The EEAG Report on the European Economy 2010. Exiting the Crisis

On 23 February 2010, the European Economic Advisory Group at CESifo presented its ninth report: 'Report on the European Economy' at a press conference in Brussels and at press conferences in major European cities.

The 2010 EEAG Report provides an authoritative analysis of the most salient aspects of the financial crisis that wiped trillions of dollars around the world and, in particular, explores what needs to be done to nurture the incipient recovery: there are still several chronic ailments in the financial market that need to be addressed and which pose significant challenges for economists and policymakers.

The financial crisis prompted many countries to put their economic reform efforts on hold, while public debt kept rising massively. Trust in the financial markets, in turn, all but disappeared. The suspension of reforms could well mean that the world will be confronted after the crisis with the same imbalances and structural problems than before the crisis, with the added burden of much higher levels of indebtedness.

The 2010 EEAG Report provides an extensive analysis on public debt and suggests measures to rebuild trust in financial markets, both of which will prove crucial in the coming years. The loss of trust will lead to a lower appetite for risk and to a dwindling demand for complex securities, turning instead to simpler, easier-to-understand, less diversified assets of a mostly domestic nature, and relying less on intermediaries. The insurance industry will also be affected by this loss of trust. The Report examines three possible mechanisms that could help restore the loss of confidence: a simpler rating system, a trust-based compensation scheme, and promoting investors’ financial education.

Clearly, countries all around the world will have to start reducing indebtedness after the sharp increase in public debt resulting from the massive stimulus packages. Less clear is when the right moment will be to start reinstating fiscal virtue, and what form an effective financial market regulation framework could take. Equally important will be the enduring problem of global imbalances induced by the United States’ long-lasting trade balance and current account deficits. The Report’s authors propose ways for overcoming these issues. As always, the Report provides a comprehensive macroeconomic outlook for 2010 which, in this case, also shows in retrospect the uniqueness of last year’s economic crisis. The authors are neither too pessimistic, nor do they predict a flourishing world economy for 2010: the consequences of the expiring fiscal packages and an increase in unemployment will slow down growth. The Report’s traditional country chapter is this year devoted to the whole euro-zone, highlighting – eight years after its introduction – the success and weaknesses of the euro in promoting stability during the crisis. While the euro shielded many countries from the effects of the crisis, it could lead to a balance-of-payment crisis in some Central and Eastern European countries. Furthermore, as the case of Greece has shown, a stable, responsible fiscal policy is essential to benefit from the credibility premium granted by EU membership.

Thanks to its non-partisan nature, the EEAG can offer fresh, unconventional views based on sound economic reasoning for policymakers, business leaders and academics.

The EEAG, which is collectively responsible for each chapter of this report, consists of a team of eight economists from seven European countries. The Group is chaired by Gilles Saint-Paul (University of Toulouse) and includes Giancarlo Corsetti (European University Institute, Florence), Michael Devereux (University of Oxford), Luigi Guiso (European University Institute, Florence), John Hassler (Stockholm University), Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, vice-chairman), Xavier Vives (IESE Business School) and Hans-Werner Sinn (Ifo Institute for Economic Research and University of Munich). The members of the Group participate on a personal basis and do not represent the views of the organisations they are affiliated with.