When the euro was introduced in 1998, one objective was to create an alternative global
reserve currency that would grant benefits to euro area countries similar to the U.S.
dollar’s “exorbitant privliege”: i.e., a boost to the perceived quality of euro denominated
assets that would increase demand for such assets and reduce euro area members’ funding
costs. This paper uses risk perceptions as revelaed in investor surveys to extract a measure
of privilege asscociated with euro membership, and traces its evolution over time. It finds
that in the 2000s, euro area assets benefited indeed from a significant perceptions
premium. While this premium disappeared in the wake of the euro crisis, it has recently
returned, although at a reduced size. The paper also produces time-varying estimates of
the weights that investors place on macro-economic fundmentals in their assessments of
country risk. It finds that the weights of public debt, the current account and real growth
increased considerably during the euro crisis, and that these shifts have remained in place
even after the immediate financial stress subsided.
This 2014 Cluster Consultation report examines common themes and challenges facing the three Baltic countries—Estonia, Latvia, and Lithuania. It identifies common features and common challenges, and discusses policies—both national and joint—that could help to address these challenges. The Baltic economies have performed well during the last two decades. The global financial crisis exposed vulnerabilities that had built up in the Baltics, but the postcrisis recovery revealed inherent strengths as well. This report highlights that national policies are necessary to address all of the challenges, but collaboration is also important in some areas.
Miss Catriona Purfield and Mr. Christoph B. Rosenberg
The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.