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Policy Brief 12-5
Interest Rate Shock and Sustainability of Italy's Sovereign Debt
[pdf]
William R. Cline
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Contagion from Greece, together with domestic political uncertainty in Italy, caused interest rates on Italian sovereign debt to spike in the second half of 2011. By January 2012, however, the short-term rate had fallen sharply and the long-term rate had eased as well. But this improvement is by no means assured to continue. Cline examines the sensitivity of the Italian public debt outlook to a new higher interest rate environment, as well as to possible shortfalls from fiscal targets. In terms of long-term solvency, Italy is not close to a precipice and could keep its debt ratio from escalating even if the recent peak interest rates on its debt (about 7 1/2 percent) were to return and persist for a long time (but rise no higher). However, there is a considerable chance that Italy would face a severe liquidity squeeze under these circumstances. It thus behooves the official sector in Europe and internationally to move quickly to provide some credible lender of last resort vehicle in the immediate future.
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Speech
Unraveling the Euro Crisis
Edwin M. Truman
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The question on everyone's mind is whether the euro will unravel. To answer that question one must identify where Europe was before the crisis in order to help make sense of the many parts of the crisis. First, the European integration project has always combined political and economic motives. Sometimes those elements have worked at cross purposes, including over the past several years. Second, the cause of the euro crisis is not primarily profligate fiscal policies by the countries principally affected. The causes are many and varied. This is why the crisis is existential for the European project as a whole. Third, European crisis management has been abysmal. The failures are rooted in European wealth, history, and institutional shortcomings. Fourth, the euro most likely will survive along with the European integration project, but Europe faces a daunting agenda in order to achieve success. In the end, the Europeans will likely use this painful crisis to move the European integration project forward, but the pace may be too slow for the good of Europe and for the world as a whole. Time is running out and European leaders need to understand that they have exhausted a great deal of good will in many countries around the world by their dithering.
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>> See also: Europe v. World
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Op-ed
Europe's New Fiscal Compact Treaty Does Not Outlaw Keynesianism and Is a Stepping Stone to More Progress
Jacob Funk Kirkegaard
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Europe has compiled a new fiscal compact treaty in record time since the idea was first introduced at the EU Council on December 9, 2011. Angela Merkel called it a "masterpiece" on the night of its final approval on January 30. It is perhaps unsurprising, though, that not everyone agrees. Many policymakers and economists—particularly those in English-speaking or peripheral European countries—have quickly dismissed the new fiscal compact treaty as an economic disaster for Europe that, true to caricatures of German policies, forever outlaws Keynesian countercyclical policies. However, it is wrong to simply condemn the new treaty as the completely wrong answer. The new fiscal compact will help change the political narrative of bailouts from "pouring ever more German taxpayers' money into Greece" to "Germany providing support for Europe's new Stability Union." Needless to say, the latter is far more politically palatable and will help secure the Bundestag's overwhelming approval of higher German contributions to the European Stability Mechanism (ESM) later in the spring. This is good news for Europe, and the new fiscal compact is the critical "down payment" making it possible.
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Peterson Perspectives Interviews
Is Obama's Reorganization Plan Headed for Oblivion?
Gary Clyde Hufbauer outlines the prospects and pros and cons of merging the US Commerce Department and US Trade Representative with a few other agencies mixed in.
Recent Blog Posts
PIIE Noted in the News and on the Web
Bloomberg
Italy's Monti Speaks About Europe Debt Crisis
Bloomberg broadcasts Mario Monti's speech at the Peterson Institute for International Economics.
Reuters
World Watches as China Economic Leaders Take Stage
Reuters draws upon Nicholas R. Lardy's new book Sustaining China's Growth after the Global Financial Crisis.
Preview of Our Next Issue
Working Paper 12-3
Chinese Investment in Latin American Resources: The Good, the Bad, and the Ugly
Barbara Kotschwar, Theodore H. Moran, and Julia Muir
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