A repository of solutions to global problems

For two years now, leading policy makers, academics and businessmen have been meeting for discussions in the Global Economic Symposium to provide concrete solutions for the most pressing global governance issues the world will be facing this century. Here is the result of these discussions: a repository of concrete policy proposals.

A test calibrated to fix the result

By: Wolfgang Münchau

If you tried to test the safety of cars using the same method, you would end up in jail.

Eurozone Meltdown

This is the first in a new series of regular briefing notes on important issues facing the euro area. In this briefing note we are asking whether the euro area could ever break up. We think not. But we are not as certain as we used to be.

Banks to prepare for eurozone exit scenarios

ISDA has established a working group to “explore the different scenarios in which a country may leave the eurozone”; preparing for the unthinkable usually means that such an event might become a self-fulfilling prophecy; The Basle Committee postpones, and waters down, Basle III; the Germans are saying that reports of their disagreement with the Basle Committee are exaggerated; Wolfgang Munchau says the German banks are overreliant on hybrid capital, as boosting capital in banks is likely to emerge as the most important economic policy challenge of the decade; EU starts official membership negotiations with Iceland; Spain’s Elena Salgado says it is her government official policy to seek a lower bond spread than Italy’s; there are a signs of a sharp and sudden fall in US housing prices during June; Paul Krugman et al debunk the Reinhart-Rogoff 90% debt rule; Paolo Manasse, meanwhile, has a very good analysis of the real fiscal adjustment 2010-1015, and finds that Italy’s plan is not very ambitious at all.

Europe’s Stress Tests: Only One Step Toward Banking Repair

By: Nicolas Véron

Ultimately, history’s verdict will depend on what happens now. First, Europe’s banks still need to raise more capital, and authorities must find a way to encourage this even after having ostensibly given them a clean bill of health.

Stress test for major European Banks: what is it good for?

By: Jan Pieter Krahnen

We find two good reasons for cheering the ongoing stress test of banks in Europe. Provided that there is government backed support in capital restructuring –either directly via capital injection or indirectly via insisting on additional equity issues-, the test is expected to raise the confidence of market participants, and to stabilize the interbank market. In addition, the test offers the opportunity for preventive capital restructuring, thereby strengthening the country’s financial architecture.

Detailed disclosure is the key to stress-test success

By: Nicolas Véron

The European decision to publish stress-test results is momentous. If its outcome is to be credible, it will necessarily reveal significant capital shortfalls in a number of banks. Otherwise, the gap with market perceptions, anecdotal evidence, and past top-down assessments by the International Monetary Fund and European Central Bank will be impossible to reconcile, and will increase market distrust and volatility.

Why the euro should prevail

By: Eric Chaney

Will the euro area survive its debt crisis? The short answer is yes. The longer answer is, this is a conditional probability, not a certainty. The conditions are an orderly resolution of the current tensions and the implementation of three sets of reforms.

G20 should worry about global imbalances not exit strategies

By: Marco Annunziata

The problem with the G20 is not the failure to co-ordinate exit strategies. That failure might have a positive effect on world growth. The real problem is the persistent failure to address beggar-thy-neighbour problems, and the return of global imbalances.

One Fiscal Size Does Not Fit All – a Korean lesson for Spain

By: Adam Posen

Twelve years ago, the Asian Financial Crisis hit. The International Monetary Fund took a common approach across the crisis countries, prioritizing fiscal austerity. In retrospect, outside observers and the Fund itself came to the conclusion that this was a mistake – while appropriate for Indonesia, the ‘It’s Mostly Fiscal’ approach made the situation worse than it needed to be in South Korea, with negative spillovers for the rest of the region. The euro area governments, under pressure from Berlin and Brussels, are repeating this mistake.

Suffocating Europe

By: Jörg Bibow

The real irony in this German tragedy is that German beggar-thy-neighbor policies have effectively forced a fiscal union upon Europe. Or, rather, if not a fiscal union, a general default it will be.

Why this crisis will go all the way

By: Wolfgang Münchau

What has happened is that global investors have realised a deep underling truth about our European sovereign debt crisis – that at its core, it is not a sovereign debt crisis at all – but a highly interconnected banking crisis about to blow up. There is a dynamic at work that the macroeconomic data does not convey – and that the political response to the crisis does not address.