Peterson Institute Update

Finishing Doha: The PIIE Parameters

Jeffrey J. Schott outlines how negotiators could jump-start the global trade talks, raise their ambitions, and produce a package beneficial to all parties.

Will the New Regime in Ukraine Embrace Reform?

Anders Åslund, co-chairman of Independent International Experts Commission on Ukraine, says the new government may adopt some of the commission's proposals.

European Carbon Tax? European Monetary Fund? It Could Be a Marriage Made in Crisis Heaven

Lacking the policy instruments to deal with Greece and other economic crises, some in Europe have floated the idea of a European Monetary Fund (EMF) as an institutionalized "European solution" to such situations. However, any new EU or—more likely—eurozone institution faces some formidable political obstacles, which rule out an EMF as a short-term solution to the emergencies that may arise when the Greek refinancing requirements peak in April and May.

Governor Gjedrem's Critique of the G-20: A Response

On February 25, Bank of Norway Governor Svein Gjedrem delivered an interesting and important speech at the Peterson Institute for International Economics. He analyzed and critiqued multilateral approaches to today's global economic challenges. He advocated: (1) effective collaboration by the systemically important countries; (2) anchoring such collaboration in a "statutory-based system of representation," such as that of the executive board of the International Monetary Fund (IMF); and (3) the use of constituencies with rotating representation as the preferred structure.

RealTime post by Jacob Funk Kirkegaard.

Greece, Act III--Athens's Leverage versus Eurozone Solidarity?

In the latest phase of its financial melodrama, Greece successfully placed a €5 billion 10-year government bond in the financial markets on Thursday (March 4). The bond issue was heavily oversubscribed, but it still produced a high yield of approximately 6.3 percent (or approximately 300 basis points above the benchmark risk-free mid-swaps rate, reflecting the market's demand for a risk premium). In many ways, this Greek return to the financial markets represents a huge success for the government and at least a temporary sign of approval from bond market vigilantes for its recently announced additional austerity measures. Ironically, however, this very success means that the leverage of the Greek government over its eurozone partners in the game of chicken related to possible financial assistance to Athens has been greatly reduced.

RealTime post by Jacob Funk Kirkegaard.

Treasury's Disappointing Performance on Capitol Hill

The campaign to convince people that Treasury is serious about banking reform—led sometimes by President Obama—suffered a major blow Thursday on Capitol Hill. In testimony to the Congressional Oversight Panel, Assistant Secretary for Financial Stability and "Counselor to the Secretary" Herb Allison said, "There is no too big to fail guarantee on the part of the US government."

RealTime post by Simon Johnson.

Policy Brief: Copenhagen, the Accord, and the Way Forward [pdf]

Policymakers and the public had high expectations for the UN climate change summit in Copenhagen last December. Since the international community embarked on a new round of negotiations in Bali in 2007, elections in the United States, Australia, and Japan raised developed countries' climate change ambitions and a number of emerging economies—including China, India, and Brazil—announced their first ever nationwide climate change targets. Yet while political will to tackle climate change appeared to be building, international climate change negotiations were failing to deliver. The UN process launched in Bali struggled for two years to reach agreement on even the most basic issues between the Parties to the UN Framework Convention on Climate Change (UNFCCC). These two trends collided in Copenhagen, when ministers and heads of state arrived to find a negotiation process in disarray and no consensus text on the table. An eleventh-hour diplomatic flurry by leaders of a diverse and representative set of countries produced a political accord addressing the core issues of the negotiations. While attracting broad support among the 192 Parties to the UNFCCC, the accord did not receive unanimous approval. Instead, the UN "took note" of the agreement.

This policy brief assesses the two-week conference, evaluates the Copenhagen Accord that resulted, and discusses key issues the international community will face moving forward. Author Trevor Houser argues that despite the chaos in Copenhagen, the accord is a significant step in addressing global climate change. The chaos in Copenhagen presents the international community with a unique opportunity to go back to first principles and craft a more suitable and sustainable long-term approach to this challenge. Houser calls for combining the UN process aimed at producing a legally binding agreement with a small-group process that would start work immediately on a politically binding basis—an approach that would prevent near-term substantive action from being held hostage to disagreements over legal form while demonstrating that meaningful international cooperation is possible and thus building support for a future treaty.

Policy Brief 10-4 by Trevor Houser.

Policy Brief: After the Flop in Copenhagen [pdf]

Despite high drama, the United Nations Framework Convention on Climate Change (UNFCCC) conference in Copenhagen ended as a flop. During chaotic negotiations and fundamental disagreements surrounding the formation of a post-Kyoto deal, five heads of state got together on the last day of negotiations in an attempt to salvage the conference with a document that would later be called the Copenhagen Accord. The United States, Brazil, South Africa, India, and China led a group of 20 supporting countries to craft the Copenhagen Accord, which was criticized because it was crafted behind closed doors and it did not commit major emitting countries to much in terms of emission reductions, finance, or technology transfer. The members of the UNFCCC agreed to "take note of" the Accord: Some leaders characterized this as a meaningful first step toward a future climate treaty, but many observers characterized the Accord as a failure because it is nonbinding and vague.

The meeting in Copenhagen made it clear that nothing will be accomplished in a system that requires consensus among 192 member nations. Some have stated that future climate cooperation should be driven by coalitions that are best suited to the task, such as a narrower group like the G-20. This approach would work best, according to Hufbauer and Kim, if several points are addressed: (1) financial responsibility to developing countries must be divided among the developed members; (2) there must be a commitment to provide public funds if private funds are not forthcoming; (3) a template of conditionality for developing countries must exist; and (4) emission control targets must be frequently reviewed in light of the 2 degrees Celsius cap.

Policy Brief 10-4 by Gary Clyde Hufbauer and Jisun Kim.

Why Rescuing Greece Will Change Europe for Decades

In the next few days, Greece's Prime Minister, George Papandreou, will meet Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France in what will likely become the defining moment for a crisis that is shaking Europe. What they decide is also likely to shape the future of the euro area and transform its politics for decades.

RealTime post by Carlo Bastasin.

A Stress Test for the Euro?

Nicolas Véron says that multiple weaknesses in Europe make it likely that currency markets will keep betting against the euro even if Greece stabilizes.

Howard Rosen on C-SPAN: How Unemployment Insurance System Works

Howard Rosen, resident visting fellow at the Peterson Institute for International Economics, explains on C-SPAN how the unemployment insurance system works in this country.

Greece, Act II--More Kabuki than Tragedy

In the nearly three weeks since European Union leaders called on the Greek government to produce a credible fiscal austerity plan and broader economic reform package, an increasingly strange, but predictable and scripted political theater has unfolded among the key actors. All are trying to pass the cost of restoring Greece to a long-term sustainable path on to someone else.

RealTime post by Jacob Funk Kirkegaard.

Containing Greece's Travails in Europe

Michael Mussa assesses the threat of a default by Greece and the misgivings and constraints felt by Germany in trying to avert a crisis.

Germany's Chinese New Year and What to Do about It

In 2009, China displaced Germany as the Exportweltmeister in terms of total volumes exported. Germany starts 2010, however, sharing a common dilemma with China: how to sustain growth, or at least limit the contraction, on both sides of its trade surplus when those markets that are locked into a fixed exchange rate with it need real adjustment. For Germany, however, the deeper political ties and trust amongst the European Union than across the Pacific are an advantage, not a source of weakness as some would have it. Those relationships provide a far easier path to resolving the dilemma for the long term than the more politically fraught, if less economically dire, US-China relationship.

Op-ed by Adam S. Posen.

Should China Fear Us?

Writing partly in response to "Should We Fear China?" Robert Salomon of NYU makes some good points about how rapid appreciation of the renminbi could hurt China and argues: "Although I agree that it is in the best long-term interest of the U.S. and other countries throughout the globe for China to revalue its currency, it isn't entirely clear to me that such a maneuver is in the near-term interests of China, ...or maybe even the global economy." Robert's concerns are focused on the effects of a sudden revaluation—a movement in the exchange rate that would be disruptive to Chinese production and plunge that country into recession. But that scenario hardly seems likely.

RealTime post by Simon Johnson.

China's Lending Activities and the US Debt

China is the largest holder of official foreign currency reserves in the world, currently estimated to be worth around $2.4 trillion. It is in the interests of both the United States and global economic prosperity that China discontinues its massive currency intervention. This intervention is a breach of China's international commitments as a member of the International Monetary Fund and constitutes a form of unfair trade practice. If China were to end its intervention, the renminbi would likely appreciate substantially by 20–40 percent. The primary effect would be an effective depreciation of the US dollar against the Chinese renminbi. Such a movement in the dollar would help expand US exports and improve the ability to compete against imports; this would aid in the process of recovery.

The question is how best to press China to revalue its currency. Given the failure of the existing multilateral mechanisms at the IMF, the United States should take this issue to the G-20. The most plausible proposal is to expand the mandate of the World Trade Organization in assessing exchange rate manipulation on the same basis as it deals with unfair trade. While such a rearrangement of responsibilities would take some years, concrete moves in this direction would concentrate the minds of the Chinese authorities in a potentially constructive manner.

Testimony by Simon Johnson.

Interview: Is China's Economy Overheating?

Nicholas R. Lardy says China is concerned but is not "slamming on the brakes" or showing any signs of planning increases in interest rates or the value of its currency.

The End Seems near for the Putin Model

A recent week in Moscow left one clear impression: The Putin model of crony state capitalism is dead. For years, the structure that Vladimir Putin crafted looked invincible with its steady, high growth rates and effective, mild repression. But the system only distributed ample oil rents to the elites and the ordinary people, creating neither moral nor economic value. Today the bill is due.

Op-ed by Anders Åslund.

Would the Volcker Rule Prevent Banks Too Big to Fail?

Morris Goldstein assesses the prospects for Congress adopting the Volcker Rule and other elements of a financial regulatory reform package.

Event: Multilateral Approaches to Global Challenges: A Norwegian Perspective

Svein Gjedrem, Governor of the Central Bank of Norway, answers audience questions after delivering his speech, "Multilateral Approaches to Global Challenges," February 25, 2010, at the Peterson Institute for International Economics.

Event materials are available online.

Having a Large Euro Area Is an Advantage for Germany

Listening to the current hue and cry over Germany's role in backstopping Greek restructuring, one might be duped into thinking that having the euro extend beyond the core economies was a great mistake. Whatever the balance of economic costs and benefits of euro adoption for other countries, for Germany itself, widespread euro adoption has been a boon. There are many advantages to being the anchor economy for a currency zone from which Germany has benefited over the last 11 years. None of those advantages are imperiled by the Greek situation and all of those advantages increase with the size of the euro area.

Op-ed by Adam S. Posen.

Europe Needs an "Economic Government" but Greece Has Made the Goal Even More Elusive

It is hardly a surprise that Greece's struggles and Europe's fitful response have come to illustrate the problems of an incomplete integration of Europe and the eurozone. As predicted by many economists before the introduction of the euro, the fact that the eurozone is not an "optimum currency area" has left the region vulnerable to asymmetric shocks, which then played a large role in the current crisis. The European Union and the eurozone do have relatively large degrees of labor and capital mobility, despite language and cultural barriers. Similarly, Europe has had—at least during the current downturn—a relatively synchronized business cycle.

RealTime post by Jacob Funk Kirkegaard.

Can Europe Build a Better EMF?

Daniel Gros and Thomas Mayer, writing on the Economist website, propose that Europe build a European Monetary Fund (EMF) that would be better than the International Monetary Fund (IMF). The EMF would be financed by its weakest members, would be stricter than the IMF in its policy conditionality, and would have a pre-positioned resolution mechanism to address sovereign default. Their proposal is an economic, financial, and political nonstarter. Pursuit of their suggestion would be counterproductive to the European project. Europe would be better advised to send Greece to the IMF for a comprehensive economic reform program than to continue to nurture it in the European context.

RealTime post by Edwin M. Truman.

America Could Turn to India for Inspiration on Tax Reform

Bemoaning the state of the Indian public sector and its inability to deliver essential services is a hardy perennial of intellectual discussions. Academic reputations can be built, and tenure at universities such as Harvard obtained, it seems, by documenting the entrails of the Delhi car licensing system. All this is fair enough because the caricature—of bumbling bureaucrats, venal politicians, and bizarre, byzantine processes for decision making—often approximates the reality. But India and the Indian public process can surprise, even wow, the careful observers. One such surprise—an unambiguous success of Indian institutions—must be the future introduction of the goods and services tax (GST), a major piece of tax reform that would be the envy of mature democracies such as the United States.

Op-ed by Arvind Subramanian.

Gazprom Is the Essence of the Energy Curse

Gazprom is Russia's leading company, but few enterprises have been as badly beaten during the global financial crisis. The Russian economy has recovered as the crisis has abated, but Gazprom may suffer from a profound structural crisis. It needs to downsize, cut waste, and reform.

Op-ed by Anders Åslund.

Delhi's Budget Bets on Growth

Against the backdrop of worldwide anxiety about the state of public finances, India's Finance Minister Pranab Mukherjee will present the annual budget to parliament Friday. India's budgetary situation has deteriorated substantially in the last two years. The overall government deficit is now in double-digit territory and government debt exceeds 80 percent of GDP. Whether urgency and dramatic progress will mark this budget remains the question.

Op-ed by Arvind Subramanian.

Financial Regulation: A New Fortress Europe?

Cross-border integration of financial institutions and markets in Europe has been the major factor determining the shape of the European Union's financial regulatory initiatives during the 2000s. A major legislative package rolled out after 1999, for example, contributed to the removal of barriers that until then had kept much of Europe's financial activity largely national.

RealTime post by Nicholas Véron.

Figuring Out the Doha Round

Fears of protectionism have risen in the wake of the global financial crisis. This column argues that, far from being time to abandon the Doha Round, sustaining political support for the rules-based multilateral trade system is more important than ever. If this column's recommendations are followed, world GDP could gain up to $282.7 billion a year.

Op-ed by Gary Clyde Hufbauer, Jeffrey J. Schott, and Woan Foong Wong.