As EU leaders muddle through the eurozone crisis, the debate about its root causes continues. CEPS Director Daniel Gros argues in this Policy Brief that the debate is important if we are to understand how to prevent future crises. In his view, external debt is the key to the turmoil in European economies and that the focus on total public debt is therefore misleading.

This Commentary argues that the current crisis in the eurozone periphery is really about foreign debt, not sovereign debt and that the single-minded concentration of the EU and the IMF on fiscal adjustment in the EU periphery is misguided. For Greece, fiscal adjustment is undeniably the key issue. For Portugal, however, the key problem is the private sector’s continuing external deficit. Ireland is different again, as it has very little foreign debt and will soon run a current-account surplus.

This paper describes four key drivers behind the adjustment difficulties in the periphery of the eurozone:

The system for financing the EU today is on its last legs. Indeed, with the EU budget being predominantly financed by national contributions, member states attach great importance to what they get in return, which in the end affects the European principle of solidarity and makes every budgetary negotiation a potential arena for political blockage. The economic and financial crisis, with its corresponding increase in the public deficit of member states, has unfortunately worsened the situation.

In a new EuropEos Commentary, Stefano Micossi conducts a post mortem on the comprehensive economic policy package agreed at the March 24-25th European Council and finds that the new measures effectively complete the economic arm of economic and monetary union and promise an end to stagnation and dismal employment performance throughout the EU.
Stefano Micossi is Director General of Assonime, the Association of Joint Stock Companies incorporated in Italy; Professor of Economics at the College of Europe, Bruges and member of the CEPS Board of Directors.

The economic philosophy behind the Competitiveness Pact now before the European Council can be summarized by two hypotheses:
1. If we fix (relative?) wages, no external imbalances can arise since relative costs determine export performance.
2. Higher productivity always means more ‘competitiveness’, and is thus always useful to reduce divergences.
On first sight, this Commentary finds that both theses seem to make sense, but on closer inspection, neither corresponds to reality.

At the European Council on 11 March 2011, EU leaders agreed to the outlines of a new mechanism to deal with eurozone debt problems after the current mechanism expires in 2013. This Commentary argues that this mechanism is a continuation of the leaders’ preference for ‘tough talk and soft conditions’ and warns that the package is merely the next step down the slippery slope of EU taxpayers sharing the burden with Greek taxpayers.
Daniel Gros is Director of CEPS.
 

Europe’s leaders have promised to find by the end of this month (March 2011) a comprehensive package, not only to end the euro crisis, but also to preserve the stability of the euro for the future. In the view of CEPS Director Daniel Gros, they are unlikely to succeed, unfortunately, because most of the elements of the package on the table so far at least deal with the symptoms and not the underlying cause of the crisis.

Turkey can look forward to important opportunities with respect to the innovative products and services that the health sector can generate. With a growing call for health services due to the size of its population and expanding insurance coverage, its geographical proximity to world markets and technological infrastructure, Turkey is a significant source of demand for innovative products and services from the health sector.

The financial crisis has affected trust in national and European governmental institutions in different ways. This paper analyses the determinants of trust in the national and European institutions over the last decade and comes to the conclusion that inflation reduces citizens’ trust only when the economy runs smoothly. In times of crisis, citizens do not worry about inflation but rather about jobs and the effects of a recession.

The debt crisis that hit the eurozone last year forced European leaders to develop new solutions to deal with the crisis. In this CEPS Policy Brief, Paul De Grauwe asserts that these solutions have been misguided by the idea that sanctions should be imposed everywhere in the system. He argues that too much emphasis was put on designing punishment mechanisms to deal with the crisis and to prevent future ones and that a greater role should be given to forgiveness.
Paul De Grauwe is Professor of Economics at the University of Leuven and Senior Associate Research Fellow at CEPS.

For the second time in a decade, central banks around the world have responded to the collapse of an asset bubble by moving aggressively to ease monetary policy, a tactic explicitly justified by the need to avoid a Japanese-style ‘lost decade’. The problem, however; as argued in this Commentary, is that Japan never lost a decade…
Daniel Gros is Director of CEPS.
 

This Policy Brief argues that some important considerations are missing in the current heated debate in the eurozone on bail-outs and bail-ins, the size of liquidity facilities and the terms of a crisis resolution mechanism. It is organised in three sections, the first of which surveys the diverse outcomes since the launch of the euro. This illustrates how the benefits the euro can generate depend on the degree of openness, flexibility and income correlation among euro area countries: these are economic concepts which over time are affected by policies.

This paper provides evidence on past growth of productivity, analysing the evolution of labour productivity, capital deepening and multi-factor productivity. Based on a literature review of recent studies, it shows that economic growth is increasingly attributable to the accumulation of intangible capital and that consequently, an increasing share of conventionally measured rise in labour productivity has, in fact, been ploughed back into the economy as intangible capital formation.