Does anybody have a clear vision of the desirable financial system of the future? This column has one. It gives simple answers to 12 simple questions panellists at a recent IMF conference failed to answer.
It is now generally accepted that financial factors can significantly influence output, sometimes driving it away from sustainable levels. Yet, when it comes to assessing potential output – the maximum level of economic activity that can be sustained over time – the influence of financial conditions is generally neglected. This column argues that embedding information from variables that proxy the financial cycle leads to estimates of potential output that are much more precise and, above all, much more robust in real time. These estimates could help improve policymaking.
Depositors in Eurozone banks are facing a steep learning curve on just exactly what deposit insurance means. This column points out that the precedents set in Cyprus and Iceland show that deposit insurance is only a legal commitment for small bank failures. In systemic crises, these are more political than legal commitments, so the solvency of the insuring government matters. A Eurozone-wide deposit-insurance scheme would change this.
This reposted column corrects an error, due to the editor, that was in the first posting.
David Cameron’s promise of a referendum on British participation in the EU has re-ignited the debate about the EU’s democratic legitimacy, just as the struggle to overcome the crisis continues. This column argues that in order to both successfully resolve the crisis and maintain states’ ability to sustain liberal finance, a substantial shift in policy is required. Enhancing the democratic legitimacy of crisis resolution measures and wider financial reforms is essential. Without diffuse support for reforms, crisis resolution is likely to collapse under centrifugal populist pressures.
Eurozone policy seems driven by market sentiment. This column argues that fear and panic led to excessive, and possibly self-defeating, austerity in the south while failing to induce offsetting stimulus in the north. The resulting deflation bias produced the double-dip recession and perhaps more dire consequences. As it becomes obvious that austerity produces unnecessary suffering, millions may seek liberation from ‘euro shackles’.
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