Asia-Europe: the third link

The report provides a comprehensive analysis of Europe-East Asia interdependences (in terms of relative economic weights, trade and financial integration, trade and financial flows, exchange rate and wealth transfers). The prime motivation of the paper is that linkages between Europe and East Asia remain frequently underestimated. While the “third link†between them is in many respects as important as the linkages between the two regions and North America, it is too often regarded only as of secondary importance.Regional integration, Financial integration, Trade integration, East Asia, European Monetary Union, Pisani-Ferry , Cohen-Setton

Is there a Common European Business Cycle? New Insights from a Frequency Domain Analysis

To assess the synchronization of business cycles in Europe we extract the cyclical component of industrial production in five European countries using the filter of Baxter and King (1999). The hypothesis of a joint business cycle is tested by using the frequency domain common cycle test suggested by Breitung and Candelon (2000). The common cycle hypothesis is clearly rejected for U.K. data whereas some weak evidence for a joint cyclical pattern is found for France, The Netherlands, Austria and Germany. Zusammenfassung Gibt es einen gemeinsamen europäischen Konjunkturzyklus? Neue Erkenntnisse durch eine Spektralanalyse Um die Synchronität der Konjunkturzyklen in Europa zu bewerten, wird die Zykluskomponente der Industrieproduktion in fünf europäischen Ländern identifiziert, indem der Baxter-King-Filter (1999) angewendet wird. Die Hypothese eines gemeinsamen Konjunkturzyklus wird durch einen Test auf einen gemeinsamen Zyklus im Frequenzbereich nach Breitung und Candelon (2000) überprüft. Ein gemeinsamer Konjunkturzyklus muss demnach für Großbritannien klar zurückgewiesen werden, wohingegen einige schwache Anzeichen für ein gemeinsames Konjunkturmuster für Frankreich, die Niederlande, Österreich und Deutschland gefunden werden konnten

Banking Union as a Shock Absorber

This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area

Gold as a Tool for Hedging Financial Risks

The article discusses gold as a protective asset, which claims to be a high-efficiency tool for hedging financial risks. In the introductory part the general characteristics of hedging as a method of full or partial risk elimination is given, and the main known types of risk hedging typical for a financial asset portfolio holder are considered. Further, dynamics of the world prices for gold is analyzed in a historical retrospective, whereby the conclusion is drawn on a tendency of this asset to grow during the periods of financial instability, and also if new financial assets appear. In the final part of the article the assessment of gold as a tool for hedging financial risks is given

Fiscal and Monetary Policy Determinants of the Eurozone Crisis and Its Resolution

Unlike the crisis years of 2007-2009 (when the insolvency of large banks was a major problem), the current round of the global financial crisis has fiscal origins. Almost all developed countries suffer from an excessive public debt burden that has been built up over the last two decades or more. The financial crisis caused a further deterioration of government accounts as a result of ill-tailored countercyclical fiscal response and, in some cases, a costly financial sector rescue. All excessively indebted countries must conduct fiscal adjustment, even if this involves economic and political costs in terms of lower output and higher unemployment. Central banks can reduce these costs through accommodative monetary policies but without compromising their anti-inflationary missions and institutional independence. The ECB is additionally constrained by its institutional status which is based on a delicate cross-country political consensus. Excessive ECB involvement in quasi-fiscal rescue operations can undermine this consensus and lead to a disintegration of the Eurozone. There are also strong arguments in favor of strengthening fiscal and banking integration within the EU, especially the fiscal discipline mechanism at national levels, and building the EU rescue capacity in respect to sovereigns and banks based on strong policy conditionality

Alternative Fiscal Rules for the New EU Member States

The fiscal regime of new EU member states is dictated by the Stability and Growth Pact by virtue of EU membership and, for EMU candidates such as all new EU members are supposed to become soon, by the Maastricht Treaty. Such dual fiscal regime is somewhat perverse: Maastricht conditions in the year before EMU entry is assessed are significantly harder than SGP conditions before and after - a pointless hurdle. Most new members have fiscal difficulties: structural deficits, relatively low and mostly indirect taxation, widespread flat tax; failure to coordinate monetary and fiscal policy, and the fiscal shock of EU entry. The paper then discusses SGP criticisms and their relevance to CEE economies: neglect of the size of public debt, and of the share of public investment; failure to co-ordinate, within the Euro-area, both the fiscal policy of member countries, and the overall fiscal stance of the euro-area with ECB monetary policy; the inappropriateness of SGP rules to the principle of subsidiarity that shapes EU policy. The March 2005 reform has softened the SGP and considered some of these factors, but there is still considerable uncertainty in the EU authorities' discretionary powers, and Maastricht conditions remain rigid. The implications are likely delays in both fiscal consolidation and the introduction of the euro in many of the new eastern member states - unless they can get away with either cosmetic measures such as those pioneered by Italy and other member states, or unilateral euroisation - two options which are neither likely nor desirable. Recommendations include: 1) unification of fiscal deficit requirements of EU membership and EMU entry 2) formal non-discretionary modification of the fiscal deficit rules applicable to both EU and EMU in the directions of the March 2005 reform of SGP; 3) the relaxation of fiscal constraints for individual countries as long as the overall fiscal stance of the entire euroarea meets the criteria set for each country

What difference does Euro membership make to stabilization? The political economy of international monetary systems revisited

For many political economists, the loss of monetary sovereignty is the major reason why the Southern periphery fared so badly in the Euro area crisis. Monetary sovereignty here means the ability of the central bank to devalue the exchange rate or to buy government debt by printing the domestic currency. We explore this diagnosis by comparing three countries - Hungary, Latvia and Greece – that received considerable amounts of external assistance under different monetary regimes. The evidence does not suggest that monetary sovereignty helped Hungary and Latvia to stabilize their economies. Rather, cooperation and external assistance made foreign banks share in the costs of stabilization. By contrast, the provision of liquidity by the ECB inadvertently facilitated the reduction of foreign banks’ exposure to Greece which left the Greek sovereign even more exposed. By viewing the Euro area as a monetary system rather than an incomplete state, we see that what is needed for Euro area stabilization is cooperation over banking union, rather than a fully-fledged federal budget