INTERECONOMICS, Vol 45, No.6 November/December 2010

Eight Months Later – Has the Eurozone Been Stabilised or Will EMU Fall Apart?

INTERECONOMICS, Vol 45, No. 6, November/December 2010

Forum: Eight Months Later – Has the Eurozone Been Stabilised or Will EMU Fall Apart?

by Wim Kösters, Paul De Grauwe, Daniel Gros, Waltraud Schelkle, Deborah Mabbett, Desmond Lachman

Eight months ago, as the risk of sovereign default in Greece fi rst emerged, the Intereconomics Forum invited a number of contributors to examine the options available to EU policymakers. As the threats to European Monetary Union resurface now, six of the same authors return in this issue’s Forum to reassess the situation, in particular with regard to the EU’s recent policy responses to the ongoing crisis. Whereas both optimists and pessimists could support their views with strong arguments eight months ago, the EU’s current predicament has shifted the prevailing sentiment strongly toward the pessimistic view. From the Irish bailout to the precarious status of Portugal, not to mention the potentially disastrous situation looming in Spain, our contributors are uncertain whether EU policymakers are up to the challenge of defending the euro. As evidence of this, several points to the EU Council’s October decision to establish a permanent crisis resolution mechanism to ensure an orderly state insolvency procedure, which did little to calm markets. Nonetheless, most of these economists still see ways for the EU to escape the crisis without being forced to abandon the common currency.

Editorial: Currency Wars?

by Daniel Gros

Article: Driven by the Markets? ECB Sovereign Bond Purchases and the Securities Markets Programme

by Ansgar Belke

At the height of the European sovereign debt crisis, the European Central Bank decided to purchase distressed European government bonds. Even worse, and more importantly, the ECB is providing direct support of several hundred billions of euros to troubled banks via its normal monetary policy operations by granting them the opportunity to refi nance at an interest rate of 1%. This article argues that these purchases will result in common monetary policy being dominated by national fiscal policies. The most worrisome aspect is that the euro area appears to have stumbled into unconventional monetary policies that, once started, will be diffi cult to exit. In the euro area, properly functioning fi nancial markets are at risk. 

Article: Fiscal Consolidation in Germany

by Werner Roeger, Jan in’t Veld and Lukas Vogel

The German federal government’s fiscal consolidation package, announced in June, is designed to permanently reduce the federal deficit to a new target level. This article uses a three-region version of the European Commission’s QUEST model to gauge the impact of the package on Germany and the spillover to the rest of the euro area and the rest of the world.