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Economic Policy Center
Domino in Southern Europe?
Greece is far from having overcome its economic and financial crisis, even a bankruptcy is no longer ruled out. But Greece has not been the only country in the EU to be considered susceptible to bankruptcy. Many think that a Greek bankruptcy could have a domino effect on other Southern European countries such as Portugal and Spain. The Kiel Institute economists Klaus Schrader und Claus-Friedrich Laaser examine the economic causes of the crises in Greece, Portugal, and Spain in their new Kiel Discussion Paper (No. 500/501). They compare economic developments in these three countries and find that there is little reason, from a real economic perspective, to expect that there will be a domino effect. more...
Five Percent is Just Too Much
Greece’s solvency problems have seemingly been resolved by the Euro Area governments and private sector investors on July 21. According to their resolutions, more than €100 billion will be provided in order to enable the Greek government to refinance its debt. But even so, bankruptcy has not been prevented for good. To demonstrate this result, the Kiel economists David Bencek and Henning Klodt use the concept of a fiscal primary surplus to analyze Greece’s public finances as well as other Euro Area countries who are currently struggling with their debt. Complete study
No Reason to Be Afraid of Migrant Workers from Other EU Countries
The integration of EU labor markets took place for some time largely without Germany. However, on May 1, 2011, Germany had to open its labor market to workers from almost all of the Central and Eastern European countries in the EU, and was the last of the EU-15 countries to do so. Germans believe that allowing migrant workers from these countries to work in Germany will pose an acute threat to German workers, subjecting them to wage dumping and causing unemployment. Thus, it has been suggested that national minimum wages should be established to provide a bulwark against a flood of cheap labor from these countries. However, the Kiel economists Hans H. Glismann and Klaus Schrader explain convincingly in an article in the May issue of the magazine Wirtschaftsdienst that Germany should take advantage of the opportunities provided by the freedom of labor to move from one EU country to another and should begin competing for scarce highly trained labor in the EU. more...
Haircut or Safety Net?
The regulations on the safety net for the euro are often criticized for its incentives for debtors. However, currently high government bond spreads can be observed.
There is no sign that the safety net evens out risk differences. Thus, the Kiel economist Jens Boysen-Hogrefe concludes in his new Kiel Policy Brief 29 that the main argument against the safety net may be exaggerated. more...
Fed should prepare markets for higher interest rates
The Kiel rearchers Nils Jannsen and Joachim Scheide investigate in their new Kiel Policy Brief 26, whether the extremely expansionary monetary policy of the Fed in the United States is still appropriate. An analysis based on the Taylor rule indicates that it is very likely that monetary policy in the United States is too expansionary. This poses considerable risks for price stability and for the credibility of the Fed. Furthermore, exaggerations in other markets, such as asset or commodity markets, are promoted. Therefore, the Fed should start communicating that monetary policy could be tightened soon if economic conditions do not change dramatically, that it does not apply further measures of Quantitative Easing and that it will start to reduce its balance sheet. more...
Insolvency Rules for States, not for Banks
Are the measures of the European Stability Mechanism sufficient for preventing further debt crises similar to those in Greece and Portugal? Definitively not, because private investors still enjoy rather high interest rates of dubious government bonds without being adequately involved in bearing the risks. An incentive-efficient rescue plan would include a substantial haircut of government bonds complemented by effective insolvency rules for systemic banks, writes Kiel Institute expert Henning Klodt in a new study. more...
Are Storage Facilities for Rare Earths Economic Policy’s Responsibility?
Rare Earths have already been ubiquitous before the debate about China’s decision to reduce their exports: The group of metals is essential for countless high-technology products. In their paper, David Bencek, Henning Klodt and Wilfried Rickels explore the question whether there are strategic dependencies between the European Economy and Chinese suppliers that might justify interventions by industrial policy. more...
Price Competitiveness Divergence in the Euro Area: The Level Matters!
This article argues that the fixation on indices or growth rates in the current discussion around price competitiveness in the euro area and the policy proposals that emerged from entirely ignoring levels may be misleading. In order to assess divergences in price competitiveness across euro area countries, the decisive measure are levels, not growth rates nor indices. Unfortunately, whether price competitiveness has converged or diverged in the euro area can be answered neither with nominal nor with real unit labor costs. A rule calling for equal growth rates in nominal unit labor costs across countries would necessarily result in divergence in unit labor cost levels and would be equivalent to fixing real exchange rates. In a currency area where nominal exchange rates are fixed and labor mobility is still relatively low, it would certainly be absurd to postulate that real exchange rates should not be allowed to move. more...