Session 8 Flashcards
Was the Eurozone crisis born in Europe?
No.
Was the Eurozone crisis born in the public sector?
No.
What kind of crisis was the Eurozone crisis?
It was a global financial crisis.
How did the Eurozone crisis start?
In the 2000s there was an accumulation of private debt and a housing market crisis in the US and in Europe.
Finally, the private sector stopped spending to reduce the debt, which led to an aggregate demand crisis.
What was the policy reaction at the onset of the crisis?
They adopted a textbook policy, that is monetary policy to avoid the collapse of the financial market.
To avoid the liquidity trap, fiscal policy as adopted to restart demand. Recovery was underway in the late 2009
What happened in Greece in 2009?
The greek elections shows that there were frauds in debt and deficit statistics. The attention shifted to public debt.
What were the specific issues the European Monetary Union encountered?
Sovereign debt and FI weaknesses
What were the two narratives that emerged in the context of the financial crisis?
The fiscal profligacy story
The structural imbalances story
What were the policy prescriptions of the New Consensus?
- Short run fluctuations have little influence on long run growth
- Structural reforms are the only tool that can lead to supply side improvements
- Discretionary policy is ineffective, rules are better
- Monetary policy is the preferred tool, because fiscal policy is subjected to biases
What was the Fiscal Profligacy (Berlin) View?
It relied on the New Consensus and asserted that Southern European Countries had out-of-control public finances.
What were the policy recommendations of the Berlin View?
What was needed was asymmetric adjustment, only for countries in crisis, through fiscal consolidation and structural reforms.
Austerity and reforms would maybe compress domestic demand but that was no problem, they could rely on exports for growth (export led-growth) just like Germany
What were the institutional consequences of the Berlin view?
Fiscal coordination happens from the bottom, through strict fiscal discipline, and monetary policy should be limited to price stability.
In what can you situate the Berlin View?
The Washington consensus that is embedded in the Maastricht treaty. The Stability and Growth Pact limits fiscal policy to automatic stabilisation and the ECB mandate is (contrary to Fed) limited to the inflation objective
What are the foundations of the structural imbalances view?
This theory can be traced back to Mundell, and what makes for an optimal currency area.
The main cost is the loss of monetary policy as a tool to absorb shocks.
On what does optimality for a currency area depend on?
- Symmetry of macroenomic shocks
- Flexbility in the labour markets
- Integration in terms of trade to generate benefits of using single currency
- existence of transfer mechanisms
Is the Eurozone an Optimal Currency Area?
- Trade integration yes
- Symmetry unclear
- Flexibility: no
- Fiscal transfers: no
Define the structural imbalances narrative.
Because the European Monetary Union is a non-optimal currency area, the convergence of interest rates together with economic convergence has led to capital flows from the core to the periphery.
What do global imbalances need?
Rebalancing through:
- Symmetric adjustment (deflation in periphery and inflation in core) to restore competitiveness
- Co-ordinated not synchronised fiscal policies
What did the crisis expose according to the structural imbalances narrative?
It exposed the delusion of markets and policy makers with the reversal of capital flows, which led to increase of interest rates in the periphery
Empirically which narrative is the most plausible?
There is no clear public finances pattern for the PIIGS that would lend credence to the fiscal profligacy pattern. But we can see a pattern in external imbalances.
Why did the Berlin view win the debate?
- Creditors have the upper hand in negotiations
- Berlin view requires little institutional change
- The big guy have more bargaining power
