Devereux, Michael P.
This is the eighth report of the European Economic Advisory Group. Like the previous ones, it starts with an assessment of the macroeconomic outlook. In preceding reports this first chapter was usually followed by topical chapters that dealt with medium and long run issues relevant to the European economy as a whole. This year, the report is structured differently. A sense of mayhem struck the world economy in autumn 2008 as the financial crisis suddenly gathered momentum and started spreading to the real economy, which slid into recession. Chapter 2 provides a detailed account of the crisis and the various stages of its development, and highlights key policy recommendations regarding regulation of financial institutions and international financial architecture. We argue that regulations such as minimal equity requirements should be extended to all bank-like institutions rather than be confined to the commercial banking sector, that a more sophisticated definition of value-at-risk should be introduced to take into account the possibility of high liquidity premia and of asset bubbles, and that there is a need for a common system of financial regulation and supervision at the European level. The crisis has fuelled an ongoing debate about the virtues of financial capitalism and none of its components have been spared. In particular, among the many innovations that have appeared in the last two decades are private equity firms that are under close scrutiny and criticism in some circles. Chapter 3 analyses how these firms work and how they contribute to the allocation of resources. Overall, we are sceptical of the critiques and think there is no systemic risk associated with these firms. (Their liabilities have little leverage and while they do leverage their investments, this is associated with little covenants and hence low risks of bankruptcy.) From now on, each edition of the EEAG report will include one chapter that focuses on one EU member country. This year that chapter is devoted to France, which elected a new president in 2007 with promises of bold economic reform. We provide a mixed assessment of those reforms; having a large number of reforms does not necessarily mean large economic effects if those reforms run in different directions and may well be reversed in the future. We find more promise in the broad reform of the government than in the areas of taxation, the welfare state or product and labour market regulation, where there appear to be many inconsistencies Show more
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Journal / seriesThe EEAG report on the European economy
PublisherCESifo Group Munich
Organisational unit02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
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