The global financial crisis has now turned into a European sovereign debt crisis, abruptly putting an end to a decade of soft budget constraints for the countries in Europe’s periphery. Interest spreads are rising once again, awakening memories of pre-euro times. The European Union has intervened with hastily constructed rescue packages and is bracing for a major reform of the European economic governance system, attempting to blend solidarity with market discipline.
In its 10th Report on the European Economy, the European Economic Advisory Group contributes to the debate by presenting a master blueprint for such a governance system. It specifies a three-step procedure that starts off with liquidity support as a first line of defence, followed by a plan to help in the case of impending insolvency and a full-insolvency procedure for the worst case. This system would make the European Central Bank bailout policy superfluous and could in the near future be applied to Greece, whose perilous situation is analyzed in a separate chapter. A chapter on Spain and one on the supervision and possible taxation of the banking sector complete the set of topical issues that the Group examines in depth in this year’s report. As always, we start with an assessment of the current economic situation and a set of forecasts prepared by the Ifo Institute and complemented by the Group.
Owing to its truly pan-European, non-partisan nature, the EEAG can offer fresh, unconventional views based on sound economic reasoning for policymakers, business leaders and academics. Over 10 years, it correctly anticipated the problems arising from the enforcement weaknesses of the Stability and Growth Pact (2002); questioned the euro-area’s institutional arrangements in terms of their adequacy for reducing the risk of financial crises (2003); provided a “primer” on the 10 countries that joined the European Union in 2004; voiced a premonitory concern about a possible collapse in real-estate prices in some European countries (2005); warned about the potentially disastrous effects of global imbalances (2006); cautioned about necessary macroeconomic adjustments in Ireland and Italy, being the first to raise a red flag regarding then-booming Ireland (2007); was the first to address the neglected supply side in fighting global warming (2008); put the finger on some of the key factors behind the financial crisis (2009); and anticipated the problems arising from excessive indebtedness (2010).
The EEAG, which is collectively responsible for each chapter in this report, consists of a team of seven economists from seven European countries. This year, the Group is chaired by Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich) and includes Giancarlo Corsetti (University of Cambridge), Michael Devereux (University of Oxford), John Hassler (Stockholm University), Gilles Saint-Paul (University of Toulouse), Xavier Vives (IESE Business School, Barcelona) and myself (Ifo Institute and University of Munich). Thomas Moutos (Athens University of Economics and Business) supported the Group with valuable comments and expertise. The members participate on a personal basis and do not necessarily represent the views of the organisations they are affiliated with.
I wish to thank the present and former members of the Group (in addition to those listed above, Lars Calmfors, John Flemming†, Luigi Guiso, Seppo Honkapohja, Tim Jenkinson, John Kay, Pentti Kouri† and Willi Leibfritz) for investing their time in a challenging project. I also gratefully acknowledge valuable assistance provided by the many scholars and staff at CES and Ifo who have helped prepare the reports. The participants in this year’s Report were Darko Jus and Florian Buck (research assistants), Tim Oliver Berg, Teresa Buchen, Nikolay Hristov, Michael Kleemann, Johannes Mayr, Georg Paula, Johanna Plenk and Timo Wollmershäuser (economic forecast), Paul Kremmel and Julio Saavedra (editing), Christoph Zeiner (statistics and graphics), Jacob Sander (fact-checking), and Jasmin Tschauth and Elisabeth Will (typesetting and layout). Moreover, I wish to thank Swiss Re for hosting our spring meeting.
Hans-Werner Sinn President, CESifo Group Professor of Economics and Public Finance, Ludwig Maximilians University, Munich
Munich, 22 February 2011
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EEAG European Economic Advisory Group at CESifo Information and current members
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