1,721,225 research outputs found
A Tale of Three Countries: Recovery after Banking Crises
Full text linkHighlights:
• Iceland, Ireland and Latvia experienced similar developments before the crisis, such as sharp
increases in banks’ balance sheets and the expansion of the construction sector. However the impact of the crisis was different: Latvia was hit harder than any other country in the world. Ireland also suffered heavily, while Iceland came out from the crisis with the smallest fall in
employment, despite the greatest shock to the financial system.
• There were marked differences in policy mix: currency collapse in Iceland but not in Latvia,
letting banks fail in Iceland but not in Ireland, and the introduction of strict capital controls
only in Iceland. The speed of fiscal consolidation was fastest in Latvia and slowest in Ireland.
• Economic recovery has started in all three countries and there are several encouraging signals. The programme targets in terms of fiscal adjustment, structural reforms and financial reform are on track in all three countries.
• Iceland seems to have the right policy mix.
• Internal devaluation in Ireland and Latvia through wage cuts did not work, because privatesector wages hardly changed. The productivity increase was significant in Ireland and moderate in Latvia, yet was the result of a greater fall in employment than the fall in output, with harmful social consequences.
• The experience with the collapse of the gigantic Icelandic banking system suggests that letting banks fail when they had a faulty business model is the right choice.
• There is a strong case for a European banking federation
Avoiding a new European divide. Bruegel Policy Brief 2008/10, December 2008
Full text linkThe financial crisis, which is now hitting the new member states severely, highlights the shortcomings of the existing institutional architecture in Europe. Current strains reflect a revaluation of risks but they also result from policy mistakes. For many years, growth in the new member states has relied on massive inflows of foreign capital that are now being called into question. Some of the non euro-area new member states suffer from serious vulnerabilities, to which policy has been slow to respond. Crisis management in the euro area has also had the unintended consequence of putting non euro-area new member states at a disadvantage. These are unhealthy developments and without decisive action, a new political and economic divide within Europe may emerge
The Baltic challenge and Euro-area entry. Bruegel Policy Contribution 2009/13, November 2009
Full text linkResident Fellow Zsolt Darvas takes a look at the issue of the Baltic states - Estonia, Latvia and Lithuania - and the challenges facing those three countries in the aftermath of the financial crisis. He argues that because it is in the broader European interest to prevent a collapse in the Baltics, the best option is immediate euro entry at a suitable exchange rate supported by appropriate resolution in order to manage the resulting debt overhang. However, there seems to be no legal basis for this under the current euro accession criteria. Furthermore, the economic foundations of the criteria are fundamentally flawed, as euro-area members continue to violate the criteria while the EU's expansion to 27 members has made the criteria tougher for new member states to meet themselves. Ultimately, the European Council has the ability to reform the criteria without a formal treaty change. The Council should do so, the author argues, and allow for more meaningful benchmarks for all future euro-area applicants
The Case for Reforming Euro Area Entry Criteria
Full text linkThe global economic and financial crisis has raised further concerns about the euro-entry criteria, in
addition to other factors, such as the effective tightening of the criteria due to the enlargement of the
EU from 12 to 27 members, the highly unfavourable property of business cycle dependence, the
internal inconsistency of the criteria due to the structural price level convergence of Central and
Eastern European countries, and the continuous violation of the criteria by euro-area members. The
interest rate criterion became a highly volatile measure. Many US metropolitan areas would fail to
qualify to be members of the US monetary union by applying the currently used inflation criterion to
the US. It is time to reform the criteria and to strengthen their economic rationale within the legal
framework of the EU treaty. A good solution would be to relate all criteria to the average of the euro
area and simultaneously to extend the compliance period from the currently considered one year to a longer period
Fiscal and Monetary Institutions in Central, Eastern and South-Eastern European Countries
Full text linkThis paper studies the role of fiscal and monetary institutions in macroeconomic stability and
budgetary control in central, eastern and south-eastern European countries (CESEE) in comparison with other OECD countries. CESEE countries tend to grow faster and have more
volatile output than non-CESEE OECD countries, which has implications for macroeconomic management: better fiscal and monetary institutions are needed to avoid pro-cyclical policies. The paper develops a Budgetary Discipline Index to assess whether good fiscal institutions underpin good fiscal outcomes. Even though most CESEE countries have low scores, the debt/GDP ratios declined before the crisis. This was largely the consequence of a very favourable relationship between the economic growth rate and the interest rate, but such a favourable relationship is not expected in the future. Econometric estimations confirm that better monetary institutions reduce macroeconomic volatility and that countries with better budgetary procedures have better fiscal outcomes. All these factors call for improved monetary institutions, stronger fiscal rules and better budgetary procedures in CESEE countries
Challenges for the euro area and implications for Latvia
Full text linkThis Policy Contribution reviews the major challenges faced by the euro area, and discusses recent initiatives and the way forward. Some implications are drawn out for Latviaâ??s euro accession, which is likely to be beneficial on balance.
The euro area faces three major challenges: (1) high private and public debt in some of its parts together with a requirement for competitiveness adjustment that in some countries has barely started; (2) weak growth outlook; (3) continued banking-sector fragility that, with sovereign stress, feeds a negative feedback loop. The euro area has agreed many significant measures to overcome these problems, including the European Stability Mechanism and the fiscal compact. The 21 February agreement on Greece removes a major source of financial instability even though it is likely that further debt reductions will be needed. Significant concerns remain, the most important of which are the slow real economic adjustment and the largely unaddressed banking-sovereign fragility. The fiscal compact raises the issue of appropriate fiscal stabilisation tools at the euro-area level.
Countries that will soon join the euro should actively shape the debate about the further development of the overall set-up. For Latvia, joining the euro makes sense because Latvia has kept its exchange rate fixed and has undergone internal adjustment. In its euro-area accession negotiations, Latvia should ensure that it does not participate in any of the currently ongoing financial assistance programmes.
This Policy Contribution reproduces evidence given by Guntram B. Wolff to the Latvian parliamentâ??s European affairs committee, 22 February 2012.
Exchange Rate Policy and Economic Growth after the Financial Crisis in Central and Eastern Europe
Full text linkIn a paper on the effects of the global financial crisis in Central and Eastern Europe (CEE), the
author reacts to a paper of Åslund (2011) published in the same issue of Eurasian Geography and
Economics on the influence of exchange rate policies on the region’s recovery. The author argues
that post-crisis corrections in current account deficits in CEE countries do not in themselves signal a
return to steady economic growth. Disagreeing with Åslund over the role of loose monetary policy in
fostering the region’s economic problems, he outlines a number of competitiveness problems that
remain to be addressed in the 10 new EU member states of CEE, along with improvements in framework conditions supporting future macroeconomic growth
Avoiding a new European divide
Full text linkThe financial crisis, which is now hitting the new member states severely, highlights the shortcomings of the existing institutional architecture in Europe. Current strains reflect a revaluation of risks but they also result from policy mistakes. In this policy brief, Zsolt Darvas and Jean Pisani-Ferry show that some of the non euro-area new member states suffer from serious vulnerabilities, to which policy has been slow to respond. They believe that the crisis management in the euro area has had the unintended consequence of putting non euro-area new member states at disadvantage. These are unhealthy developments and without decisive action, a new political and economic divide within Europe may emerge.
Banking system soundness is the key to more SME financing. Bruegel Policy Contribution 2013/10, July 2013
Full text linkThe SME access-to-finance problem is not universal in the European Union and there are reasons for the fall in credit aggregates and higher SME lending rates in southern Europe. Possible market failures, high unemployment and externalities justify making greater and easier access to finance for SMEs a top priority. Previous European initiatives were able to support only a tiny fraction of Europe’s SMEs; merely stepping-up these programmes is unlikely to result in a breakthrough. Without repairing bank balance sheets and resuming economic growth, initiatives to help SMEs get access to finance will have limited success. The European Central Bank can foster bank recapitalisation by performing in the toughest possible way the asset quality review before it takes over the single supervisory role. Of the possible initiatives for fostering SME access to finance, a properly designed scheme for targeted central bank lending seems to be the best complement to the banking clean-up, but other options, such as increased European Investment Bank lending and the promotion of securitisation of SME loans, should also be explored
An action plan for the European leaders
Full text linkAt the extraordinary EU Council of 21 July European leaders have to accomplish a triple-mission. First, they should pave the way to restoring solvency in Greece by initiating debt reduction. Softening the Greek debt burden implies i) reducing the interest rate on official lending, ii) requesting from the EFSF support for an immediate bond buy-back programme, and iii) asking the ESRB for an immediate evaluation of the risks to financial stability involved in a future restructuring of the sovereign debts in the euro area.
Second, they should promote immediate growth-enhancing measures to be financed through unused EU structural funds and EIB loans (â?¬16bn). The available funds shall be used to i) raise the quality of higher education, ii) finance wage subsidies in manufacturing and tourism so as to generate an internal devaluation at contained domestic-demand costs; and ii) create research laboratories (i.e. lighthouse innovation projects) that would support an upgrading of the Greek value chain.
Third, they should address risks to financial stability in the euro zone by breaking the vicious circle between sovereign debt and banking risk. The EFSF should be able to guarantee national deposit insurance schemes; at the same time, the European Banking Authority should assume stronger supervisory powers.
This is an immediate action plans but of course more ambitious reforms are necessary down the road.
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