A Litmus Test for Banking Union

Among economists a wide consensus exists that a transfer of supervisory powers to the ECB needs to be accompanied by increased risk sharing at the euro area level, through the establishment of a European resolution mechanism and a joint deposit guarantee scheme. This line of argument is based on the accountability principle, according to which […]

The ECB Is Not Infallible

For the ECB, 2012 ended on a high note. Mario Draghi was proclaimed person of the year by the Financial Times, and at the December summit the ECB was given the final say on euro area banking supervision. Amid a general collapse in confidence in banks, politicians and national supervisors, all hopes are now directed […]

First the Governance, Then the Guarantees

The European Commission’s plan to establish a single supervisory mechanism (SSM) for all banks in the euro area has received a mixed reception. The ambitions regarding the coverage (all banks) and time path (first phase starting in January 2013) have met with strong German resistance. Quick initiatives to complement the SSM with a joint deposit […]

An Interest Stabilization Mechanism as a Feasible Alternative for Eurobonds

As interest spreads within the euro area widen, the stalemate on eurobonds continues. While Mario Draghi calls for a “brave leap” towards fiscal union, leaders in Germany and its satellites are understandably wary because of voter opposition. Eurobonds imply a common guarantee on the sovereign debt of euro area members and can be an effective […]

Rating Agencies Should Not Overreact to Dutch Problems

This year, the Netherlands celebrates ten years of political instability. In 2002 the first Balkenende Cabinet collapsed after just 86 days in office. Internal conflicts within the populist LPF party destabilized the government. After the fall of Balkenende’s government, nobody nervously watched the reaction in the bond markets or anticipated rating downgrades. This time is […]

Use the EFSF for ‘Sovereign Cleansing’ of Eurozone Banks

The Greeks’ ability to hold Europe hostage continues to amaze. The surprise referendum was probably not the last delaying tactic of the Greek government. But for the good of Europe, it is time to end the hostage crisis. This can be done by employing the EFSF for a thorough “sovereign cleansing” of the banking system […]

A Handicapped European Systemic Risk Board

Since December 2010, the European Systemic Risk Board (ESRB) is responsible for macro-prudential oversight of the financial system within the European Union. The ESRB is independent from politics and resides with the ECB, which also ensures its secretariat. The ESRB shall “contribute to the prevention or mitigation of systemic risks to financial stability in the […]

Students: A Greek Export Success Story

Not the debt burden, but a lack of competitiveness is the biggest problem of the Greek economy. In one area, though, Greek export performance seems outstanding. Greece ranks among the top exporting countries of students. Each year, more than 30,000 Greek youths study abroad. In contrast, Greece imports very few foreign students (apart from Greek-Cypriots). […]

Financial Repression as a Solution to the Greek Debt Crisis

Economic projections unanimously show that the Greek debt-to-GDP ratio is on an unsustainable path. Still, European politicians hesitate to bite the bullet of debt restructuring. Their hesitation is understandable. Apart from the – probably manageable – losses which would be inflicted upon European banks, debt restructuring puts the Greek financial system at risk, is hard to sell to the German public and is in the context of EMU an untried and risky step into the unknown. Above all, it sends the wrong political signal to Greece, which is that economic salvation may come from debt forgiveness, instead of from economic reforms. Debt forgiveness reduces the momentum for reform. Yet without tackling its bloated public sector, the many privileges and entitlements, the rigidities in goods and labor markets and its lax tax morale, Greece will never be able to compete in the euro area. Its economic problems would continue to burden the public finances, making it hard to regain the confidence of financial markets. Taxpayers and bank customers in northern Europe are not keen on paying the bill for a country whose predicaments are of their own making and which has been fudging the financial numbers for years. So, while the case for reform is clear, the case for debt restructuring is less so.

Euro as Usual

In recent weeks, the value of the euro has often been linked to the way in which European leaders handle their sovereign debt crisis. Many observers interpret a weak euro as a vote of no confidence in the crisis measures. But this interpretation is flawed. The euro has little informational value regarding the success or failure of current EU economic and budgetary policies.