• Bruegel think-tank has just issued a policy brief on global governance. It raised issues which are fundamental in shaping the future role played by Europe in XXI century global world. Summary and policy challenge are below:


The system of multilateral rules and institutions that is currently responsible for global economic governance is in a sorry state. In the coming months, Europe will be faced with important decisions about the

future of this system. The EU should not wait before proposing and initiating reforms. Europe has a large stake in the multilateral system and has considerable experience in designing effective institutions, making it well placed to lead a reform agenda. Moreover, the legitimacy of the EU in the eyes of its citizens depends on its ability to tackle the big issues that really matter for the future of the global economy.


Global economic governance matters. Since the US at present appears less ready to move it forward, European policymakers must take responsibility for advancing the reform agenda. Reforms are especially needed in areas such as trade, finance and the environment. Specifically, the EU should act now to unlock the stalled global trade negotiations, push for badly needed governance reforms at the IMF and the World Bank, and take the lead in addressing the problem of global warming. However, the EU is unlikely to be successful unless it first gets its own house in order and makes changes both to its internal governance and to the way that Europe is represented in international forums. “

  • Here is the link to Menzie Chinn post about international economics related sessions during the Chicago ASSA meeting past week. It reviews several important contributions. Menzie Chinn also recommends that every economist should read recent George Akerlof paper, so did I in my previous post .
  • European Commission services prepared a paper summarizing 101 proposals to modify the Stability and Growth Pact (SGP). Paper summary is below:

“The failure of key EU Member States to respect the requirements of the Stability and Growth Pact (SGP) a few years after its inception triggered a heated debate on how to reform the framework of fiscal policy coordination in the Economic and Monetary Union (EMU). This paper systematically analyzes 101 reform proposals presented by professional academic and non-academic economists prior to March 2005, when the Council of the European Union adopted a revised version of the SGP. Each proposal is characterized by a set of variables reflecting features such as the degree of modification of the SGP, the background of its

author(s), the main aim attached to fiscal policy coordination in the EMU, the timing of the proposal and the type of proposal made. Using multivariate statistical analysis, roughly four different schools of thought concerning the reform of the SGP are identified. In line with the main findings of the political economy literature, all four schools of thought share the view that in the absence of specific rules fiscal policy would lead to excessive deficits and hence affect the conduct of the common monetary policy. However, beyond this common denominator, there is no consensus on how best to co-ordinate fiscal policy. We present several explanations for the multitude of proposals, the most important being the present lack of a consensus in the economics profession concerning the role of fiscal policy. Economists hold diverging views on the goals, instruments, efficiency and institutions for fiscal policy-making. This state of affairs is in sharp contrast to the case of monetary policy. In addition, the institutional framework for the SGP was completely new. The euro area is the first case where monetary policy-making is centralized while fiscal policy-making is decentralized to national governments. As long as we lack consensus on the proper role of fiscal policy, the SGP will be the subject of different economic assessments.”

  • Morgan Stanley’s comment on world reserve accumulation, summary is below:

“We document the latest figures on the world’s official reserves. The total stock of official reserves continues to grow rapidly. Despite the recent trend to the contrary (the last month or so), we continue to hold the view that in 2007 we will witness waning interventions by the Asian central banks, with the sole exception of the PBoC/SAFE. The returns on the underlying investments will account for an increasing share of the incremental changes in the official currency reserve position. Regarding reserve diversification, we also maintain the view that, in 2007, we will see central banks taking a decisive step toward investing their ‘excess’ reserves like ‘sovereign wealth funds’ by diverting from the traditional investment patterns. This prospective move will mark a watershed in central bank reserve management and for the financial markets in general. “

  • The Economist article comparing BoE and ECB. There is still a lively and ongoing debate on whether central bank should surprise the markets, or not. Many papers have been written on the subject, many will be.
  • IMF has published new Working Paper , which concludes that New Member States are enjoying lower risk premia than their peers, thanks to EU accession via higher policy credibiloity channel. Summary of the paper is below, the full text is not available yet.

“References to policy credibility, particularly with regard to fiscal policy, are ubiquitous in both economic literature and financial markets, even though it is not directly observable. The case of the EU new member states (NMS)-emerging markets joining a supranational entity that is generally considered to have higher policy credibility-provides a unique experiment to assess the effects of credibility on sovereign credit. This paper examines the impact of EU accession on three key variables that can reflect in varying degrees policy credibility: sovereign ratings, foreign currency spreads, and local currency yields. The results suggest that the NMS appear to have enjoyed higher credibility compared to their peers.”