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PIIE Update Newsletter
June 15, 2012

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A Better Eurobond

William R. Cline
  William R. Cline Earlier this year it looked as if the European Central Bank's trillion-euro Long Term Refinancing Operations (LTROs) might have begun to ease the European debt crisis. Recently the crisis has escalated again, to the point where it is contributing to the downturn of global equity markets, including in the United States. Growing evidence of Spain's banking problems and its need to revise its fiscal targets contributed to a moderate rebound in government borrowing premiums by mid-April. With the specter that June elections may lead Greece to exit the currency area, uncertainty has now brought yields on 10-year government paper back up to 6 percent in Italy and about 6.5 percent in Spain. It has become increasingly clear that the euro area needs to erect a financial firewall before Spanish and Italian yields spiral even further upward and create a self-fulfilling prophecy of insolvency. Whereas German opposition to a sharp expansion of the European Stability Mechanism and diminishing impact of yet another round of large lending by the European Central Bank may limit two approaches to a firewall, the third—eurobonds—could be greatly strengthened by the incorporation of country-specific insurance premiums. The resulting sinking fund would provide a buffer against any eventual losses by Germany and other euro area partners, thereby perhaps overcoming past German opposition to eurobonds. Even with a significant insurance premium such as 250 basis points, the total cost to borrowers such as Italy and Spain would be well within bounds consistent with debt sustainability.

>> Read full op-ed

What Putin's Piecemeal Reforms Will Look Like

Anders Åslund
  Anders Åslund The Russian government has just gone through its biggest personnel change since 1991, with 20 out of 28 ministers being first-time appointees. Skeptics claim that it does not matter because Putin decides everything. But Putin is not omnipotent. The Center for Strategic Research, headed by economist Mikhail Dmitriyev, published a convincing study about the likelihood of serious political instability and possibly violent protests during Putin's third presidential term. Using focus groups, the study shows how public opinion restricts the options of government policy. The report also notes that a broad consensus has formed concerning social and economic problems, including the need to reform education, health care, infrastructure, housing, and the legal system. This list of priorities is no surprise to anyone who has followed the Russian economic debate, but the novelty is that a broad consensus has formed about these issues. A comprehensive economic reform is not likely, but with a new set of policymakers in charge of social policy, piecemeal reform and substantial but quiet and pragmatic progress is likely.

>> Read full op-ed

India Must Look to Its States for Salvation

Devesh Kapur and Arvind Subramanian
  Arvind Subramanian Political fragmentation and weak leadership in New Delhi are eroding federal power relative to India's states. But might decentralization offer hope for the Indian economic union even as the very opposite is seen as Europe's salvation? In Europe, centralization is becoming an existential necessity. India, in contrast, is decentralizing even as the center is weakening. In Europe, better economic performance in the periphery is seen as possible only with tough rules dictated from the core. In India, it is competition between the states that holds the prospect for unleashing dynamism. Europe is being refashioned in the image of Germany. India, in contrast, is having to reinvent itself as an economic union in a way that allows competing ideas of India to flourish.

>> Read full op-ed

  Working Paper 12-11
Gender in Transition: The Case of North Korea

Stephan Haggard and Marcus Noland
  Marcus Noland This paper uses a survey of 300 North Korean refugees to examine the experience of women in North Korea's fitful economic transition. Like other socialist states, North Korea has maintained a de jure commitment to women's rights. However, the authors find that women have been disproportionately shed from state-affiliated employment and thrust into a market environment characterized by weak institutions and corruption. As a result, the state and its affiliated institutions are increasingly populated by males, and the market, particularly in its retail aspects, is dominated by women. Among the most recent cohort of refugees to leave North Korea, more than one-third of male respondents indicate that criminality and corruption is the best way to make money, and 95 percent of female traders report paying bribes to avoid the penal system. In short, the increasingly male-dominated state preys on the increasingly female-dominated market. These results paint a picture of a vulnerable group that has been disadvantaged in North Korea's transition. Energies are directed toward survival, mass civil disobedience is reactive, and as a group, this population appears to lack the tools or social capital to act collectively to improve their status.

>> Read full working paper [pdf]

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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Financial Repression and the One-Child Policy

Why Internal Devaluation Is Advantageous

Ireland's Endorsement of Austerity and Other Reasons for Euro Optimism

The Ideas India Must Shed

Despite Its Troubles, the Euro Area Is Making Progress
  The Politics of a Chinese Slowdown

Capital Stock...and Flow

A Statistical Snapshot

Income Inequality and Economic Rebalancing

SOE Dividends and Economic Rebalancing
  Nutrition Update

Songbun and Market Participation

Sanctions Busting

Sources: The UN Overview of Needs and Assistance

Phalanx CRAM system

PIIE Noted in the News and on the Web

NBC Nightly News
Family Net Worth Drops Nearly 40 Percent
A new report from the Federal Reserve states that the average American family's net worth declined 39 percent between 2007 and 2010, from $126,400 to $77,300. C. Fred Bergsten tells NBC News' Anne Thompson that these numbers help explain why the economic recovery has been so modest and why it remains so fragile.

NPR | All Things Considered
Economic Crisis Looms Larger in Spain than Greece
C. Fred Bergsten joins NPR's Robert Siegel to discuss the circumstances that led to Spain's current economic crisis.

PBS NewsHour
Is Spain 'in Denial' Over Growing Banking Crisis?
Jacob Funk Kirkegaard and Douglas Rediker, New America Foundation, discuss the bailout Spain has secured for up to $125 billion to shore up its ailing banks and why it is still unclear how those funds will be distributed.

Voice of America
Greece Eurozone Exit Would Be Felt Worldwide
Simon Johnson explains that because the European Union is more than a quarter of the world's economic output, their mismanagement of the euro crisis could have dire implications for many countries.

C-SPAN | Washington Journal
Chinese Investment in the U.S.
Daniel H. Rosen talks about Chinese direct investment in the United States, which industries are being invested in, and how foreign direct investment affects the US economy.

US Role to Fade with China Calling Shots as Creditor
Arvind Subramanian sits down with RT to discuss his book, Eclipse: Living in the Shadow of China's Economic Dominance, and how China's financial resources and role as creditor are putting pressure on the United States and the European Union.

NPR | Morning Edition
Despite Low Rates, Investors Rely on Treasurys
Joseph E. Gagnon discusses why cash-rich corporations have become risk-averse investors, opting for the security of Treasury bills and bonds despite the low interest rates.

The Roosevelt Institute
What Constrains the Federal Reserve?
In this interview Joseph E. Gagnon explains the tools the Federal Reserve has to bring about a stronger economic recovery, and the constraints it faces in trying to do so.

Preview of Our Next Issue

Making the Most of Doing More [pdf]
Adam S. Posen

Policy Brief
Restoring Fiscal Equilibrium in the United States
William R. Cline

Policy Brief
The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications
Peter A. Petri and Michael G. Plummer
In This Issue

Robert Zoellick A Conversation with Robert Zoellick
World Bank President Zoellick shares his outlook on global economic and foreign policy issues.
Arvind Subramanian Who Needs to Open the Capital Account?

Coauthors Olivier Jeanne, Arvind Subramanian, and John Williamson present the major findings and policy recommendations of their new book.

Featured Book
Title Resolving the European Debt Crisis
William R. Cline
Guntram B. Wolff

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