Asymmetries in Post-War Monetary Arrangements in Europe: From Bretton Woods to the Euro Area

This paper provides a perspective on monetary cooperation in Europe, before and after the creation of the euro area (EA), focusing on macroeconomic and financial asymmetries among its member states. After surveying the evolution of EU macroeconomic and monetary arrangements and developments before and after the creation of the euro, and particularly the euro area crisis, we argue that economic and financial asymmetries have played a key role in post-war monetary arrangements in Europe. Such asymmetries have also characterized the euro area, which needs fundamental fiscal, financial and labor market reforms in order to operate more efficiently as an optimum currency area. Two key reforms would be a common EA budget of sufficient size, which would help smooth out the asymmetric impact of macroeconomic shocks through the operation of automatic fiscal stabilizers and the explicit recognition of the ECB as a lender of last resort in times of crisis.

Journal of Economic Asymmetries, (with Gravas, C. and Jacque, L.), 2023

The scope and methodology of economic and financial asymmetries

This paper focuses on economic and financial asymmetries by addressing methodological issues related to the meaning of economic asymmetries and how such asymmetries arise in markets, general equilibrium modeling and in national and global economies. The methodology of modeling asymmetric information began with Akerlof’s celebrated model of “lemons” and while these asymmetries were quickly adopted in microeconomics, macroeconomics, business cycles and related areas, economic policies adapted the concept of asymmetries to highlight the importance of unequal magnitudes of responses among economic and financial variables. We discuss numerous topics that illustrate the large scope of economic and financial asymmetries in actual economies and their modeling to establish their methodological centrality in economic analysis and policy.

Journal of Economic Asymmetries, 27, (2023) (with Maliaris A. and Stengos T.) e00297

Economic and Financial Asymmetries in the Euro Area

This paper provides a perspective on the euro area (EA), focusing on macroeconomic and financial asymmetries among its member states and the need for major and fundamental reforms. After surveying the evolution of EU macroeconomic and monetary cooperation and developments since the creation of the euro, and particularly the euro area crisis, we argue that the euro area is in need of fundamental fiscal, financial and labor market reforms. In addition to reforms currently discussed, a common EA budget of moderate size would help smooth out the asymmetric impact of macroeconomic shocks through the operation of automatic fiscal stabilizers. It would also help countries in recession face smaller national fiscal and financial consequences of such recessions, and would also partly address labor market fragmentation as it could be targeted to euro area wide unemployment insurance. It would also help in the avoidance of future crises if the scope of the ECB to act as a lender of last resort in times of crisis was expanded and officially recognized.

(with Laurent Jacque) Ch. 15 in Alogoskoufis, G. and Featherstone, K. (eds), Greece and the Euro: From Crisis to Recovery, ebook, Hellenic Observatory, London School of Economics

Greece Before and After the Euro: Macroeconomics, Politics and the Quest for Reforms

This paper analyses developments in the Greek economy before and after the euro. The main thesis is that the imbalances that led to the crisis of the post-2010 period were building up during the previous three decades and that their root causes were not merely economic, but social, structural, institutional and political. The fiscal imbalances created in the 1980s were not adequately addressed by the convergence policies of the 1990s, while the long-standing problem of low international competitiveness was further exacerbated by the failure to promote the necessary structural reforms. Greece’s accession to the euro area with major structural and fiscal imbalances and low and deteriorating international competitiveness, led to a steep rise in its external indebtedness. The lopsided adjustment and the inadequacy of the reforms was due to domestic political and social constraints, both before and after euro area entry. In view of the institutional weaknesses of the euro area itself, the external imbalances ultimately led to the external debt crisis of 2010, the imposition of the economic adjustment programs and the ‘great depression’ of the 2010s. The paper also explores the prerequisites for a sustained recovery of the Greek economy within the euro area, once the global economic crisis induced by the coronavirus pandemic is over. The quest for wide ranging reforms remains Greece’s top priority.

Chapter 3 in Alogoskoufis, G. and Featherstone, K. (eds), Greece and the Euro: From Crisis to Recovery, ebook Hellenic Observatory, London School of Economics

Greece and the Euro: From Crisis to Recovery

The origins of the post-2010 Greek crisis and the pre-conditions – economic, political and institutional – for a sustained recovery of the Greek economy were examined recently by a number of prominent academics, many of whom possess extensive political experience in Greece. 

A selection of their contributions, first presented in a workshop at the London School of Economics, in December 2018, and a conference at the Fletcher School of Tufts University in April 2019, is collected in this e- book, edited by the organisers, George Alogoskoufis and Kevin Featherstone. 

With ramifications for both Greece and the Euro-Area as a whole, the contributions consider the constraints that derive from the structural linkages between the domestic and the European levels. While concerned with the core economic agenda, they place it within its political, social, and institutional contexts in order to have a more complete assessment. They ask what scope there is for recovery, the priorities that need to be set, and the prospects for their attainment. 

Many of the chapters have been updated to take into account developments since the Covid-19 pandemic in 2020.

Greece and the Euro: From Crisis to Recovery, ebook (co-edited with Kevin Featherstone), Hellenic Observatory, London School of Economics

Asymmetries of financial openness in an optimal growth model

This paper analyzes international borrowing and lending in an optimal growth model with adjustment costs for investment, under both pre-commitment and lack of pre-commitment to debt repayment. We study the dynamics of the current account in the transition towards the balanced growth path, and derive the implications of financial openness for both the transition path and the balanced growth path. A comparison with financial autarky reveals that, under pre-commitment, and to the extent that countries start from different initial conditions, financial openness is beneficial for both poor and rich countries, as it allows them to engage in mutually beneficial inter-temporal trade. During the adjustment process, relatively poor countries experience higher consumption and investment compared to autarky, and thus experience current account deficits and accumulate net foreign debt. The inter-temporal tradeoff is asymmetric between poor and rich countries, in that poor countries experience lower steady state consumption, due to the need to service their accumulated foreign debt while the opposite happens in relatively rich countries. Under non pre-commitment, this asymmetric inter-temporal tradeoff results in a time inconsis- tency problem. Poor countries reach a point in the adjustment process after which it is welfare improving for them to default on their foreign debt. In the absence of pre-commitment mechanisms, international lenders anticipate these incentives, and international lending and borrowing breaks down. This time inconsistency problem can thus explain both the Feldstein-Horioka puzzle and the Lucas paradox that capital does not flow from rich to poor countries. Credible sanctions in the case of default and ceilings on international borrowing are analyzed as partial solutions to the time-inconsistency problem caused by this asymmetry between poor and ‘rich’ countries.

The Journal of Economic Asymmetries, 23 (2021) e00201

PDF of final accepted manuscript

The Euro @20: How Economic and Financial “Asymmetries” Marred the Promise of the Single Currency

In this paper we review the process of European Monetary Integration since the early 1970s and the abandonment of the Bretton Woods system. In what we have cast as a drama in five acts, we first recount the quest for a European Monetary Union and document the gradual deepening of monetary cooperation among member states, through the creation of the European Monetary System. We then discuss the launch of the euro in 1999 and the euro crisis through the lens of the optimal currency area literature. The last two sections discuss whether the euro @ 20 is likely to limp along by “muddling through” or, whether the corona pandemic will usher the euro area into bold reforms to deepen the European monetary union by laying the foundations of a fiscal union. The risk of a breakup is also discussed.

Journal of Applied Corporate Finance, (Fall 2020), Volume 32, Number 4, pp. 90-104 (with Laurent Jacque)

The Clash of Central Bankers with Labour Market Insiders, and the Persistence of Inflation and Unemployment

This paper analyses the implications of monetary policy for the dynamic behaviour of inflation, in a ‘natural’ rate model characterized by endogenous unemployment persistence. We present evidence for the main industrial economies which suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its ‘natural’ rate. We provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders. The clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same degree of persistence in this model. The analysis suggests that inflation persistence could be addressed in a welfare-improving way, if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its ‘natural’ rate.

Economica, 85 (2018) pp. 152-176

PDF of Accepted Manuscript

 

Endogenous Growth and External Balance in a Small Open Economy

This paper puts forward an intertemporal model of a small open economy which allows for the simultaneous analysis of the determination of endogenous growth and external balance. The model assumes infinitely lived, overlapping generations that maximize lifetime utility, and competitive firms that maximize their net present value in the presence of adjustment costs for investment. Domestic securities are assumed perfect substitutes for foreign securities and the economy is assumed small in the sense of being a price taker in international goods and assets markets. It is shown that the endogenous growth rate is determined solely as a function of the determinants of domestic investment, such as the world real interest rate, the technology of domestic production and adjustment costs for investment and is independent of the preferences of domestic households and budgetary policies. The preferences of consumers and budgetary policies determine the savings rate. The current account and external balance are functions of the difference between the savings and the investment rates. The world real interest rate affects growth negatively but has a positive impact on external balance. The productivity of domestic capital affects growth positively but causes a deterioration in external balance. Population growth, government consumption and government debt affect the current account and external balance negatively, but do not affect the endogenous growth rate.

Open Economies Review, (2014), 25, pp. 571-594, DOI 10.1007/s11079-013-9290-8

PDF of Accepted Manuscript

Recent Research Papers

Recent Research Papers of George Alogoskoufis include papers on Fiscal and Monetary Policy, Endogenous Growth and External Balance in a Small Open Economy, as well as a paper on Greece’s Sovereign Debt Crisis.

Links to Recent Research Papers