegative impact of exchange rate misalignments inside the monetary union. Similarly, the stabilizingrole of euro-bonds used to finance European investment projects is illustrated.JEL Classification: F31, F32, F41, F37, E12.

This paper proposes indicators to assess government debt sustainability in the medium and long term. We follow the methodological approach by Bohn (2008) and distinguish three channels that contribute to sustainable government finances: economic growth, real interest payments and fiscal responses. We combine the estimated fiscal response with a stochastic debt simulation to create two indicators. The first captures the probability of debt-to-GDP ratios rising by more than 20 percentage points during a 10-year period. A government will fail on this indicator if its fiscal response to an increase in debt is not sufficient to control the swings in debt caused by shocks to real growth and interest payments. The second indicator captures the probability of debt levels being above 90% of GDP in 10 years. We estimate these indicators using historical data for nine OECD countries. We find that the probability of debt-to-GDP ratios rising by more than 20 percentage points in the next decade clearly identifies countries that have sustainability concerns: Italy, Spain, Portugal and Iceland, from those that do not: US, UK, Netherlands, Belgium and Germany. JEL Classification: E4, E6, H0, H6

The recent developments in the euro area have shown how important it is that the various economic sectors pay attention to their financial positions. In the literature, the approach to analyse these positions is often partial, focusing on the government sector or just on the gross debt, as in the case of Reinhart and Rogoff (2010) and Cecchetti et al. (2011). This paper conducts an aggregate analysis of the debt positions of the euro area countries, taking account not only of the public debt but also of private sector debt and the financial assets of the various sectors (net debt). On the basis of this analysis, it emerges that euro area countries differ extensively in terms of their total net debt. In a context of hampered financial integration, the euro area might benefit from a reduction of these differences. JEL Classification: E42, E61, F32, F34, F36, F4.

Many observers consider the German “debt brake” beyond criticism. In the current crisis, many European countries have difficulties refinancing their budgets, while the German Treasury's funding conditions are most favourable. The “fiscal compact's” call for the introduction of German-style “debt brakes” in the constitutions of other countries in order to rebuild their credibility on financial markets therefore might seem reasonable. However, there are several reasons to doubt the underlying (macro-) economic reasoning. Two specific problems of the German debt brake are analysed in greater detail: Firstly, the German rule is neither simple nor transparent. The calculation of structural deficits is a complex matter highly sensitive to specification and therefore open to political manipulation. Secondly, the debt brake will ultimately have a pro-cyclical effect because of the way the commonly used cyclical adjustment method works. This will, as a result, destabilise the economy. The German debt brake can therefore hardly serve as a good example for other countries. JEL Classification: H12, H39, H50, H6.

The public finances crisis has brought binding fiscal rules proposals back to the forefront. The paper analyses their justifications and specifications, either in a classical or in a Keynesian framework. In the recent period there is no evidence that public deficits were caused by fiscal indiscipline and induced too high interest rates; there is no evidence that economically relevant rules can be designed. The paper provides an analysis of fiscal rules implemented either at country level (like the UK golden rule), or at the EU level (the Stability and Growth Pact). The paper shows that fiscal rules did not work before and during the crisis. The paper discusses the EU project, the “Fiscal Pact”, which risks to paralyse fiscal policies and to prevent economic stabilisation. The priority today is not to strengthen public finance discipline but to question economic developments which make public deficits necessary to support output. JEL classification: E62.

In response to the severe disruption of the financial system, the agenda defined by the Group of Twenty (G20), in 2008, has led to a new regulatory framework. These ongoing reforms outline a new organization, which could be called the Global and Integrated Prudential Model. Such a model is based on global rules defined by international standard setters and on the integration between the different parts of the prudential organization. In this context, a new prudential organization is being set up in Europe. Henceforth, international coordination is underway, but questions remain. What could be the effects of the new rules on banking capital requirements, and, consequently, on the funding of the economy, not to mention the very structure of the financial system?As for the EU, which very swiftly carried out an important recasting of its legal frame, the continent will henceforth have to face three challenges: first, the risk of regulatory competition from large countries, chiefly the USA; second, the need to improve the law-making and the complex supervisory system; and third, the building of the Banking Union aimed at overcoming the current euro area crisis. JEL Classification: E58, F36, G28.

This paper considers how a range of economies are adjusting to the external imbalances that they faced at the beginning of the current crisis. It also considers how the real economy may adjust when recovery eventually takes hold. Finally it considers how the adjustments under way will contribute to a return to long-term growth. JEL Classification: E63, F32.

We specify an open-economy version of a two-region New Keynesian model for EMU and demonstrate that the result on the unsustainability of the euro with ever-mounting inflation differentials by Wickens (2007) does not hold in general. Strong fiscal consolidation and far-reaching successful structural reforms are needed to reach sustainability in terms of competitiveness and reduced public debt over the medium run. However, the current deflationary adjustment involves a major polarisation within the euro area. Debt relief within the union and internal devaluation in the debtor country may essentially alleviate the adjustment burden and shift it from the problem countries to the strong countries. An internal revaluation in the strong countries can markedly help the situation in the weak countries in the short run if the interest rate remains unchanged. JEL Classification: E43, E52, E62.

The European Redemption Pact (ERP), a proposal of the German Council of Economic Experts, describes an exit strategy from the debt crisis which currently plagues the euro area. The pact includes a binding commitment of all participating countries to bring public debt ratios below the reference value of 60% within the next 20 to 25 years. To ensure that this objective can be reached with realistic primary balances, participating countries can transfer their excessive debt exceeding the 60% threshold at a certain date, into a redemption fund for which participating member countries are jointly and severally liable. In this technical paper, we describe in detail one possible way of implementing the ERP and the primary balances each country would need to achieve under the proposal. JEL Classification: E40, E43, E44, E47, H62, H63, H68, H77.

Fiscal consolidation will go too far if it pushes the economy towards a “bad equilibrium” with high and growing fiscal deficits and debt, high risk premia on sovereign debt, slumping economic activity and plummeting confidence. In this paper we examine the possible conditions under which fiscal consolidation would backfire in this sense. For this purpose we develop a stylised stock-flow model of public debt and growth, which we subsequently calibrate empirically on a sample of OECD countries. We find that, if the sovereign risk premium is initially high, fiscal consolidation will help a country to escape from a “bad equilibrium”, not push it toward it, even if the direct negative demand impact of fiscal consolidation is large. In that case the stabilising impact of structural reform and financial backstops will also be larger than under normal market conditions. JEL Classification: E62, C33, C62.

The deepening of the debt crisis in the euro area is due to three systemic causes which national governments are not able to overcome on their own. First, being members of a monetary union euro states cannot dampen or even reverse the rise in public debt through devaluations. At the same time, they have no access to funds from a national central bank. Second, under “finance-capitalistic” framework conditions, speculators systematically exploit and strengthen the fiscal troubles in the weakest countries by driving up CDS premia and interest rates to unsustainable levels. This development might transform a liquidity crisis into a solvency crisis. Third, these speculative activities widen the interest rate differentials within the euro area drastically thereby endangering the economic and political cohesion of the EMU and even of the EU.A systemic solution which restores the primacy of politics over speculation needs to stabilize interest rates for all euro countries. It is proposed to transform the European Stability Mechanism (ESM) into an agency for financing euro states, the European Monetary Fund (EMF). It would provide governments with financial means by selling Eurobonds. These bonds are guaranteed by all euro countries to an unlimited extent. The EMF would stabilize Eurobond interest rates at a level slightly below the level of medium-term economic growth (in nominal terms). The Eurobonds are held by investors with the EMF, they are not tradable but can be liquidated at any time. The EMF helps to restore sound public finances in euro countries in close cooperation with the ECB, the European Commission and national governments. To this end, the EMF provides funds for the euro states according to clear criteria (“conditionality”) which are not exclusively restrictive. JEL Classification: E000, F330, G280.