Tag Archives: financial crises

“Nobody said it would be easy, and nobody was right.” On the (Im)possibilities of International Policy Coordination

International Policy Coordination: The Long View

Barry Eichengreen (eichengr@econ.berkeley.edu), University of California at Berkeley (United States)

URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:17665&r=his

Abstract: This paper places current efforts at international economic policy coordination in historical perspective. It argues that successful cooperation is most likely in four sets of circumstances. First, when it centers on technical issues. Second, when cooperation is institutionalized – when procedures and precedents create presumptions about the appropriate conduct of policy and reduce the transactions costs of reaching an agreement. Third, when it is concerned with preserving an existing set of policies and behaviors (when it is concerned with preserving a policy regime). Fourth, when it occurs in the context of broad comity among nations. These points are elaborated through a review of 150 years of historical experience and then used to assess the scope for cooperative responses to the current economic crisis.

Review by: Manuel Bautista González

“The question is whether those who talk the talk also walk the walk.” (Eichengreen 2011: 1)

Barry Eichengreen

Financial turmoil in the European Union has been increasing in the last months. According to The Economist, credit in the eurozone is tighter than it was in the worst months after the Lehman bankruptcy. “Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualization scheme, or any other bedtime story. We are each on our own”, wrote Simon Johnson and Peter Boone earlier this week (Johnson and Boone 2012). Paul Krugman has brought attention to the horrific consequences of the defeat of the European monetary experiment: “Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history. It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists” (Krugman 2012).

It is in this context that this paper written by Barry Eichengreen and distributed by NEP-HIS on 2012-01-03 is an opportune “breathless historical review” (Eichengreen 2011: 29) of past attempts of international policy coordination in monetary, fiscal and financial matters from the last quarter of the nineteenth century to our days. In so doing, Eichengreen provides an interesting narrative centered in politics and institutions that complements optimally a reading of his classical work on the history of the international monetary system and global capital markets (Eichengreen 2008) as well as his most recent account of the US dollar as a dominant international currency (Eichengreen 2011b).

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The European Debt Crisis in an American Fiscal Mirror

Fiscal federalism: US history for architects of Europe’s fiscal union

By C. Randall Henning (henning@piie.com) and Martin Kessler (mkessler@piie.com)

URL: http://d.repec.org/n?u=RePEc:bre:esslec:669&r=his

Abstract: European debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The “fiscal compact” agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as “debt brakes” in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are “sovereign”: The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important caveats. First, debt brakes are likely to be more durable and effective when “owned” locally rather than mandated centrally. Second, maintaining a capacity for countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and create a common fiscal pool for restructuring the banking system.

Review by: Manuel Bautista González

This paper was included in the NEP-HIS report issued on January 18th, 2012, through it C. Randall Henning and Martin Kessler contribute to the debate on fiscal solutions to the current European debt crisis. This by offering insights drawn from the past and present of U. S. fiscal federalism.

Henning and Kessler periodize their historical overview in five moments, namely, the financial reforms enacted after the adoption of the U. S. constitution, the state defaults of the 1840s, the financial troubles of state and local levels during the Reconstruction period, the fiscal instability during the Great Depression, and some recent experiences of state and local troubles from the 1970s to the current economic recession.

Later, in the analytical section of the paper, the authors study the probable adoption of balanced budget rules in the European Union with regards to their political enactment, their diversity across the Union and their effectiveness in preventing fiscal disarray. Henning and Kessler assess the need for (federal) countercyclical policies that complement the procyclical fiscal discipline at the state and local levels. They also review the literature on the relationship between state and local debt and capital and banking markets and offer preliminary conclusions relevant to both policymakers and scholars of monetary unions and fiscal federalism.

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