Should the Eurozone rely on the US?

by Christophe Blot, Caroline Bozou and Jérôme Creel

The Covid-19 pandemic has led governments and central banks around the world to implement expansionary fiscal and monetary policies. The United States stands out for its substantial fiscal support, which is much greater than that in the euro area. In a recent paper prepared for the Monetary Dialogue between the European Parliament and the European Central Bank, we review these measures and discuss their international implications. Given the size of the US stimulus packages and the weight of its economy, we can indeed expect significant spillover effects on the euro area. However, the impact will depend not only on the orientation of economic policy but also on the precise nature of the measures adopted (transfers, spending and the articulation between monetary and fiscal policy).

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Environmental health policy: A priority for a global health renaissance

by Éloi Laurent, Fabio Battaglia, Alessandro Galli, Giorgia Dalla Libera Marchiori, Raluca Munteanu

On 21 May, the Italian Presidency of the G20 together with the European Commission will co-host the World Health Summit in Rome. A few days later, the World Health Organisation will hold its annual meeting in Geneva. Both events will obviously focus on the Covid tragedy and on reforms that could prevent similar disasters in the future. “The world needs a new beginning in health policy. And our health renaissance starts in Rome,” said European Commission President Ursula von der Leyen on 6 May. We share this hope and want to see it succeed.

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The “modern theory of money” – is it useful?

by Xavier Ragot

A heated debate is currently taking place in macroeconomics. The change in US economic policy following the election of Joe Biden has sparked debate over what to expect from “Bidenomics”. The debate has seen radical Keynesian proposals being promoted by the “modern theory of money” (MMT). This movement advocates massive stimulus packages and the monetization of public debt. This post discusses the MMT proposals through a review of two recent books that have recently appeared in French: Stephanie Kelton, The deficit myth (John Murray, 2020) and Pavlina Tcherneva, The case for a job guarantee (Polity, 2020).

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Climate: The urgency of justice

By Éloi Laurent and Paul Malliet

On the eve of the climate summit organized by the Biden administration on 22 and 23 April, which will be attended by 40 heads of state and government, we offer here some initial reflections on a critical issue facing international climate negotiations: how should the effort to reduce emissions be shared between countries within the framework of the United Nations?

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Reducing uncertainty to facilitate economic recovery

Elliot Aurissergues (Economist at the OFCE)

As the health constraints caused by the pandemic continue to weigh on the economy in 2021, the challenge is to get GDP and employment quickly back to their pre-crisis levels. However, companies’ uncertainty about their levels of activity and profits in the coming years could slow the recovery. In order to cope with the possible long-term negative effects of the crisis, and weakened by their losses in 2020, companies may seek to restore or even increase their margins, which could result in numerous restructurings and job losses. Economic recovery could take place faster if business has real visibility beyond 2021. While it is difficult for the current government to make strong commitments, on the other hand mechanisms that in the long term are not very costly for the public purse could make it possible to take action.

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Dispersion of company markups internationally

Stéphane Auray and AurélienEyquem

The strong globalization of economies has increased interest in the importance of markups for companies with an international orientation. A markup is defined as the difference between the marginal cost of production and the selling price. Empirical evidence is accumulating to show that these markups have increased significantly in recent years (Autor, Dorn, Katz, Patterson, and Reenen, 2017; Loecker, Eeckhout, and Unger, 2020) and that large corporations account for a growing share of the aggregate fluctuations (Gabaix, 2011). Moreover, the dispersion of markups is considered in the literature as a potential source of a misallocation of resources – capital and labour – in both economies considered to be closed to international trade (see Restuccia and Rogerson, 2008, or Baqaee and Farhi, 2020) and economies considered to be open to trade (Holmes, Hsu and Lee, 2014, or Edmond, Midrigan and Xu, 2015). Finally, it has recently been shown by Gaubert and Itskhoki (2020) that these markups are a key determinant of the granular origin – i.e. linked to the activity of big exporters – of comparative advantages, or in other words, they may be a determinant of trade competitiveness.

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What factors drove the rise in euro zone public debt from 1999 to 2019?

by Pierre Aldama

Between 1999 and 2019, the eve of the Covid-19 pandemic, the public debts of the 11 oldest euro zone members had risen by an average of 20 percentage points of GDP. This increase in public debt is commonly attributed to structural budget deficits, particularly those in the pre-crisis period and in the “South”. But how much of the stock of public debt in 2019 can be attributed to structural deficits, and how much to GDP growth, interest payments or cyclical deficits? In this post, we use the December 2020 edition of the OECD’s Economic Outlook to break down the changes in public debt into its main factors: structural and cyclical primary balances, the interest burden, nominal GDP growth and stock-flow adjustments. This shows that the structural deficits generally contributed less than is commonly assumed, and that the increase in public debt over the period was largely the result of the direct and indirect consequences of the double-dip recession in the euro zone.

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Monetary Policy During the Pandemic: Fit for Purpose?

Christophe Blot, Caroline Bozou and Jérôme Creel

In a recent Monetary Dialogue Paper for the European Parliament, we review and assess the different policy measures introduced by the ECB since the inception of the COVID-19 crisis in Europe, mainly the extension of Asset Purchase Programme (APP) measures and the development of Pandemic Emergency Purchase Programme (PEPP) measures.

APP and PEPP have had distinct objectives in comparison with former policies. APP has been oriented towards price stability while PEPP has been oriented towards the mitigation of financial fragmentation.

To this end, we start by analysing the effects of APP announcements (including asset purchase flows) on inflation expectations via an event-study approach. We show that they have helped steer expectations upward.

Then, we analyse the impact of PEPP on sovereign spreads and show that PEPP has had heterogeneous effects that have alleviated fragmentation risk: PEPP has had an impact on the sovereign spreads of the most fragile economies during the pandemic (e.g. Italy) and no impact on the least fragile (e.g. the Netherlands). However, sovereign spreads have not completely vanished, making monetary policy transmission not fully homogeneous across countries.

On a broader perspective, we also show that overall macroeconomic effects have been in line with expected outcomes since the mid-2000s: ECB monetary policy measures have had real effects on euro area unemployment rates, nominal effects on inflation rates and financial effects on banking stability. These results are in line with recent estimates at Banque de France (Lhuissier and Nguyen, 2021).

As a conclusion, an increase in the size of the PEPP program, as recently decided by the ECB, will be useful if financial risks re-emerge. Meanwhile, we argue that an ECB decision to cap the sovereign spreads during the COVID-19 crisis would alleviate the crisis burden on the most fragile economies in the euro area, where sovereign spreads remain the highest.

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Spain: Beyond the economic and social crisis, opportunities to be seized

by Christine Rifflart

Spain has been hit hard in 2020 by the Covid-19 health crisis, which the authorities are struggling to control, accompanied by an economic recession that is one of the most violent in the world (GDP fell by 11% over the year according to the INE)[1]. The country’s unemployment rate reached 16.1% at the end of last year, a rise of 2.3 points over the year despite the implementation of short-time work measures. The public deficit could exceed 10% of GDP in 2020, and the public debt could approach 120% according to the Bank of Spain’s January 2021 forecasts. Europe has enacted large-scale support programmes for affected countries, and as one of these Spain will be the country receiving the most EU-level aid. It will benefit from at least 140 billion euros, with 80 billion of that (i.e. 6.4% of 2019 GDP) taking the form of direct transfers through the NextGenerationEU programme.

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Public debt: Central banks to the rescue?

By Christophe Blot and Paul Hubert

In response to the health and economic crisis, governments have implemented numerous emergency measures that have pushed public debt up steeply. They have nevertheless not experienced any real difficulty in financing these massive new issues: despite record levels of public debt, the cost has fallen sharply (see Plus ou moins de dette publique en France ?, by Xavier Ragot). This trend is the result of structural factors related to an abundance of savings globally and to strong demand for secure liquid assets, characteristics that are generally met by government securities. The trend is also related to the securities purchasing programmes of the central banks, which have been stepped up since the outbreak of the pandemic. For the year 2020 as a whole, the European Central Bank acquired nearly 800 billion euros worth of securities issued by the governments of the euro zone countries. In these circumstances, the central banks are holding an increasingly high fraction of the debt stock, leading to a de facto coordination of monetary and fiscal policies.

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