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"EconWeekly" - 5 new articles

  1. Italian banks: ownership structure, corporate governance, and asset quality
  2. Long-term growth trends
  3. Surprises from the 2014 Global Wealth Report
  4. New paper on the mechanisms behind the eurozone crisis
  5. Interview with Jean Tirole, the Toulouse school, French economists
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Italian banks: ownership structure, corporate governance, and asset quality

Nadege Jassaud, economist at the IMF, writes an entry on Vox about Italian banks: ownership structure, corporate governance, and asset quality. Her main points:
1. The recently released ECB balance sheet assessment highlighted nine Italian banks that failed the asset quality review (AQR) and stress tests – before 2014 recapitalisation. Eight of them fall into the categories described in this article (and 14 out of the 15 Italian banks participating in the assessment).

2. In Italy, bank ownership through foundations and bank cooperatives raises specific challenges for corporate governance.

3. Italian foundations have played a critical role in the privatisation of community-owned banks.

4. Foundations still remain in control of the largest Italian banks.

5. Foundations suffer from an opaque and weak governance structure.

6. The financial position of several foundations has weakened, raising concerns about their capacity to provide further bank support.

7. Banks with foundation ownership tend to feature weaker asset quality than other Italian banks.

8. Cooperative structures are widespread in Europe and have been an important source of credit to local businesses.

9. The cooperative model raises governance issues when banks grow above a certain size.

10. Like foundation-owned banks, bank cooperatives have weaker asset quality compared to other banks and are less resilient to shocks.
This reminds of the Spanish cajas de ahorros, bank-like institutions with no shareholders and effectively under the control of local governments. The cajas were poorly managed, and highly vulnerable to the real estate crash. Regulators forced them to merge, and restructure into proper banks, after the financial crisis.

Long-term growth trends

Gavyn Davies brings our attention to a paper (by Juan Antolín-Díaz, Thomas Drechsel, and Ivan Petrella), on the changing long-trend of GDP growth in G-7 countries. Here's the paper, here's a non-technical summary, and here are Davies' comments.

Trend growth rates have declined massively over the past 50 years. The authors do perform structural break tests, but I'm not sure whether one can conclusively say that there is a break in the series, rather than the alternative hypothesis that the change is gradual.

Either way, the figures are impressive (or depressing):

From Davies' column (emphasis mine):
The results show an extremely persistent slowdown in long run growth rates since the 1970s, not a sudden decline after 2008.


Averaged across the G7, the slowdown can be traced to trend declines in both population growth and (especially) labour productivity growth, which together have resulted in a halving in long run GDP growth from over 4 per cent in 1970 to 2 per cent now.
Some version of secular stagnation does seem to be taking hold. This may partly explain why, for the last five years, forecasts of G7 real GDP growth have been persistently biased upwards.


The regression to the mean that Summers/Pritchett have identified is a reversion to the global average growth rate. But that growth rate may also change. The assumption that the mean growth rate is one of the great economic constants in advanced economies is simply wrong.


The slowdown in long run growth in the developed economies therefore seems to have become a permanent fact of life, rather than a temporary result of the financial crash that will disappear over time. But the actual path for GDP has fallen well below even the depressed long run equilibrium path since 2009.

On the assumption that growth is a constant, I would say that virtually every analyst recognizes that there's been a growth slowdown, relative to the 1970s. I think the more common mistake is to extrapolate from recent growth rates to forecast long-term growth (for example, assuming the U.S. long-term growth rate is 2% or 2.5%). Without a theory of what has depressed productivity (for example) since the 1970s, or since the early 2000s, how useful are those long-term forecasts?

In the last quoted paragraph I don't think "equilibrium" is the best word. This is purely econometric work, so I don't know what notion of "equilibrium" this even corresponds to.

Finally, take the tail end of the charts (say, the last ten years) with a grain of salt. I think the trend estimate at any point in time should be informed by both past and future data. Recent trend estimates might be biased by data from the current business cycle--especially the recent deep recession, and current (possibly abnormal) recovery.

Still, I think the broad findings are important.

Surprises from the 2014 Global Wealth Report

1. Wealthy French:
"Although just 1.1% of the world's adults live in France, in terms of aggregate household wealth in current USD, it ranks fourth among nations --behind China and just ahead of the U.K. [...] This reflects the high average net worth of French households, rather than unusually high wealth inequality."
Here's a count of the world's millionaires, by country. France ranks second.

2. Wealth inequality fell, between 2000 and 2014, in: Switzerland, Denmark, Germany, Japan, Philippines, France, Colombia, Canada, Mexico, Malaysia, New Zealand, Singapore, Saudi Arabia, and Poland.
Moreover, among the G7, only the U.K. recorded rising inequality.

That's from Credit Suisse's Global Wealth Report 2014.

New paper on the mechanisms behind the eurozone crisis

Philippe Martin and Thomas Philippon have written a new paper about the mechanisms of private leverage and fiscal policy within the eurozone, from its creation through the Great Recession. (NBER link, ungated version).

From the introduction (emphasis mine):

There is wide disagreement about the nature of the eurozone crisis. Some see the crisis as driven by fiscal indiscipline and some by fiscal austerity, some emphasize excessive private leverage, while others focus on external imbalances, sudden stops or competitiveness divergence due to fixed exchange rates. Most observers understand that all these “usual suspects” have played a role, but do not offer a way to quantify their respective importance. In this context it is difficult to frame policy prescriptions on macroeconomic policies and on reforms of the eurozone.


...we propose a simple model that focuses on three types of shocks: household leverage, fiscal policy, interest rate spreads and exports. A key challenge is then to empirically identify private leverage shocks that are orthogonal to shocks on fiscal policy and shocks on spreads. To help us identify the eurozone shocks, we use the US as a control.


The key difference between the US and the eurozone experience is the sudden stop in capital flows starting in 2010 in the later.


Contrary to the eurozone, the US states did not experience any shock on spreads in borrowing costs and no fear an a potential exit of the dollar zone. This allows us, for the eurozone, to identify the part of the private deleverage dynamics that is not due to the spreads shocks by the private deleveraging predicted in the US on the period 2008-2012. We call this the “structural” private leverage shock.


Starting in the Spring of 2010, sovereign spreads widen and several European countries find it difficult to borrow on financial markets. The US and EZ experiences then start to diverge. While US states grow (slowly) together, eurozone countries experience drastically different growth rates and employment. A state variable that correlates well with labor markets performance in 2010-2011 in the Eurozone is the change in social transfers during the boom. Eurozone countries where spending on transfers (and also government expenditures) increased the most from 2003 to 2008 are those that are now experiencing severe recessions in the later stage. This suggests that in the second stage past fiscal policy, because of its effect on accumulated debt, had an impact on the economy through spreads and the constraint on fiscal policy it generated after 2010.


In this paper, we analyze a model where borrowing limits on “impatient” agents drive consumption, income, the saving decisions of “patient” agents and employment in small open economies belonging to a monetary union. We introduce nominal wage rigidities which translate the change of nominal expenditures into employment. We first consider the predictions of the model taking as given the observed series for private debt, fiscal policy and interest rate spreads between 2000 and 2012.
Maybe I don't understand the paper, but it seems to me that using U.S. states to identify the causal mechanisms is crucial. It also seems (and I might be wrong) that the identifying vehicle are the spread shocks. Now, there exist important differences between U.S. states and eurozone countries: fiscal, political, labor markets, cultural, etc. Insofar as those differences are not reflected in spreads or spread shocks, but played a role in determining the path of unemployment, deficits, etc., the identification strategy is flawed. Comments?

Putting those doubts aside, I love this paper.

Summary of main findings, from the conclusion:

1. The private leverage boom (in 2000-2008) was the key igniting element of the crisis, especially in Spain and Ireland.

2. Pro cyclical fiscal policy during the boom worsened the situation, especially in Greece.

3. In Ireland and Spain, a more conservative fiscal policy during the boom would have helped, but would have entailed an implausibly large fall of public debt.

4. A macro-prudential fiscal policy to limit private leverage during the boom would have stabilized employment in all countries. However, in the absence of more prudent fiscal policy, this would have induced a larger buildup in public debt.

5. Fiscal and macro-prudential policies are thus complements, not substitutes, in order to stabilize the economy.

6. The sudden stop in the eurozone worsened the crisis by further constraining fiscal policy. If the ECB's "whatever it takes" line had come earlier (and had been successful at that earlier time), Ireland, Spain, Greece and Portugal would have been able to avoid the latest part of the slump.

Interview with Jean Tirole, the Toulouse school, French economists

Les Échos relays today's interview (in French) with Jean Tirole, by Europe 1. Tirole opines talks about the future of France, the job market, the need for reforms, sovereign debt, the euro, and the role of industrial regulation.

Jean Tirole : l'assurance chômage "incite au... by Europe1fr

Also on Les Échos: The Toulouse school of economics.

I can't help drawing parallels between Toulouse's school of economics and Universitat Pompeu Fabra's (where I did my undergrad econ). Both are young schools, started in the 1990s with the ambition of becoming world class schools of economics, on par with the best U.S. schools. Both are located in the "periphery" of their respective countries. And both are mostly staffed by faculty with Ph.D.'s from U.S. schools.

And the most promising French economists, according to the IMF:

1. Xavier Gabaix (NYU)
2. Esther Duflo (MIT)
3. Emmanuel Farhi (Harvard)
4. Hélène Rey (LSE)
5. Emmanuel Saez (UC Berkeley)
6. Thomas Philippon (NYU)
7. Thomas Piketty (Paris School of Economics)

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