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PIIE Update Newsletter
March 20, 2012

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  New Book
Resolving the European Debt Crisis

William R. Cline and Guntram Wolff, eds.
  Resolving the European Debt Crisis What began as a relatively localized crisis in Greece in early 2010 soon escalated to envelop Ireland and Portugal. By the second half of 2011, the contagion had spread to the far larger economies of Italy and Spain. In mid-September the Peterson Institute and Bruegel hosted a conference designed to contribute to the formulation of policies that could help resolve the euro area debt crisis. This volume presents the conference papers; several are updated through end-2011.

European experts examine the political context in Greece (Loukas Tsoukalis), Ireland (Alan Ahearne), Portugal (Pedro Lourtie), Spain (Guillermo de la Dehesa), Italy (Riccardo Perissich), Germany (Daniela Schwarzer), and France (Zaki Laïdi). Lessons from past debt restructurings are then examined by Jeromin Zettelmeyer (economic) and Lee Buchheit (legal). The two editors separately consider the main current policy issues: debt sustainability by country, private sector involvement and contagion, alternative restructuring approaches, how to assemble a large emergency financing capacity, whether the European Central Bank (ECB) should be a lender of last resort, whether joint liability "eurobonds" would be feasible and desirable, and the implications of a possible break-up of the euro area. The luncheon address by George Soros and a description (by Steven R. Weisman with Silvia B. Merler) of the policy simulation game played on the second day of the conference complete the volume. Involving market participants and experts representing the roles of euro area governments, the ECB, IMF, G-7, and credit rating agencies, the game led to a proposal for leveraging the capacity of the European Financial Stability Facility through arrangements with the ECB.

>> Preview and purchase book online

Financial Repression Has Come Back to Stay

Carmen M. Reinhart
  Carmen M. Reinhart Elevated levels of public debt in the United States and elsewhere will probably be the most enduring legacy of the post-2007 financial crises. For the advanced economies, public debts had not approached these levels since the end of World War II. As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of "taxation" that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. In the United States, as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers. In the past, other measures also included directed lending to the government by captive domestic entities (such as pension funds or banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter coordination between governments and banks. Faced with a private and public domestic debt overhang of historic proportions, policymakers will be preoccupied with debt reduction, debt management, and, in general, efforts to keep debt-servicing costs manageable. In this setting, financial repression in its many guises (with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences) will probably find renewed favor.

>> Read full op-ed

  Working Paper 12-4
Spillover Effects of Exchange Rates: A Study of the Renminbi

Aaditya Mattoo, Prachi Mishra, and Arvind Subramanian
  This paper estimates the impact of China's exchange rate changes on exports of competitor countries in third markets, known as the "spillover effect." Recent theory is used to develop an identification strategy in which competition between China and its developing country competitors in specific products and destinations plays a key role. The authors find robust evidence for the existence of a statistically and economically significant spillover effect. In particular, exports to third markets of countries with a greater degree of competition with China tend to rise and fall significantly more as the renminbi appreciates and depreciates. Estimates suggest that a 10 percent appreciation of the renminbi increases a developing country's exports at the product-level on average by about 1.5 to 2 percent. For high indices of competition, the increase could be as large as 6 percent. The results imply that going forward an appreciation of the renminbi could provide a substantial boost to developing country exports. These findings may have important policy implications for developing countries and for the multilateral system if exchange rate movements (or the lack thereof) stem from policy actions. Since the resulting spillover effects are significant, one country's policies can potentially have substantial export implications for other countries.

>> Read full working paper [pdf]

Greece's Crisis: Testing the Viability of the Euro Project

Yannos Papantoniou
  More than one trillion euros have been dispensed over the past two years in the cumulative efforts of the European Union, European Central Bank (ECB), and private sector lenders to overcome the euro area's sovereign debt crisis. Today, however, the euro area is in no better position than in the autumn of 2009 when the full scale of Greece's fiscal problem was revealed. The adjustment program imposed on Greece by the troika (the European Commission, the ECB, and the IMF) in May 2010 was seriously flawed. It placed too much emphasis on austerity, through tax raises and income cuts, and too little on reform. Its implementation, punctuated by delays, omissions, and outright failures, further accentuated planning defects instead of correcting them. Repositioning the euro area in the global economic map requires a vision and a plan. It will not be the outcome of endless bargaining among short-sighted players whose paramount concern is to contain current losses without taking due account of longer-term gains. Saving Greece is doable, provided that both the country and the euro area take the necessary steps. Success, combined with a leap forward in European unification, will lay the basis for sustainable growth and a dynamic presence in the globalized world.

>> Read full speech [pdf]

Who Should Lead the World Bank

Devesh Kapur and Arvind Subramanian
  The World Bank must find a new president when Robert Zoellick departs in June. This once again raises the thorny issue of leadership of the Bretton Woods twins (the Bank and the International Monetary Fund [IMF]). At their birth, John Maynard Keynes memorably warned that if these institutions did not get good leaders they would "fall into an eternal slumber, never to waken or be heard of again in the courts and markets of Mankind." Getting a good leader, of course, requires a careful selection process. Today, however, the world is stuck with just the opposite: a dreadfully antiquated process whereby the United States and Europe, despite their economic travails, retain a monopoly on the leadership of the Bank and the IMF, respectively. It is imperative that the selection process be altered to broaden the search for candidates who are sensitive to changing realities and possess key qualifications. This would not mean ruling out a deserving American candidate, but it would also mean looking carefully at others, such as former Presidents Luiz Inácio Lula da Silva of Brazil and Ngozi Okonjo-Iweala, the economics czarina in Nigeria. Dramatic shifts and daunting challenges in the world economy mean that the World Bank's next president will have to be someone whose primary task is to initiate and sustain change while commanding support and legitimacy across the Bank's membership. He or she will also require a demonstrated capacity for political leadership and a core conviction that the Bank needs a new vision and path forward.

>> Read full op-ed

Peterson Perspectives Interviews

audio  Leadership Struggle in China
Nicholas R. Lardy explains what led to the ouster of a popular Communist Party official as China heads toward installing new leaders this year.

audio  Is Portugal the Next Domino to Fall?
Nicolas Véron is confident that Portugal can solve its problems without resorting to a debt write-down that would rattle European markets.

audio  China Adjusts Its Forecast Downward
Nicholas R. Lardy says China's new forecast is in line with its 5-year plan, but it omits details on how it plans to achieve more balanced growth.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Is the Risk Free Status of Euro Area Sovereign Debt in Tatters?

The World Bank's Next President Must Arrest Its Institutional Decline

Gasoline Prices and Electoral Politics in the Age of Unconventional Oil

China's Economic Outlook in 2020 and Beyond

A New Era for Global Financial Standards
  Can Microcredit Lenders Fill the Gap?

Household Wealth and the Housing Market

Capital Account Liberalization and the Corporate Bond Market

China's Rebalancing Will Not Be Automatic

The Myth of China's Giant Fiscal Deposits
  Genser and Cotler on Responsibility to Protect

More on the Missile Test

More from Suzanne Scholte

EU-Korea Human Rights and Democratic Transition Dialogue Programme

Refugee repatriation aftermath

PIIE Noted in the News and on the Web

A Real Jobs Plan for the 21st Century
Forbes draws upon J. Bradford Jensen's recent book, Global Trade in Services: Fear, Facts, and Offshoring, and argues that aggressive liberalization of the services trade could create 3 million new jobs.

Euro Fate Depends Whether Wyplosz or Kirkegaard Is Right
Jacob Funk Kirkegaard and Charles Wyplosz differ on the question of whether the private sector involvement in Greece will happen in Portugal.

Financial Times
American Nightmare
The Financial Times calls Arvind Subramanian's book, Eclipse: Living in the Shadow of China's Economic Dominance, "penetrating" and a "rewarding piece of economic analysis."

Imagining the Day China Eclipses America
CNN posts an excerpt from Arvind Subramanian's book Eclipse: Living in the Shadow of China's Economic Dominance.

The Agenda with Steve Paikin: Nicholas Lardy: Sustaining China's Economic Growth
Canadian broadcaster Steve Paikin interviews Nicholas Lardy about his recent book, Sustaining China's Economic Growth after the Global Financial Crisis.

China Daily
China Must Reexamine Housing to Continue Sustainable Growth
China Daily covers Nicholas Lardy's speech on imbalances in China's economy at the Chicago Council on Global Affairs.

Russian Presidential Election
C-SPAN broadcasts US Ambassador to Russia Michael McFaul's speech at the Peterson Institute.

Preview of Our Next Issue

Working Paper
Global Imbalances and Foreign Asset Expansion by Developing Economy Central Banks
Joseph E. Gagnon

In This Issue

Vítor Gaspar Portugal: Gaining Credibility and Competitiveness

Finance Minister of Portugal Vítor Gaspar discusses his country in the context of the European debt crisis.
Michael McFaul Russia after the Presidential Election: What It Means for the United States

US Ambassador to Russia McFaul discusses what Russia's presidential elections mean for the United States.
Barbara Kotschwar Transportation and Communication Infrastructure in Latin America: Lessons from Asia

The Americas Society and the Peterson Institute for International Economics hold a discussion on new research on Latin American infrastructure.

Featured Book

The International Political Economy Society votes unanimously to award the "best paper award" to PIIE Working Paper 11-20: Rent(s) Asunder: Sectoral Rent Extraction Possibilities and Bribery by Multi-National Corporations, by Edmund Malesky, Nathan Jensen, and Dimitar Gueorguiev.

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