Don't blame globalisation for the squeezing of the middle class. CEPS Policy Brief, No. 121, 2 February 2007

Globalisation is being blamed for the squeezing of the middle class and protectionism is being offered as a solution. We argue in this paper that the increase in inequality is a long-term trend resulting from a variety of factors, including the decline in manufacturing, the reduction in the progressivity of taxation and the steady increase in asset prices, and that globalisation has only had a marginal impact on it. Protectionism will not reverse any of these trends. We discuss some policy options aimed at cushioning this increase in inequality and argue that they will likely result in expanding fiscal deficits and pressure on central banks to test the limits of growth

La trampa estructural de Japón. Lecciones para Europa y Estados Unidos

Este artículo analiza la evolución de la economía y las políticas de las autoridades japonesas desde el estallido de la burbuja bursátil. El artículo concluye que la respuesta de las autoridades japonesas fue, en sus inicios, consistente con la ortodoxia del momento. Sin embargo, el complejo sistema de incentivos y subsidios de la sociedad japonesa impidió una respuesta eficaz, y las políticas que finalmente se implementaron fueron tardías, insuficientes y mal diseñadas. Aplicando los resultados de este análisis a la situación actual de Europa y Estados Unidos se concluye que Europa experimentara todavía un largo de periodo de estable pero lento crecimiento, mientras que Estados Unidos pasara por un periodo de crecimiento volátil que terminara, en el mejor de los casos, con alta inflación.This article analyses the evolution of the Japanese authorities'''' economy and policies as from the bursting of the stock exchange bubble. The article concludes that the Japanese authorities'''' response was, in its beginnings, consistent with the orthodoxy of the moment. However, Japanese society''''s complex incentives and subsidies system prevented an effective response, and the policies that were finally implemented were late, insufficient and wrongly designed. Applying the results of this analysis to the current situation in Europe and in the United States, the conclusion is that Europe will still experience a long period of stable but slow growth, whereas United States went through a period of volatile growth that is to end, in the best of the cases, with high inflation rates

Comovement and Macroeconomic Interdependence: Evidence for Latin America, East Asia, and Europe

This paper analyzes common economic patterns across countries and economic sectors in Latin America, East Asia and Europe for the period 1970-94. This is done by means of an error-components model that decomposes real value-added growth in each country into common international effects, sector-specific effects and country-specific effects. We find significant comovement in the European and East Asian samples. In the Latin American sample, however, we find country-specific components to be considerably more important than common patterns. These results are robust to different sub-sample time spans and different sub-sample country groups.

Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework

This paper presents a methodology for the calculation of bilateral equilibrium exchange rates for a panel of currencies in a way that guarantees consistency at the global level. A theoretical model, which encompasses the balance of payments and the Balassa-Samuelson approaches to real exchange rate determination, shows that the stock of net foreign assets and the evolution of sectoral prices are the fundamentals underlying the behavior of the real exchange rate. An unobserved components methodology in a cointegration framework allows us to identify a time-varying equilibrium real exchange rate, and deviations from this equilibrium provide an estimate of the degree of multilateral misalignment. Finally, an algebraic transformation converts these multilateral equilibrium real rates into bilateral equilibrium nominal rates. The results uncover, inter alia, that by the start of Stage III of EMU the euro was significantly undervalued against the dollar and even more against the pound, but overvalued relative to the yen. Regarding EMU currencies, it is shown that the four major EMU currencies locked their parities with the euro at a rate close to equilibrium.

What can European leaders learn from Koizumi?. CEPS Policy Briefs No. 97, 1 March 2006

Following a long period of stagnation, Japan is growing again. The key to this success story is Koizumi’s relentless focus on structural reform, with two objectives: breaking the structural trap of political constituencies defending old and unproductive economic sectors; and adopting a two-pronged macro-micro approach to make reform unavoidable. This paper argues that Europe should follow a similar strategy whereby financial market integration, and not the EU bureaucracy and grandiose political declarations, should be the main driving force of national economic reforms, pressuring liberalisation in goods and services markets and making labour market reforms unavoidable

EMU at Risk: 7th Annual Report of the CEPS Macroeconomic Policy Group. CEPS Paperback. June 2005

This is the seventh annual report issued by the CEPS Macroeconomic Policy Group since it was reconstituted at the start of economic and monetary union in 1999.This distinguished group of economists argues that a combination of slow growth, inadequate policy responses and newly emerging intra-area divergences are putting EMU at risk. Against this background, the MPG recommends that the ECB should downgrade its short-term concern about cyclical economic developments and pursue a monetary policy aimed at preserving the value of the euro in the long-term. Moreover, it urges the core countries to urgently return to fiscal discipline, both in their own interest and to set an example that would allow them to exert pressure on potential soft currency countries to do the same

The Nine Lives of the Stability Pact. A special report of the CEPS Macroeconomic Policy Group. CEPS Paperback. February 2004

This special report by the CEPS Macroeconomic Policy Group (MPG) is concerned with the implementation of the prohibition of excessive deficits contained in the Treaty of Maastricht via the Stability and Growth Pact. Specifically, it deals with the controversy that was provoked by the failure of the ECOFIN Council of 25 November 2003, to endorse recommendations of the European Commission to put France and Germany on notice that they had violated the Treaty’s prohibition of excessive deficits. The CEPS MPG finds that the core of the dispute arises not so much from the Stability Pact, but from the 3% limit set in the Treaty. It asserts that this clause should not be altered, as argued by many observers, and that it is even more appropriate now, than when it was first agreed in 1991, because of the slowdown of potential growth in Europe. The CEPS MPG is composed of distinguished economists who have undertaken to carry out independent, in-depth research on current developments in the European economy

The Dog that Lost Its Bark: The Commission and the Stability Pact. CEPS Policy Briefs No. 58, 1 November 2004

In a new Policy Brief submitted this month to the Monetary Committee of the European Parliament, CEPS Director Daniel Gros and two of his fellow Macroeconomic Policy Group members find that the case for consolidation of government finances against the background of present and prospective demographic changes remains very strong. They argue that the Commission’s recent proposals for reform of the SGP risk watering down the Pact, resulting in an erosion of fiscal discipline

A world out of balance? Special Report of the CEPS Macroeconomic Policy Group. CEPS Paperbacks. April 2006

Over the last decade the global economy has been on a dynamic path with ever-increasing US current account deficits financed by emerging market surpluses. This report argues that the forces driving this development are now abating and might even reverse soon, forcing an adjustment in asset markets and the global economy. The global supply of savings is likely to shrink soon, with investment in emerging markets growing strongly and consumption in oil rich countries adjusting gradually to the windfall from high oil prices. This combination should lead to higher real interest rates and a cooling of the housing price bubbles that have developed in many areas; with asymmetric effects on the US economy which should slow much more than the eurozone. A gradual resorption of the US external deficit is thus possible without a crash of the USD. The key issue for this gradual adjustment is whether US policy-makers will accept a prolonged period of weaker growth, because a reduction of the growth rate in domestic demand by about 1 percentage point over several years is a conditio sine qua non for a reduction in the US external deficit towards more sustainable levels. Since this lower US growth will likely drag down global growth, a cautious approach to the reduction of the US current account deficit is likely, with the adjustment taking place over a few business cycles. If, however, the process is unduly delayed by US policies resisting this necessary slowing down of domestic demand growth or by the rest of the world failing to pick up the baton, the odds of a disorderly adjustment will increase dramatically. In fact, it is extremely important that the US deficit starts shrinking soon in light of the report’s finding that the underlying external financing needs are probably even larger than officially reported