QUADERNI DEL DIPARTIMENTO DI SCIENZE ECONOMICHE E SOCIALI
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QUADERNI DEL DIPARTIMENTO DI SCIENZE
ECONOMICHE E SOCIALI
‘THE CONVERGENCE ILLUSION’:
WHY EUROPE’S APPROACH TO THE FINANCIAL CRISIS
ISN’T WORKING – AND WHAT TO DO ABOUT IT
Angelo Federico Arcelli, Edward P. Joseph
Serie Rossa: Economia – Quaderno N. 89 febbraio 2013
UNIVERSITÀ CATTOLICA DEL SACRO CUORE
PIACENZAI QUADERNI
Possono essere richiesti a:
Dipartimento di Scienze Economiche e Sociali, Università Cattolica, Via Emilia Parmense 84,
29122 Piacenza tel. 0523 599342. Oppure si può ottenere una copia dall’area di download del
Dipartimento al seguente indirizzo: http://www.unicatt.it/dipartimenti/ScEcoSoc/default.stm
ALL PAPERS PUBLISHED IN THIS SERIES ARE DOUBLE REVIEWED‘The Convergence Illusion’: Why Europe’s Approach to the Financial
Crisis Isn’t Working – and What to Do About It
Angelo Federico Arcelli*
visiting fellow, Center for Transatlantic Relations
School for Advanced International Studies (SAIS)
Johns Hopkins University, Washington, DC
Edward P. Joseph
senior fellow, Center for Transatlantic Relations
School for Advanced International Studies (SAIS)
Johns Hopkins University, Washington, DC
Abstract
The crisis of sovereign debt in Europe revealed the limits and anomalies of the Euro, the common
currency for 17 European Union member states, which participate in the EU common market but are
denied independent monetary policies, even during a period of severe economic contraction and
illiquidity. Such rigidity has had some perverse effects, such as, in the wake of divergent pressure on
interest rates, that capital flight from weak to strong countries, exacerbating political differences within the
EU, even to the point of calling the Union’s continued existence into question.
The solution to the sovereign debt crisis and the restoration of confidence in the European project are
critical for the long term stability and economic growth of the region, and for the stability of worldwide
financial market. But such a solution lies not only in Eurozone members’ hands, rather, particularly in this
moment, in US possible support and long term strategy. The opening to a renewed Transatlantic bond,
eventually extended to a broader common market or at least a trade agreement, jointly with a clear path
to a growing political integration of Europe may be the ways for solving credibly all market doubts on the
future of Euro and the stability of financial markets.
Reversing the most serious adverse trends – as opposed to temporizing with ‘crisis response’ – requires
a thorough understanding of the origins of the crisis and the continuing efforts to contain it, in Greece,
including the prospects for stemming contagion to Spain and Italy. This paper explores those issues and,
as well, the continuing political difficulties that plague European policy making. The implications for the
US economy and global financial stability of continuing failure by Europe to confront difficult truths -- and
to take concerted action -- are enormous.
Keywords: Convergence, Economic Growth, Globalization, Growth, US, EU.
JEL Classification: F620 Macroeconomic Impacts of Globalization
*Corresponding author:
Angelo Federico Arcelli, PhD
Center for Transatlantic Relations
School for Advanced International Studies (SAIS)
Johns Hopkins University, Washington, DC
1717 Massachussets Avenue, NW – Suite 525
20036 Washington, DC
United states of America
e-mail: angelo.federico.arcelli@jhu.edu
Acknowledgement: Edward P Joseph is responsible for paragraphs 2, 3 and 5; Angelo Federico Arcelli
paragraphs 1, 4 and 6 and conclusions are shared.
1The anomalies of Euro and the ‘Convergence Illusion’
When the Euro was devised in April 1998 (and then circulated as a paper bill as of January
1st, 2002), it seemed as if the entire European project had taken a giant, irreversible leap
forward. The immediate task for the single currency was to supplant the role of the
Deutsche Mark, the benchmark currency known for its strength and stability. And this core
aim was achieved. The Euro became the reference currency for much of Europe.
However, as we now know, the Euro indeed represented a giant leap, not just towards
inexorable European integration, but, rather, into a world of financial make-believe. Driven
by political considerations, the architecture for the Euro turned out to be as imaginary as the
bridges and buildings that are fictional decorations for the paper currency itself.
The architects behind the currency are perhaps better thought of as ‘visionaries’ since the
entire project rested, truly, on a common ‘vision’ – in the sense that Joan of Arc had a vision
more than, say, Jean Monnet. They understood that, at its essence, a national currency is a
storehouse of value that, on the open market, reflects the strength or weakness of a given
economy, as well as its trade balance and the sum of its fiscal and monetary policies. What
they did not understand (or, more accurately, pretended not to understand) is that a
common currency comprising highly variegated economies could not survive without the
institutions to constrain (or at least compensate for) substantial and systematic differences
in fiscal and monetary policy as well as in macroeconomic performance.
Instead, the Euro’s visionaries invested in what we can call, ‘the convergence illusion.’ This
is the theory under which the Euro would automatically force member countries to converge
economically, by de facto neutralizing economic policy leverage for governments. The
thinking was that having a commonly valued currency would somehow over time force
governments to cohere fiscal policy. Markets implicitly accepted the convergence theory
and sovereign spreads between Eurozone countries were, in fact, quite limited for a
decade. In reality, the convergence magic did not materialize. Instead, several weak
Eurozone countries have run unsustainable deficits and/or failed to make structural reforms
that would have make convergence sustainable. The result has been unending crisis.
The ‘visionaries’ would point out that Eurozone members also pledged, under the ‘European
Stability Pact’ to keep deficits within a narrow range of GDP. Alas, these overoptimistical
theorists seem not to have contemplated that anyone would violate these pledges, as
sanctions were only optional. In reality, sanctions have never been imposed for those who
violated their pledge. Violations soon became tolerated and therefore, widespread. Even the
relatively parsimonious Germans have flouted these rules.
In recognition of the failure of the Stability Pact, 25 of 27 EU countries, including all
Eurozone countries, agreed in March, 2012, agreed to a new “fiscal compact” that would
force those countries with a debt to GdP ratio above 60% to arrive to a structural deficit of
maximum 0.5% and to bring back the debt/GdP ratio to 60% within 20 years. Despite the
long time-frame, even this revised mechanism will prove challenging to achieve. One of
Europe’s largest economies, Italy, for example, currently has a debt to GdP ratio of 126%,
requiring the imposition of severe austerity with little prospects for growth.
2The Euro is a reference currency which has no single Treasury behind it, which is another
visionary flight of fancy. This means there is no single governmental entity to monitor the
impact of government policy on exchange rate stability. Instead, the Euro relies on a Central
Bank with no mandate for autonomous economic policy. The ECB is anchored to a defined
inflation target, and its monetary instruments are narrowly constrained by treaty, confining it
to the role of ensuring the stability of the system rather than an instrument of economic
support through monetary policy (like the Fed). Fiscal policy in Europe is left up wholly to
national governments leaving Brussels with no say whatsoever.
Sustainability of the Euro also depends on maintaining balanced competitiveness of all
countries in the Eurozone. In theory, in a single currency area comprising several states,
rising unit labor costs in a country would lead to a decline in exports, and therefore, a
decline in economic output. Unfortunately, here the theory has worked too well; chained to a
common, strong currency, underperforming Eurozone economies can no longer achieve
trade balance by simply allow their currencies to cheapen on international markets. At the
same time, with a single, strong currency supporting commerce in both strong and weak
economies, imports of value added products from strong countries like Germany have
remained artificially high, further aggravating trade imbalances in less competitive Eurozone
countries.
The burden of past public debt and inefficiencies would have been a major impediment to
launching the Euro, but only if the market had priced legacy debt appropriately. Instead, the
market simply bought into the "convergence illusion” from 1998 to 2008, accepting
intuitively that a common currency would impose common competitiveness and, thereby,
common fiscal discipline. Likewise, holders of Greek and similar sovereign debt, similar in
their behavior to purchasers of US sub-prime mortgage derivatives, simply assumed that
European growth would continue inexorably, facilitating convergence and making the debt
burden manageable even in higher debt economies.
In turn, the belief in convergence kept borrowing spreads quite narrow, limited to a few
basis points (the 10-yrs difference between Germany and Greece was in the area of 25-30
bps). The borrowing honeymoon was sustained with another seductive theory: that all
Eurozone member states would only need a bit of time and some resources to adjust their
inefficiencies and manage imbalances in public finances. While Germany embarked on
difficult structural reforms in the early 2000s, other Eurozone members squandered the
adjustment period, failing to make any dent on state obligations to pensioners or seriously
addressing structural costs. For years, national budgets simply continued on a path
unsustainable in the long run, without significant effort to reduce labor costs or increase
labor flexibility and mobility. In short, the Euro was a currency launched without an
adequate institutional foundation, the policy superstructure or the political commitment to
sustain its value.
1. The crisis and its effects
The failure of Lehman Brothers in 2008 ignited the financial crisis by generating a chain
reaction of near-panic as creditors suddenly were left wondering what the value of debt on
their books really was. Lehman, and the related subprime crisis in the US, triggered a
financial crisis from which Europe (unlike the US) has not begun to recover.
3European governments, like the US, had to intervene urgently to support the banking
system, but this move simply opened another facet to the Euro crisis. From the outset,
instead of acting in concert and continuing on the path of greater financial and political
union, each Eurozone member tended to support its ‘own’ banks. Support for banks since
then has remained a mostly national, uncoordinated and spasmodic emergency activity
(utilizing different tools, such as a state guarantee in Germany and state-funded capital
increases in the UK and other states.)
With few exceptions, the aim of emergency response has been to put out the fire in one
state, without regard to the flames licking the rickety frames of other countries’ banks. This
‘beggar my neighbor’s bank’-policy made it painfully clear to the market that when it came to
risk there was, in fact, no ‘Union’ at all, but rather a highly variegated conglomeration of EU
countries. This also resulted in the end of the convergence illusion, as markets now priced
in national risks as opposed to Europe-wide or the Eurozone as a whole.
To cope with the acute recession in 2009 that followed the financial crisis, Eurozone
countries let public deficits grow. This led to a generalized pressure on public debt costs,
particularly in the weak countries (the “PIGS”), underscoring the notion that there was no
“Eurozone” risk at all, but rather individual sovereign debt risks. The eventual default of a
sovereign Eurozone borrower was no longer an unthinkable event.
As bond holders increasingly ‘thought about the unthinkable,’ spreads suddenly began to
rise between those heavily burdened with sovereign debt and those less indebted. This has
led to a new vicious circle, where the debtor country, punished by the market, has had to
make restrictive economic reforms and raise taxes to cope with balance sheet imperatives,
so that it can attempt to restore its “credibility” as a sound borrower. But embracing austerity
has stunted growth, aggravating the recession, resulting in further punishment from bond
markets, with even higher spreads. In turn, higher spreads trigger more restrictive measures
and then a deeper crisis. In short, austerity, contrary to its very purpose, has generally failed
to bring down spreads, or where it has, has failed to do so commensurate with the
associated drop in economic activity.
Higher spreads and fear of sovereign defaults also led to another perverse effect, which is
that substantive financial and investment capital flows started to go from weak to strong
countries of Eurozone further aggravating the disparity between Eurozone economies by
providing access to lower cost financing to industry in northern Europe while frequently
penalizing industry with higher interest rates in southern, indebted economies. This may
suggest that normal self-equilibrating dynamics which should characterize a well
(economically) integrated are not functioning in the Eurozone. Such imbalances also
favored speculative allocations with shorter term horizon rather than productive investment
and growth, implying that Europe is still far from being perceived as economically
integrated.
In sum, the assumed process of convergence instead became “divergence.” Richer
Eurozone states benefited from the crisis as the single currency prevented any competitive
devaluation, sustaining their high value exports, while continuing to afford them access to
the bond market at favorable rates. Meanwhile, the exact contrary was happening in the
weak economies, as they entered the vicious circle of fear and austerity leading not to
4confidence, but more fear. Divergence has had a political dimension as well, with richer,
Northern countries sneering at their ‘lazy, profligate’ Southern neighbors, further sapping
the cohesion necessary to make far reaching political reforms that are, ultimately, the only
salvation for the Eurozone. As Hughes-Hallett and Martinez Oliva suggest, “the European
crisis should perhaps be seen as collateral damage from political disagreements over the
real purpose of EMU and European integration.’ 1.
2. Relevance of the Greek case
The coup de grace has been reached in Greece, where the country’s ‘brand’ has become
so tarnished that even productive Greek enterprises are now penalized by lenders with
higher interest rates. The problem has become so acute that some of Greece’s largest and
most profitable companies are re-locating, further damaging the country’s prospects for
recovery.
Greece, of course, is where the sovereign debt crisis first exploded. The weaknesses of the
Greek economy were concealed by artful maintenance of public finance accounts aimed at
satisfying pre-Euro convergence criteria. The actions taken so far by EU, ECB, IMF (‘the
troika’) and other major players have not afforded a decisive solution to Greece’s problems,
rather they have been temporary crisis-aversion measures. The troika’s policies have
mostly been based on over-optimistic scenarios about the ability of the Greek economy to
recover, fueling overly optimistic assessments of the sustainability of its public debt burden.
Since the onset of the crisis (2009), the ‘troika’ has been unable to devise a comprehensive
plan to address the Greek crisis. This lack of a conclusive solution has left markets with the
impression that the only strategy is, in fact, just to buy time so that European banks (heavily
exposed to Greek debt), would avoid the onslaught that would be triggered by a sudden
default. To date, the total nominal cost of bailouts and “haircuts” to support Greece is well
over 300 billion in Euros.
So what has been won with this staggering cash infusion and debt relief? To date, Greece
has failed to get on a sustainable path. Although the yawning budget deficit has closed, and
unit labor costs have gone down, fundamentally, there is still lack of confidence of the
sustainability of Greece’s debt burden. Austerity and the lack of liquidity continue to depress
output, fueling speculation that, in the end, Greece might yet exit the Euro. Once-optimistic
forecasts about recovery and long term sustainability of the restructured debt have not been
fulfilled. Instead, Greece continues in recession, now lasting over four years and expected
to continue.
The continuing bailouts in Greece have been far more costly than a prompt, effective
intervention in 2009-10 (when German electoral issues prevented more concerted action).
The case of Ireland is illustrative. In Ireland the crisis was mainly the result of the banking
sector. But Ireland attracted the intervention of the United Kingdom (which is not a
1
See Andrew Hughes-Hallett and Juan Carlos Martinez Oliva, “The Importance of Trade and Capital Imbalances in the European
Debt Crisis”, January 2013.
5Eurozone member) which saw its own national interests at stake. By contrast, French and
German interests in Greece have been reflected by onerous austerity measures.
On 13th December 2012, EU finance ministers approved another bailout of EURO 49.1b to
Greece to inject new funds and in part as forgiveness packages on interest for existing
bailout debts. The decision came after Greece bought back, at a heavy discount, EURO
31.9b of its bonds. Both EU and Greek leaders have celebrated this decision, claiming it
vindicates the current policy and proves that indeed solidarity, not ‘go it alone’, is the
dominant trend in Europe. The celebrations are premature because the bulk of the package
had already been agreed to and had been suspended pending enactment of reforms by
Greece. Moreover, the package includes stretching out some targets for debt to GdP ratio
(still a daunting 120%) to be reached by Greece only by 2022. Even in the wake of the
jubilant announcements there are voices claiming that the only “final” way out of the Greek
crisis is substantial debt forgiveness (which is hard to negotiate and will be difficult for
creditor countries to accept, in part because it will create a dangerous precedent in other
cases.)
Indeed, given the continuing tenuousness of the situation, and the lack of a convincing
strategy (or even the concerted political will to devise one), there is still the temptation to
pursue a ‘managed’ Greek exit from the Euro as a panacea. Unfortunately, the architecture
of the Eurozone makes such an exit practically impossible as the treaty did not define any
mechanism to accomplish such a step. Adopting the Euro was meant to be an irreversible
step, just as forward movement on continued European integration was thought to be
irreversible. In addition, even if a mechanical means existed for Greece to exit the Euro, no
credible financial means have yet been devised to arrest contagion (the anticipated panic
that would ensue as banks which have substantial exposure to Greek debt -- and even
banks that don’t -- face anxious depositors and creditors who will doubt the solvency of
these institutions.)
To create an exit mechanism now would therefore incur severe risk. For a weak country
whose currency is expected to sharply devaluate after the exit, one can anticipate sudden
outflows of money or (private and public) defaults. Paradoxically, the only countries that
could manage an exit are the strong ones -- whose export-oriented economies benefit from
the Euro and whose economies would eventually suffer from a higher value, non-Euro
currency. In short, rich and poor, indebted and parsimonious, bloated and reformed,
Eurozone countries are now tethered to one another.
3. The “irreversible” currency and clashing interests in the EU
At each critical moment of the current crisis, it may have appeared that Europeans have
stepped up and done what was necessary to avert collapse. However, the measures taken
have served mainly to stave off collapse for a short period, leaving markets unconvinced of
the sustainability of current debt burdens. The most recent example is the 14 December EU
Summit decision to place the Eurozone’s biggest banks under ECB supervision. While a
significant step forward, the agreement still awaits approval by European parliaments. More
to the point, European leaders left other steps unaddressed such as providing the ECB with
the ability to insure public deposits and to dissolve or resuscitate failing banks. Leadership
has been glaringly absent, as difficult decisions only seem to come when politicians are
6faced with the abyss; indeed, the lack of ambition at the 14 December Summit was due
precisely to the fact that the immediate pressure on the Euro seemed be easing.
Complicating resolution of the problem is the fact that the central players (Germany on the
political side, and the ECB, as the central bank, with all the limits of its mandate) cannot
assuage market anxiety with finality by proclaiming their intention to always and
unconditionally come to the Euro’s rescue. If they do so, they incur moral hazard of relieving
pressure on (and thereby leverage for) leaders in debtor countries to commit and achieve
painful economic reforms to their publics, which, in fact, have only been partially sold.
Unfortunately, markets are much less forgiving when it comes to the logic of moral hazard;
the less clear and express the commitment of the ‘troika’ (the EU, the ECB, and the IMF) to
defending the Euro, the more bearish and jittery markets remain.
As for the ECB, unlike the US Federal Reserve, it has strict constraints under its governing
treaty and therefore cannot conduct quantitative easing operations that are an antidote to
disinflation. The ECB instead tried a surrogate, the two LTRO (“Long-term refinancing
operations”, up to three years liquidity supply to Eurozone banks for a total of around Euro 1
trillion) deals for the commercial banking sector in December 2011 and February 2012. This
approach has also proven, to be only of temporary relief. Subsequent announcements by
the ECB about its readiness to back a “non-reversible” Euro, including by its President
Mario Draghi have been made, but the markets do not seem to be completely convinced.
Recent reduced pressure on Euro seems more the consequence of concerns for US
problems (fiscal cliff, debt ceiling) than the buying of a new phase achievement.
In general, interventions in nearly all cases have not been timely, not been well coordinated
and, therefore, in the end, were more costly. The two stability mechanisms created (the
European Financial Stability Facility, “EFSF” and the European Stability Mechanism, “ESM”)
to date have had a marginal impact (ESM is a brand new mechanism.) As the rule is that
support under these facilities must be requested and is subject to strict conditions,
governments would accept them only as last resort. Accepting such a facility would imply
ceding a degree of sovereignty, which is both politically and administratively distasteful for
any government. The common financial and banking supervisory agreement is a good step
forward, but remains, for the time being, limited to big “systemic” banks, leaving most
financial players (the ones with less than EURO 30bn of total assets) under the supervision
of national central banks.
The continuing jitters have had at least one positive impact. The EU has achieved some
significant reforms which would have been unthinkable at such a pace without the crisis.
The need for more responsible fiscal posture and a focus on improving competitiveness has
become the new policy consensus across European governments – although segments of
the public, unhappy with increased taxation and reduced social spending do not share in the
consensus.
While there are different interests, objectives and political environments across Europe, the
crisis may lead to even deeper economic reforms, much more in the direction of
competitiveness and in the favor of business and industry. The price for this is a reduction in
the size of the European social welfare state, a step that no government in Europe could
have even attempted in pre-crisis times.
74. What are the real obstacles to a conclusive solution
Tthe durability of this reform consensus is in jeopardy without fundamental overhaul of
financial and fiscal governance in Europe, i.e. completing the institutional architecture that
any sound common currency requires for stability. Without true centralized constraints on
national spending, and a trans-European treasury and budget controller, there will never be
sufficient confidence that Europe will either manage its escape from this crisis, or manage
to prevent and address further shocks. Unfortunately, there is an array of obstacles
standing in the way of fundamental reform:
First, there is no significant, common long term political viewpoint or strategy to deal with
crisis; instead, political leaders are simply being carried along, reluctantly taking decisions
that are ‘forced’ on them by the market, i.e. bond holders, and not because of any
affirmative belief that austerity and ‘rushed competitiveness’ will actually make debtor
economies more competitive. Without a consensus on what kind of reform is necessary,
there is little hope of launching a productive debate.
Second, the goal of a fiscal and financial union is stymied by the very reforms themselves,
which involve transferring even more national authority to Brussels, something that few if
any European electorates will support. Due to the crisis and its consequences (including
tough social state reforms), large majorities of Europeans have lost confidence in the
capacity of EU institutions, and governments acting together, to address the crisis. The
belief that ceding more power to Brussels and related EU institutions would create more
prosperity and development is waning.
Third, taking such breathtaking steps will require political vision and courage, elements that
are consistently absent in Europe. Only the imperative of crisis could supply the necessary
courage to take such steps. However, as the immediate crisis subsides to a degree with
each successive bailout (although leaving the underlying problem intact), so does the
intense, verge-of-a-catastrophe pressure necessary to goad European leaders into taking
the political risk that fundamental reform entails.
Fourth, national interests still prevail over common European ones. Since the Euro crisis
exploded, EU national governments, which are still the key decision makers, have privileged
their national interest, failing to demonstrate a credible will to a long term vision of Europe.
Germany and the Nordic countries do not want a political union that means formalized
sharing of debt. This is because they still suspect that indebted countries (in the South, plus
Ireland) have not made structural and other reforms, so that even if there were a
mechanism for ‘political union’, they would effectively be underwriting the bonds of countries
which will continue irresponsible borrowing practices, amidst bloated government budgets
and regulation-heavy, union-favorable private sectors.
Even if Germany, Finland, Austria, the Netherlands and few others overcame both their own
skepticism and the reticence of their publics necessary to support political union, it is difficult
at the moment to devise a supra-national European Treasury and budget controller in
whose the power of EU states could acquiesce. An EU ‘Treasury’ with the powers
effectively to control budgets and fiscal policy/practice across the EU space (or even within
the Eurozone) would threaten the national sovereignty of the constituent states (which the
8publics/voters would unlikely support in referenda), and would also threaten the power of
political leaders (which Presidents and Prime Ministers do not relish.).
Fifth, competition for European leadership between France and Germany still dogs Europe,
and complicates the quest to put European interest above the national interest. Germany is
unwillingly to take any (costly) long term commitment to defending the Euro without
leverage on the “final word” in political decisions. This is what lies behind the “controls”
debate and the eventual creation of an EU controller with powers on national budgets. In
fact, this controller’s powers would likely mirror the lines of the ECB treaty, giving a
prevalent role to economic sustainability issues and de facto reducing further any room for
national states independent policies. In the end, it would be a major step towards political
union, but more aligned to the German view of how that union should proceed. At the
moment, it is unclear what the main players (led by Germany and France) really want.
Nobody seems to have a clear vision (or to be willing to communicate it) of the long term
future for Europe.
So, what we are left with is a troika-driven policy (EU, ECB, IMF) which is constrained, in
the end, by a few member states (Germany first, but not alone) which are the major source
of financing for bailing out indebted countries. And Germany is adamant that the indebted
make fundamental structural reforms, as the price for their financing. In the meantime, as
social pressures occasionally mount in Greece, Spain, et al, there is push back, or simply
foot dragging (in Greece especially) as some cuts are made, but no real structural reforms
are achieved. In short, it is wrong to believe that Europe is ‘dealing effectively with the crisis’
Instead, Europe and the troika are playing a dual game, continuing to push hard for reform,
while doling out bail outs at the last minute in order to keep the markets/creditors at bay.
5. Beyond Greece: The Spanish and Italian cases, and the ‘war of currencies’
Looking forward, it will probably not be Greece that will likely trigger a Euro-wide collapse,
because the amounts needed to cope with a Greek crisis are sustainable. In short, Greece
is small enough that it can be saved from the outside. Spain is a much more serious
potential ‘domino’ that could cause a chain reaction. Although its debt-to-GDP ratio is
relatively sustainable at 70% (compared to 170% in smaller Greece), the Spanish economy
is much larger than Greece’s and the crisis in Spain, a construction bubble that has
devastated the real estate and construction sectors, appears intractable. With one
Spaniard in four unemployed, Madrid’s capability to use the tax levy to cope with public
needs is drastically reduced.
The ultimate Euro crisis would be triggered if contagion arrives to Italy, an economy that is
literally ‘too big to fail.’ It is commonly understood that if Spain were to sink, then eventually
sufficient resources for a bail out or at least massive support could be mustered. But the
same is not for Italy, which is close to two times larger in terms of GDP. And contagion is
plausible given how inter-linked the Italian and Spanish economies are and that the market
would clearly understand that no rescue plan is possible should a real crisis explode.
Nevertheless, Italy is in better shape than Spain: its economic backbone is more diversified;
its unemployment rate a more manageable problem (at 10 to 11%), and finally, business,
banking and labor in Italy grasp that after Spain, there is no safety need big enough to save
the Italian economy, yielding much-needed sense of realism in Rome, Milan and Torino.
9In the end, if one wants to prevent the unthinkable in Italy, the task is to prepare for the
possible in Spain. Preparation should be undertaken well before Spain might arrive at the
point of bailout, as the markets will perceive that whatever effort made to support Spain
would dry up all resources for potential crisis in Italy (whose public debt is over EURO 2
trillion, i.e. too big to bail out).
Complicating these preparations, indeed aggravating the risks of contagion, is an incipient
‘war of currencies’ due to lack of coordination among leading central banks. The US Federal
Reserve is determined to keep interest rates low at least until 2015. However, the ECB
lacks the Fed’s tools, such as ‘quantitative easing’ (purchase of Treasury bonds) to effect
low interest rates (and thereby lower exchange rates.) This leaves the Euro relatively
overpriced, further weighing down exports not just from strong economies like Germany’s,
but weaker ones as well.
Bereft of the array of monetary policy tools available to the Fed, the ECB’s Governing Board
launched a new financing mechanism on 2 August 2012: the “Outright Monetary
Transactions” (OMT) program 2. This permits the ECB, under certain conditions, to purchase
the secondary market sovereign bondS issued by certain Eurozone member-states. Such
program is activated only upon the request of the bond-issuing Eurozone government, and
provided the government agrees to ensure domestic economic measures meant to facilitate
a stabilization. As with the Fed’s quantitative easing, the aim is to lower borrowing costs. In
this way, the OMT would boost confidence in the Euro, encouraging the private market to
buy up remaining bond issues in the market.
The OMT has already had an ‘announcement effect’ lowering significantly sovereign
spreads of Italy and Spain over Germany. Nevertheless, the actual employment of the OMT
is subject to question. The ECB’s Governing Council was split over the decision to adopt the
OMT and high level German officials, ever anxious about underwriting the debt issues of
irresponsible Eurozone governments, expressed publicly their opposition. Some economists
have voiced their doubts about OMT's effectiveness in addressing the European debt crisis,
arguing that the program will fail because it doesn’t address the core problem 3 or the sharp
recession in Southern Europe and the need to have a budget expansion – all rejected by
Northern countires.
In the end, the Euro crisis remains a structural problem and needs a comprehensive
response, including resolving questions over the ECB’s ability to manage independently
monetary policy.
6. Towards a Trans-Atlantic Solution
The solution to the sovereign debt crisis and the restoration of confidence in the European
project are critical for recovery in the US and the stability of worldwide financial markets.
For the moment, even as the UK prepares to hold a referendum on its continued
2
See "Technical features of Outright Monetary Transactions", ECB Press Release, 6 September 2012. In fact OMTs are not the
same as Quantitative Easing operations. These latter have a monetary policy impact, as the central banks may buy bonds and, by
doing so, inject liquidity into the banking system, so expanding the monetary base. The ECB has made clear that the principle of full
sterilisation will apply, and it will absorb back the money injected into the system.
3
See the article by Bill Mitchell on September 11th, 2012:”The ECB plan will fail because it fails to address the problem”
(http://bilbo.economicoutlook.net/blog/?p=20935).
10membership in the EU, most European leaders have ruled out the possibility of a
‘contraction’, or reduction in the size of the Union. The hope is that a Greek exit from the
Eurozone will be forestalled, and that Italy and Spain will avert financial panic.
Even if that hopeful scenario materializes, the structural differences between Eurozone
economies will remain. Only fundamental institutional reform can address that. However,
Europe has proven itself, repeatedly, incapable of achieving that.
The implications for the US economy of Europe’s persistent inability to address its problems
except by ‘buying time’ are enormous. An exogenous shock or miscalculation or inability to
come to terms at another critical moment, and contagion could set in and spread across the
Atlantic, shuttering hopes for pick up in the US recovery. Given the limited ability of EU
institutions or European leaders to come to grips with the fundamentals, US leadership
remains crucial. Perhaps the only way to restore a credible vision for the future of Europe is
through the Trans-Atlantic partnership, including:
1. A renewed US commitment to a reinforced economic cooperation area.
2. A US-EU Comprehensive Free Trade Agreement. A trade deal would be the most
immediate way of injecting confidence.
3. For the medium term, an embryonic, tightened Trans-Atlantic (the US, Canada and
the EU) economic area.
4. Given the implications that an EU-US trade agreement would have on the long term
exchange ratio between the US dollar and the Euro, a wholesale review of the
Bretton Woods structure would be timely.
11Elenco dei quaderni già pubblicati
Serie Rossa: Economia
Serie Gialla: Sociologia e Diritto
Serie Azzurra: Economia Aziendale
Serie Blu: Metodi quantitativi e Informatica fino al n. 7
Serie Verde: Metodi quantitativi e Informatica dal n. 8
1. Fully Funded Social Security and Allocation of Resources: The Case for An
Environmental Motive in A Two Countries Overlapping Generations Model
Domenico Moro, N. 1 dicembre 2002, Serie Rossa, Economia.
2. What Money Can’t Buy: The Relevance of Income Redistribution for Functioning
Levels
Sara Lelli, N. 2 febbraio 2003, Serie Rossa, Economia.
3. Management Control Transformation: Perspectives from the Information Economy
Antonella Cifalinò, Laura Zoni, N. 3 marzo 2003, Serie Azzurra, Economia Aziendale.
4. Firm size distributions and stochastic growth models: a comparison between ICT and
Mechanical Italian Companies
Lisa Crosato, Piero Ganugi, Luigi Grossi, N. 4 marzo 2003, Serie Blu, Metodi quantitativi
e Informatica.
5. Lo sviluppo del CANTONE di SAINT-LAURENT-DE-CHAMOUSSET (Regione
Rhone-Alpes)
Barbara Barabaschi, N. 5 marzo 2003, Serie Gialla, Sociologia e Diritto.
6. The role of transport infrastructures for cohesion and development of an enlarged
Europe
Odile Heddebaut, N. 6 maggio 2003, Serie Rossa, Economia.
7. Alcuni risultati su prodotto di Hadamard, matrici binarie e sistemi lineari
Mario Faliva, Eugenio Venini, N. 7 giugno 2003, Serie Blu, Metodi quantitativi e
Informatica.
8. La Distribuzione della Dimensione delle Imprese: Processi Stocastici, Distribuzioni
Asimmetriche e Concentrazione Industriale.
Lisa Crosato, N. 8 giugno 2003, Serie Verde, Metodi quantitativi e Informatica.
9. Modeling a Regional Economic System: the Case of Lombardy
Maurizio Baussola, N. 9 giugno 2003, Serie Rossa, Economia.
10. Innovation and Employment: Evidence from Italian Microdata
Mariacristina Piva, Marco Vivarelli, N. 10 ottobre 2003, Serie Rossa, Economia.
11. Investments, Firm’s Insiders and Financial Structure
Marco Mazzoli, N. 11 ottobre 2003, Serie Rossa, Economia.12. Industrial Firms’ Market Power and Credit Market Oligopsony in “Bank-Oriented”
Financial Systems
Marco Mazzoli, N. 12 ottobre 2003, Serie Rossa, Economia.
13. Sviluppo Locale e Capitale Sociale: il Caso delle Regioni Italiane
Paolo Rizzi, N. 13 febbraio 2004, Serie Rossa, Economia.
14. Teoria dei Processi Imitativi ed Applicazioni Economiche
Marco Arnone, N. 14 febbraio 2004, Serie Rossa, Economia.
15. Multilevel Flexible Specification of the Production Function in Health Economics
Luca Grassetti, Enrico Gori, Simona C. Minotti, N. 15 aprile 2004, Serie Verde, Metodi
quantitativi e Informatica.
16. The Persistence of Profits, Sectoral Heterogeneity and Innovation
Eleonora Bartoloni, Maurizio Baussola, N. 16 maggio 2004, Serie Rossa, Economia.
17. Aggregate Demand and Supply and the Labour Market within a Regional
Econometric Model
Laura Barbieri, Maurizio Baussola, N. 17 giugno 2004, Serie Rossa, Economia.
18. Firm Size Distribution with Shrinkage in a mature Italian Industrial District
Piero Ganugi, Lisa Crosato, Fabrizio Cipollini, N. 18 giugno 2004, Serie Verde, Metodi
quantitativi e Informatica.
19. Alcune considerazioni non ideologiche in tema di privatizzazione di alcuni servizi
locali, struttura produttiva e competitività
Marco Mazzoli, N. 19 settembre 2004, Serie Rossa, Economia.
20. Il Triangolo Competitivo: Innovazione, Organizzazione e Lavoro Qualificato
Marco Vivarelli, Claudio Piga e Mariacristina Piva, N. 20 settembre 2004, Serie Rossa,
Economia.
21. L’adozione di nuove tecnologie in Europa: i fatti stilizzati e il posizionamento
competitivo dell’Italia
Maurizio Baussola, N. 21 settembre 2004, Serie Rossa, Economia.
22. Adverse Selection and Moral Hazard in the Annuity Markets
Silvia Platoni, N. 22 settembre 2004, Serie Rossa, Economia.
23. Mandatory Social Security with Social Planner and with Majority Rule
Silvia Platoni, N. 23 settembre 2004, Serie Rossa, Economia.
24. Cluster identification: policy implications of the evolution of the cluster concept in the
context of globalisation and European enlargement
Francesco Timpano, N. 24 dicembre 2004, Serie Rossa, Economia.
25. Les Sociétés d’Économie Mixte dans la Gestion des Services Publics Locaux en Italie
Pio G. Rinaldi, N. 25 dicembre 2004, Serie Gialla, Sociologia e Diritto.26. Financial Markets, Technological Innovation, Investments in R & D, and public policies
Marco Mazzoli, N. 26 dicembre 2004, Serie Rossa, Economia.
27. Sostenibilità e Riduzione del Debito Estero per i Paesi Poveri
Marco Arnone e Andrea F. Presbitero, N. 27 febbraio 2005, Serie Rossa, Economia.
28. Lo schema di analisi della relational view per analizzare le relazioni di sub-fornitura
sotto il profilo della specificità degli asset. Il caso delle imprese del settore della
meccatronica
Roberta Virtuani, N. 28 marzo2005, Serie Azzurra, Economia Aziendale.
29. Gestione del Territorio e delle Risorse Umane nell’Amministrazione Provinciale di
Padova – La qualità dell’azione amministrativa quale fattore di promozione dello
sviluppo locale.
Barbara Barabaschi, N. 29 marzo 2005, Serie Gialla, Sociologia e Diritto.
30. The Persistence of Profits: An Ordered Probit Approach
Eleonora Bartoloni e Maurizio Baussola, N. 30 marzo 2005, Serie Rossa, Economia.
31. Variabili Socio-Politiche e Investimenti in America Latina
Alessandra Conte e Marco Mazzoli, N. 31 settembre 2005, Serie Rossa, Economia.
32. Analyzing International Competitiveness at the Firm Level: Concepts and Measures
Donatella Depperu e Daniele Cerrato, N. 32 ottobre 2005, Serie Azzurra, Economia
Aziendale.
33. External Debt Sustainability: Theory and Empirical Evidence
Marco Arnone, Luca Bandiera e Andrea F. Presbitero, N. 33 dicembre 2005, Serie
Rossa, Economia.
34. Macroeconomic Effects of Deregulation in Goods Market with Heterogeneous Firms
Marco Arnone e Diego Scalise, N. 34 dicembre 2005, Serie Rossa, Economia.
35. Small Area Estimation and the Labour Market in Lombardy’s Industrial Districts: a
Methodological Approach
Eleonora Bartoloni, N. 35 dicembre 2005, Serie Rossa, Economia.
36. A Cournot Duopoly Model with Complementary Goods: Multistability and Complex
Structures in the Basins of Attraction
Fernando Bignami, Anna Agliari, N. 36 gennaio 2006, Serie Verde, Metodi quantitativi e
Informatica.
37. Interactions between Nominal and Real Rigidities with Microfoundations, and
Monetary Policy
Marco Arnone, Diego Scalise, N. 37 febbraio 2006, Serie Rossa, Economia.
38. The Debt-Growth Nexus in Poor Countries: a Reassessment
Andrea F. Presbitero, N. 38 febbraio 2006, Serie Rossa, Economia.39. Aspetti economici ed energetici della cogenerazione e distribuzione del calore tramite
teleriscaldamento
Filippo Insinga, N. 39 maggio 2006, Serie Rossa, Economia.
40. International Retirement Migration: Legal Framework in European Union
Domenico Moro, N. 40 luglio 2006, Serie Rossa, Economia.
41. Testing exchange rate efficiency: the case of Euro-Dollar
Marco Mazzoli, Christian Barducci N. 41 luglio 2006, Serie Rossa, Economia.
42. R Functions and Exact Distribution of the Likelihood Ratio Test Statistics for Testing
a Null Hypothesis
Giorgio Pederzoli, N. 42 settembre 2006, Serie Verde, Metodi quantitativi e Informatica.
43. Panel Unit Root Tests: A Review
Laura Barbieri N. 43 ottobre 2006, Serie Rossa, Economia.
44. Panel Cointegration Tests: A Review
Laura Barbieri N. 44 novembre 2006, Serie Rossa, Economia.
45. David and Goliath: small banks in an era of consolidation. Evidence from Italy
Paola Bongini, Maria Luisa Di Battista, Emma Zavarrone N. 45 dicembre 2006, Serie
Azzurra, Economia Aziendale.
46. The link investments-finance: an empirical analysis on the Italian mechanic sector
Marco Mazzoli, Carlotta Cagnasso N. 46 maggio 2007, Serie Rossa, Economia
47. Il Fallimento del Conduttore nel Contratto di Leasing: Aspetti Finanziari e Giuridici
Filippo Insinga, N. 47 luglio 2007, Serie Azzurra, Economia Aziendale.
48. The Internationalization of Small and Medium-Sized Enterprises: The Effect of
Family Management, Human Capital and Foreign Ownership
Daniele Cerrato, Mariacristina Piva, N. 48 ottobre 2007, Serie Azzurra, Economia
Aziendale.
49. Unemployment Duration and Competing Risks: a Regional Investigation
Chiara Mussida, N. 49 ottobre 2007, Serie Rossa, Economia.
50. L’Investimento in Attività non Finanziarie nella Gestione di Grandi Patrimoni. Aspetti
Tecnici e Organizzativi.
Andrea Lippi, N. 50 luglio 2008, Serie Azzurra, Economia Aziendale.
51. Synchronization and on-off Intermittency Phenomena in a Market Model with
Complementary Goods and Adaptive Expectations
Fernando Bignami, Anna Agliari, N. 51 luglio 2008, Serie Verde, Metodi quantitativi e
Informatica.
52. Training Programs and Performance Measurement: Evidence from Healthcare
Organizations
Stefano Baraldi, Antonella Cifalinò, N. 52 luglio 2008, Serie Azzurra, Economia
Aziendale.53. Corporate Skills as an Incentive to R&D Investment
Mariacristina Piva, Marco Vivarelli, N. 53 luglio 2008, Serie Rossa, Economia.
54. School Attendance, Child Labour and Gender Bias in Morocco
Mario Veneziani, N. 54 dicembre 2008, Serie Rossa, Economia.
55. Is Corporate R&D Investment in High-Tech Sectors More Effective?
Raquel Ortega-Argilés, Mariacristina Piva, Lesley Potters, Marco Vivarelli , N. 55 luglio
2009, Serie Rossa, Economia.
56. Legalità, Istituzioni e Società
Marco Arnone , N. 56 novembre 2009, Serie Rossa, Economia.
57. Incentives, Moral Hazard and Adverse Selection
Silvia Platoni , N. 57 gennaio 2010, Serie Rossa, Economia.
58. Technological Capabilities and Patterns of Cooperation of UK Firms: a Regional
Investigation
Simona Iammarino, Mariacristina Piva, Marco Vivarelli, Nick Von Tunzelmann , N. 58
gennaio 2010, Serie Rossa, Economia.
59. Endogenous Labor Supply, Borrowing Constraint, and Credit Cycles
Anna Agliari, George Vachadze N. 59 gennaio 2010, Serie Verde, Metodi quantitativi e
Informatica.
60. Determinacy and Sunspots in a Nonlinear Monetary Model
Alessandra Cornaro, Anna Agliari N. 60 febbraio 2010, Serie Verde, Metodi quantitativi
e Informatica.
61. Cost-Benefit Analysis of Electric Demand-Side Management
Filippo Insinga, N. 61 febbraio 2010, Serie Azzurra, Economia Aziendale.
62. Trade, Technology and Skills: Evidence from Turkish Microdata
Elena Meschi, Erol Taymaz, Marco Vivarelli, N. 62 giugno 2010, Serie Rossa, Economia.
63. Analisi Dinamica della Sostenibilità dei Sistemi Locali
Antonio Dallara, N. 63 luglio 2010, Serie Rossa, Economia.
64. La Costruzione di un Indicatore di Sostenibilità dei Comuni Italiani Capoluogo di
Provincia: Metodologia e applicazioni
Antonio Dallara, N. 64 luglio 2010, Serie Rossa, Economia.
65. How Happy are the Albanians: An Empirical Analysis of Life Satisfaction
Julie Litchfield, Barry Reilly, Mario Veneziani, N. 65 luglio 2010, Serie Rossa,
Economia.66. Unemployment outflows: the relevance of gender, marital status and geographical location
across three European countries
Enrico Fabrizi, Chiara Mussida, N. 66 luglio 2010, Serie Rossa, Economia.
67. A Note on Two-Way ECM Estimation of SUR Systems on Unbalanced Panel Data
Silvia Platoni, Paolo Sckokai, Daniele Moro, N. 67 luglio 2010, Serie Rossa, Economia.
68. Young firms and innovation: a microeconometric analysis
Gabriele Pellegrino, Mariacristina Piva e Marco Vivarelli, N. 68 dicembre 2010, Serie Rossa,
Economia.
69. Mobilità del lavoro e disoccupazione: i nuovi scenari dell’economia italiana
Carlo Lucarelli e Chiara Mussida, N. 69 dicembre 2010, Serie Rossa, Economia.
70. Spillover diffusion and regional convergence: a gravity approach
Giovanni Guastella e Francesco Timpano, N. 70 dicembre 2010, Serie Rossa, Economia.
71. Technology, Trade and skills in Brazil: some evidence from Microdata
Bruno Cesar Araújo, Francesco Bogliacino, Marco Vivarelli, N. 71 Luglio 2011, Serie Rossa,
Economia
72. Innovazione e performance aziendali del settore delle macchine utensili in Italia
Fabio Campanini, Serena Costa, Paolo Rizzi, N. 72 Luglio 2011, Serie Rossa, Economia
73. Optimal inflation weights for EU countries
Daniela Bragoli, N. 73 Agosto 2011, Serie Rossa, Economia
74. Multivariate Transvariation Analysis and Currency Crises
Daniela Bragoli, N. 74 Agosto 2011, Serie Rossa, Economia
75. Industrial structure and the macroeconomy
Theoretical premises for a macromodel with social mobility, oligopoly, entry/exit and cycle
Marco Mazzoli, N. 75 Settembre 2011, Serie Rossa, Economia
76. The impact of R&D on employment in Europe: a firm-level analysis
Francesco Bogliacino, Mariacristina Piva, Marco Vivarelli, N. 76 Ottobre 2011, Serie Rossa,
Economia
77. Assessing the Impact of Public Support on Innovative Productivity
Alessandra Catozzella, Marco Vivarelli, N. 77 Novembre 2011, Serie Rossa, Economia
78. Innovation and Employment: Some Evidence from European Sectors
Francesco Bogliacino, Marco Vivarelli, N. 78 Dicembre 2011, Serie Rossa, Economia
79. The Option Pricing Theory for Forecasting the Corporate Failures: Some Evidences from
Italian Stock Market
Luca Di Simone, N. 79 Dicembre 2011, Serie Azzurra, Economia Aziendale.
80. The natural rate of unemployment and the unemployment gender gap
Maurizio Baussola, Chiara Mussida, N. 80 Dicembre 2011, Serie Rossa, Economia.
81. La governance interna delle università e il principio dell’autonomia universitaria
Pio G. Rinaldi, N. 81 Dicembre 2011, Serie Gialla, Sociologia e Diritto.
82. Financial performance in manufacturing firms: a comparison between parametric and
non parametric approaches
Eleonora Bartoloni, Maurizio Baussola, N. 82 Maggio 2012, Serie Rossa, Economia.83. A new Mobility Index for Transition Matrices
Camilla Ferretti, Piero Ganugi, N. 83 Settembre 2012, Serie Verde, Metodi quantitativi e
Informatica.
84. The Transatlantic Productivity Gap: Is R&D The Main Culprit?
Raquel Ortega-Argilés, Mariacristina Piva, Marco Vivarelli, N. 84 Settembre 2012, Serie Rossa,
Economia.
85. Financial Crisis and Corporate Diversification: Evidence from Acquisitions in Italy 2007-2010
Daniele Cerrato, Donatella Depperu, N. 85 Settembre 2012, Serie Azzurra, Economia Aziendale.
86. Entrepreneurship and Post-Entry Performance: the Microeconomic Evidence
Marco Vivarelli, N. 86 Ottobre 2012, Serie Rossa, Economia.
87. Rischio, Vulnerabilità e Resilienza Territoriale
Paola Graziano, N. 87 Novembre 2012, Serie Rossa, Economia.
88. A Regional Labour Market Model for Analyzing the Impact of a Recession
Laura Barbieri, Maurizio Baussola, Chiara Mussida, N. 88 Novembre 2012, Serie Rossa,
Economia
89. ‘The Convergence Illusion’: Why Europe’s Approach to the Financial Crisis Isn’t Working –
and What to Do About It
Angelo Federico Arcelli, Edward P. Joseph, N. 89 Febbraio 2013, Serie Rossa, Economia
La Redazione ottempera agli obblighi previsti dalla L. 106/2004 e dal DPR 252/2006Finito di stampare presso NORMADEC s.r.l. Centro Copie, Università Cattolica,
Via Emilia Parmense, 84, Piacenza, nel mese di febbraio 2013You can also read
