Tuesday, June 10, 2014

Europe's imbalances: connecting the dots in a winning thesis

Andreas Glossner examines Europe's economic problems over the past two decades and draws lessons for policymakers in a thesis that recently won him SAIS Europe's highest academic award. In his paper, "Fiscal Policies and Macroeconomic Imbalances Across the Euro Area: A Study of Trends and Discontinuities," Glossner analyzes the link between fiscal and economic coordination in the euro area, and recommends that Europe use incentives instead of sanctions to promote economic convergence. Below Glossner, who won one of the C. Grove Haines awards last year as well, answers some of our questions about his thesis, which he wrote for his master's degree at SAIS Europe.

Q: How did you get the idea for the paper?
Glossner: In following the debate about the right kind of fiscal governance in the euro area, I found that the polarization of views has sometimes obscured its broader context -- that of the history of the monetary union. In my thesis, I took a comprehensive, empirical look at the macroeconomic impact of European fiscal policies across three time periods: prior to the launch of the Euro, during the first years of monetary union and since the onset of the recent crisis. My thesis examined the link between fiscal policies and external imbalances, which partly explains why Europe was hit so deeply in the aftermath of the global financial crisis.
Andreas Glossner receiving his C. Grove Haines award
from SAIS Europe Director Kenneth Keller

Q: What was the hardest part?
Glossner: Many of the concepts in the thesis were hard to quantify, especially given that “macroeconomic imbalances” is a somewhat vague term. I decided to focus on external imbalances and worked out a set of hypotheses that I then tested empirically. This was a challenging part of the project, even though I had done econometric research in trade economics before and had studied physics prior to coming to SAIS.

A second big challenge was to bring the different strands of the relevant literature together. The debate about fiscal multipliers, the literature on the build-up of intra-euro area imbalances and the broader questions pertaining to the monetary union’s governance are all related to the topic of the thesis.

Q: What were your main findings?
Glossner: First, and in line with the literature, I found that macroeconomic imbalances could ultimately shape European countries’ fiscal constraints during the crisis because of the failure of the euro area to converge economically. Before 1999, economic convergence did not exceed that in the OECD as a whole, and after the launch of the euro, the euro area diverged economically -- evident in the build-up of macroeconomic imbalances. In the thesis, I suggest a simple categorization of countries according to the origins and characteristics of these imbalances, and show that the constraints of national fiscal policies in responding to the recent crisis have been a direct function of this categorization.

Second, the thesis makes it evident that fiscal policies have not contributed to halting or reversing this overall economic divergence. This can partly be attributed to the fact that the heterogeneity of national fiscal policies across the euro area did not fundamentally decrease in the run-up to the euro and persisted after 1999. Thus, the development of structural primary balances shows that in the years prior to the crisis, the fiscal stance of euro area countries varied from restrictive to strongly expansive. In addition, it is shown that specific policy measures in some countries permitted or even facilitated the build-up of imbalances that fueled the overall economic divergence of the euro area prior to 2008.

Based on these findings, I also suggest a set of cautious policy conclusions for future fiscal coordination in the euro area.

Q: What advice would you offer to other students writing papers?
Glossner: Finding the right research question is the hardest part, but in the process, you already set half of the groundwork for the actual paper. Don’t hesitate to tackle the “big questions.”

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