Cinzia Alcidi

State-of-Play in Implementing Macroeconomic Adjustment Programmes in the Euro Area

Two of the four macroeconomic adjustment programmes, Portugal and Ireland’s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.

Great recession versus great depression: monetary, fiscal and banking policies

Purpose - This paper sets out to explore three areas in which the experience of the great depression might be relevant today: monetary policy, fiscal policy, and the systemic stability of banks. Design/methodology/approach - A critical review of the US data for the 1920s and 1930s is presented and stylised facts for monetary, fiscal and banking policies during the noughties are shown and compared with those of the great depression. Findings - The authors confirm the consensus on monetary policy: deflation and massive bank failures must be avoided. With regard to fiscal policy it is impossible to confirm a widespread opinion according to which fiscal policy did not work because it was not tried. The paper finds that fiscal policy went to the limit of what was possible under the conditions as they existed then. Policy reaction after 1932 was no less bold than that of today if one accounts for sustainability issues. Lastly, the investigation of the US banking system shows a surprising resilience of commercial banks that remained profitable, at least on average, even during the worst years. Originality/value - First, the paper presents a systematic comparison between the great depression and the great recession, highlighting similarities and differences. Second, it suggests a relevant policy implication. Findings on commercial bank sector resilience suggest that at present national authorities have little choice but to make up for the losses on “legacy” assets and wait for banks to earn back their capital. However, to prevent future crises, at least a partial separation of commercial and investment banking seems justified.

euro zone crisis 2010

The euro zone crisis started in early 2010 when it emerged that the Greek government had for years doctored the official data on its deficits and debt. The figures for the deficit and debt level presented by the new government were so much higher than the previous ones that rating agencies and many market participants downgraded their assessment of Greece’s ability to service its debt fully. As a result, the cost of refinancing the Greek debt increased sharply and the government could not secure the resources needed to fund its current deficit and roll over the portion of the debt coming due. By the end of April 2010 it had to be bailed out with a ϵ110 billion programme.

What Lessons from the 1930s

This paper explores three areas in which the experience of the Great Depression might be relevant today: monetary policy, fiscal policy and the systemic stability of the banking system. We confirm the consensus on monetary policy: deflation must be avoided. With regard to fiscal policy, the picture is less clear. We cannot confirm a widespread opinion according to which fiscal policy did not work because it was not tried. We find that fiscal policy went to the limit of what was possible within the confines of sustainability, as they existed then. Our investigation of the US banking system shows a surprising resilience of the sector: commercial banking operations (deposit-taking and lending) remained profitable even during the worst years. This suggests one policy conclusion: At present the authorities in both the US and Europe have little choice but to make up for the losses on ‘legacy’ assets and wait for banks to earn back their capital. But to prevent future crises of this type, one should make sure that losses from the investment banking arms cannot impair commercial banking operations. At least a partial separation of commercial and investment banking thus seems justified by the greater stability of commercial banking operations.

The Greek Crisis and Its Structural Features: Some Insights from a Comparative Exercise

This paper looks into the recent experience of Greece and addresses why Greece has so far failed to put in place the social and economic changes necessary to resume growth. Economic and institutional features of the country as well as social values and cultural factors play a role in the judgement about such failure. Each of them needs to be considered and addressed in order to shape a different future for the country, but most have received only limited attention. This helps to explain why the internal devaluation that came along with the adjustment programmes (and the financial support) did not on its own deliver a rapid return to growth. The comparison between the southern regions of Italy (the “Mezzogiorno”) and Greece suggests some stunning similarities. The experience and perverse effects of certain policies adopted in the Mezzogiorno serve as a warning that risks could arise in the relationship between Greece and the EU should serious and far-reaching reforms not be implemented soon.