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Commentary & analysis with a focus on European economic policy

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Debt rescheduling and the power of exponential growth

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The agreement to reschedule Greek debt has been in the news recently. Frequently it is pointed out that Greek debt has not been forgiven, but “merely” rescheduled. While economists and some journalists argue that this distinction is not really important in an economic sense, I am not sure that this is widely understood. It may therefore be helpful to present a few back-of-the-envelope calculations that show the power of rescheduling debt servicing, which essentially means pushing payments into the future. It brings into play what can be called the “power of exponential growth”, which is like the inverse of the “power of compound interest” that can make debt burdens snowball.

I am going to take two time periods, based on an assessment that the recent Greek debt deal extends “the average loan maturity to over 40 years from 32.5 years currently”.  To keep things simple we’ll use 32 and 40 years. [Read more…]

Merkel and Macron in Meseberg

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In purely economic terms, and on the surface, the Euro crisis appears to be over. The recovery has gained in both strength and depth. Unemployment is now below its pre-crisis average. A number of former crisis-hit countries are staging an impressive recovery. Public debt ratios are coming down and the ECB is preparing to wind up its QE program by the end of the year. Nonetheless the recent meeting between Chancellor Merkel and President Macron in Meseberg, Brandenburg in the run-up to the forthcoming European Council meeting on 27-29 June can still rightly be seen as crucial. Economic misery continues, especially in Greece and Italy, but the deep wounds of the crisis have yet to heal in many countries. More fundamentally, the recovery hides the fact that major structural issues remain unresolved. The recent crisis of government formation in Italy illustrated this well, leading to a major spike in interest rates not only in the third-largest EMU-economy, with its low growth and debt ratio north of 130% of GDP, but also in other countries like Spain, with much lower debt and fast growth. The risk of contagion and of break-up has clearly not gone away. The recovery has merely papered over the cracks; but every recovery in history has given way to a downturn. The Euro Area, as currently institutionalised and with debt ratios still high, monetary policy highly expansionary, and political trust in short supply, cannot withstand a renewed downturn. [Read more…]

Analysis of the proposal „A constructive approach to Euro Area reform“

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A group of 14 prominent economists, seven each from France and from Germany, has issued a detailed and rather comprehensive proposal for reform of the Euro Area (CEPR 2018).* This is a welcome initiative. There is a window of opportunity for reform in the Euro Area. Economically it has been created by the strengthening and increasingly broad economic upturn: policymakers can leave firefighting mode and focus on structural governance reforms. Politically it has been opened up by the 2015 report by the five presidents of the EU institutions, the initiatives by the new French President Macron, the proposals by the European Commission of December 2017, and, most recently, the declarations of intent on Europe emerging from the grand-coalition talks in Germany.

Together Germany and France account for half of Euro Area GDP. The authors of the report are all well-known in policy-oriented circles, while coming from different traditions. For all these reasons the report is set to be very influential. This appraisal follows the structure of the report itself, examining the underlying philosophy and problem analysis (1), the proposals relating to the financial sector (2), to fiscal governance (3) and finally institutional questions (4). An overall assessment with recommendations for extensions and alternatives concludes (5). [Read more…]