There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Government bonds and their investors: What are the facts and do they matter?
Jochen Andritzky05 August 2012
Public debt held by non-residents has been on the rise over the last few decades – that is until the global crisis. This column looks at how the ownership of government bonds in the G20 and the Eurozone. It finds that increased foreign bondholders bring costs as well as benefits.
Prior to the start of the global crisis in late 2008, global imbalances, reserve accumulation and regulatory changes fostered greater cross-border integration of sovereign debt markets as measured by the share of government securities held by non-residents.
The Eurozone crisis has thrown into relief the dangers of financial contagion. The authors of CEPR DP8358 analyze the causes and consequences of sovereign debt crises in zones with financial integration. They conclude that without fiscal integration, the supply of government debt in these areas reaches an inefficient equilibrium, with safer governments inefficiently issuing too little of their high-quality debt and riskier governments issuing too much.
How can excessive public debt be avoided? This column proposes a novel solution: “vote-share bonds”. These government bonds are tied to the share of the vote that the adoption of the underlying deficit has received in parliament. A bond with a higher vote-share is considered senior. Vote-share bonds inspire fiscal responsibility, while retaining the flexibility to stabilise negative macroeconomic shocks.
In democracy, political forces often tend to push the volume of public debt beyond socially desirable levels. This time, the amount of accumulating public debt appears to be unprecedented in peace time (Buiter and Rahbari 2010). This is most obvious in the Eurozone with its soaring public debt levels and the sovereign debt crisis. But fiscal troubles also extend to other EU member states, to Japan, and to the US.
Fiscal fragility: What the past may say about the future
Joshua Aizenman, Gurnain Kaur Pasricha07 November 2010
Amid government concern over public debt, one measure – the debt-to-GDP ratio – has gained prominence above all others. This column presents forecasts of the fiscal burden of debt for each OECD country. Looking at past as well as current data, it argues that prudent fiscal policy should involve both short-term stabilisation and forward-looking fiscal reforms. Finding a balance between the two is crucial.
The global crisis has brought to the fore the fiscal vulnerabilities of OECD countries, and in particular, some countries of the Eurozone such as Greece, Ireland, Italy, Portugal, and Spain (Baldwin et al. 2010 and Corsetti 2010). The US faces similar fiscal challenges, although its ability to obtain relatively cheap funding of its debt allows it to delay dealing with them.
The Eurozone crisis and debate over fiscal stimulus have emphasized the importance of responsible government debt management. CEPR DP 8001 develops a political economy model in which politicians prop up their reelection chances with debt-financed public projects but postpone the delivery of the projects until the next term. The author proposes to remedy this by instituting debt-threshold contracts which, if violated, would disqualify politicians from standing for reelection. He suggests that such contracts do not impede the stabilization of negative macroeconomic shocks.
How politicians excited financial markets’ attack on the Eurozone
Jacopo Carmassi, Stefano Micossi24 June 2010
As the recent austerity measures can testify, Europe’s leaders are acutely concerned about government debt. This column tracks policy announcements from the start of the Eurozone crisis in December 2009, arguing that governments may have contributed to turmoil with their public display of confusion – ultimately undermining credibility. But if Eurozone governments show unity of purpose, this credibility can be restored.
Despite multiplying good news from the real economy, the past six months have been the most trying times for the euro – certainly the most testing since the height of the financial crisis in late 2008.