Stress tests are good, but not enough

By: Wolfgang Munchau

It is important that the EU should extend the stress tests to all relevant banks, but it is more important that member states have a bank resolution strategy.

Eurozone Meltdown

This is the first in a new series of regular briefing notes on important issues facing the euro area. In this briefing note we are asking whether the euro area could ever break up. We think not. But we are not as certain as we used to be.

EU wants to tax bonds of countries in deficit

European Commission proposes tax on bonds of countries with excessive deficits to be discussed at the Ecofin July 12; Fed worried about the impact of the European crisis on US growth prospects; US home sales are back down again; ahead of the G20 summit Wolfgang Schäuble defended budget consolidation as a strategy focussing on the long-term rather than short term measures like the US; Tim Geithner and Larry Summers put the priority maintaining global recovery; FT concludes that Germany won over France pushing through their ideas for the EFSF and economic governance in the eurozone; INSEE predicts slow recovery for France this year, question remains what about 2011; Christine Lagarde warned ministers that they have to do more to cut spending; Paul Krugman rebukes the view that the financial crisis was a made-in-America crisis; George Soros, meanwhile, recommends Germany to consider leaving the EU, just as a thought experiment.

Why this crisis will go all the way

By: Wolfgang Münchau

What has happened is that global investors have realised a deep underling truth about our European sovereign debt crisis – that at its core, it is not a sovereign debt crisis at all – but a highly interconnected banking crisis about to blow up. There is a dynamic at work that the macroeconomic data does not convey – and that the political response to the crisis does not address.

Don’t blame the euro

By: Heleen Mees

With all the turbulence rocking the financial markets and the sharp drop in the euro’s exchange rate, you could almost forget that the single European currency has been quite a success. By increasing the size and liquidity of the financial markets, the single currency resulted in lower real interest rates, not just on government bonds, but also on corporate bonds, mortgage loans and consumer credit. But banks and other financial institutions failed to charge realistic risk premia and thus lulled European leaders into a false sense of security.

GFC to GSC – Part 2: Nowhere to Run To, Nowhere to Hide

By: Satyajit Das

The GSC has profoundly shifted economic dynamics. Refusing to acknowledge the real problems, major economies have over a period of two decades transferred debt from companies to consumers and finally onto public balance sheets. A huge amount of assets and risk now is held by central banks and governments, which are not designed for such long-term ownership. There are now no more balance sheets that can be leveraged to support the current levels of debt.

What do markets want?

By: Kevin O’Rourke

Markets want debts to be kept under control, but in the long run they also want economic growth and low unemployment. Too much austerity at the wrong time will not make governments more credible, but less so.

GFC to GSC – Part 1: The Year of Wishful Thinking

By: Satyajit Das

If sub-prime was the Patient Zero of the Great Financial Crisis, then Greece, the cradle of Western civilisation, was the equivalent of the Great Sovereign Crisis. As historian Arnold Toynbee observed: "An autopsy of history would show that all great nations commit suicide."

How many quasi-fiscal activities can the ECB bear?

By: Ansgar Belke

Who will actually have to pay the losses if Greece and Portugal will not be able to serve their debt in the end? Ultimately, the owners of the ECB would be asked to pay up, while by far the largest part will be imposed on Germany. The toxic bonds in the balance sheets of the ECB might eat up most of the reserves and equity capital if they were to fall by a sufficiently large amount. In this case, with a given public deficit and level of spending, taxes will inevitably go up.

Fiscal Discipline Alone is not Enough

By: Adam Posen

The reform of euro area economic governance will ultimately have to include greater systemic fiscal transfers and stabilization, not just increased budget discipline. The anger over Greek deception and the fear of a sovereign debt crisis may make fiscal discipline prominent among some euro area decision-makers. But such one-sided reform will have costs that will become even more evident in the next couple of years. It also ignores a key source of the current crisis, the lack of sufficient counter-cyclical stabilization within the euro’s monetary union.

A new breed of fiscal watchdogs

By: Lars Calmfors, George Kopits, and Coen Teulings

Faced with a looming debt sustainability problem, EU member governments have been left to their own devices. Both inside and outside the euro area, they are weighing well-known options for reforming entitlement programs and the tax system, to be complemented with the introduction of a new breed of independent fiscal institutions at the national level. Inspired by the experience of the US Congressional Budget Office (CBO) and the Netherlands’ Central Planning Bureau (CPB), in recent years, Belgium, Canada, Sweden, Hungary, and Slovenia have adopted similar institutions, in some cases under the aegis of a council of fiscal experts.