Interest rates, eurobonds and intra-European exchange rate misalignments: the challenge of sustainable adjustments in the eurozone

The euro zone crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. At the level of the whole euro zone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. The paper gives a new evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and eurobonds issuance. Three main results are obtained. Facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Implementation of eurobonds as a tool to partly mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 60% of GDP. Furthermore, eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire euro zone with stabilized current account imbalances. However, the settlement of a European Debt Agency in charge of the issuance of the eurobonds would face strong political obstacles

Exchange Rate Misalignments, Fiscal Federalism and Redistribution: How to Adjust in a Monetary Union

The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. This situation reflects a simple diagnosis. At the level of the whole euro zone, the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. In a first step, the paper gives an evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach. Using panel econometric techniques over the period 1994-2011, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Last, we give an estimation of the equivalent transfers in % of GDP implied by these misalignments in the different European countries. In a second step, we use a ‘stock-flow consistent’ model of 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 and social transfers financed by federal taxes and euro-bonds issuing. Three results are obtained. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Without such a federal mechanism the overvaluation of the Southern currency (Greek or Spanish euro), facing the undervaluation of the Northern currency (German euro), induces a strong slowdown in the South and a cumulative imbalances within the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated. Their role in the pooling of national debts would be the last point to examine

Désajustements de change, fédéralisme budgétaire et redistribution : comment s’ajuster en union monétaire

The euro zone crisis illustrates the insufficiency of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Firstly, the paper gives an evaluation of exchange rate misalignments inside the euro zone, using a FEER approach (Jeong, Mazier and Saadaoui, 2010). Using panel econometric techniques over the period 1994-2010, we confirm that the exchange rate misalignments in the euro zone have diverged, reflecting unsustainable evolutions. Secondly, we use a “stock-flow consistent” model of 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 and social transfers financed by federal taxes and euro-bonds issuing. The stabilizing role of such a federal budget is confirmed facing asymmetric shock or the negative impact of exchange rate misalignments inside the monetary union. Similarly, the stabilizing role of euro-bonds used to finance European investment projects is illustrated

The future of the euro

The euro crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, few alternative mechanisms are available. Nevertheless, fiscal policy could play an active role. The chapter is organized as follow. In the first part, we give a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and we discuss the structural character of these misalignments. In the second part, we analyse the deadlock of the actual European institutional framework and propose two alternative exit strategies, a first step towards a fiscal federalism or, on the opposite, a new monetary regime based on a multi-euro system

Alternative economic policies in the euro zone

The chapter analyses in two ways the alternative economic policies that are put forward to overcome the blockages of the euro area. First, the consistency of the different alternatives is discussed; second, a two-country SFC model of the monetary union is used to evaluate the macroeconomic impact of these alternatives. Several typical alternative structures have been suggested: reaffirmation of the no-bail-out clause for the national governments, fiscal federalism, eurobonds, creation of a Euro Treasury. These alternatives, and other more pragmatic ones, raise many problems and are, in many cases, hardly realistic in political terms. According to the simulations of the SFC model, the stabilisation effects advocated by the ‘international risk-sharing approach’ are weak or even nonexistent in some cases. When interest rates increase due to credit rationing, a cumulative slowdown can emerge. On the contrary a federal budget, even if small but with federal transfers, can have an efficient stabilising role. Large European investments projects financed by eurobonds are also a powerful instrument. The mutualisation of public national debts with eurobonds or the enlargement of financial support by northern countries can contribute to stabilisation, but in a limited way. On the whole, the alternative economic policies are whether unlikely (federal budget, eurobonds), or hardly feasible (European investments) or have only a limited impact (eurobonds, northern financial support). The risk of a status quo is high

Crise de la zone euro, intégration financière et rationnement bancaire

International audienceÀ l’aide d’un modèle « stock flux consistent » (sfc), nous étudions la portée du financement bancaire intra-zone en matière de crédit et d’achat de titres publics. Plusieurs résultats se dégagent. Le recours au crédit intra-zone n’a aucun rôle de stabilisation spécifique dans le cas où la banque centrale est prêteur en dernier ressort. Concernant le financement des États, nous introduisons dans le modèle la possibilité d’un rationnement bancaire par les taux d’intérêt sur les titres publics. La hausse des taux contribue à un ralentissement cumulatif. Dans ce contexte, le recours au financement intra-zone (mécanisme européen de stabilité, financement bancaire ou intervention de la banque centrale) peut jouer un rôle de stabilisation, à condition qu’il ne s’accompagne pas de plans d’austérité budgétaire. Ces résultats illustrent les mécanismes à l’œuvre dans la crise des pays du Sud de l’Europe

US Interstate Risk Sharing: A Post-Crisis Examination

International audienceThis paper examines the modalities of risk sharing in the United States, and their evolution between the pre-financial crisis period and the post-crisis one. Reassessing the mechanisms at play in the US economy, we document a lower share of adjustment coming from capital markets, in comparison to previous estimates. The measures taken during the crisis have not impacted the absolute degree of risk sharing, although the relative size of its components has changed, with a stronger role for the federal government

Crise de la zone euro, asymétries et politiques budgétaires

International audienceDans une union monétaire, comme la zone euro, les ajustements face à des évolutions asymétriques sont plus difficiles en raison de la fixité des taux de change intraeuropéens, comme l’illustre la crise actuelle des pays de l’Europe du Sud. Une démarche s’appuyant sur un modèle « stock flux cohérent » (SFC) à deux pays de taille asymétrique en Union monétaire, s’inspirant des travaux de Godley et Lavoie [2007], est proposée. A l’aide de ce modèle, nous simulons une perte de compétitivité dans le sud de la zone. 5 variantes sont analysées : restriction budgétaire dans le sud, expansion budgétaire dans le sud, expansion budgétaire dans le nord, expansion budgétaire dans l’ensemble de la zone et expansion budgétaire dans l’ensemble de la zone avec intervention de la banque centrale européenne (bce). Plusieurs résultats se dégagent et illustrent les mécanismes à l’œuvre dans la crise des pays du Sud de l’Europe. La mise en place d’une politique budgétaire restrictive au sud permet de réduire la dette publique et le niveau des taux d’intérêt mais au prix d’une croissance plus faible. L’effet d’une politique de relance par la demande au sud s’avère efficace sur la croissance à court terme mais présente l’inconvénient à moyen terme d’augmenter fortement les taux d’intérêt plongeant l’économie dans la récession. Afin d’éviter l’explosion des taux dans les pays du sud sans mettre en péril la croissance, seule une politique de relance au nord permet à la fois de relancer la production et de réduire les déséquilibres intra-zone euro. Enfin, une politique de relance dans l’ensemble de la zone est efficace sur la croissance tout en limitant la hausse des taux d’intérêt à condition que la bce devienne moins indépendante des États