A new phase for the Eurozone

The state of Greek and Italian economies

Very little to celebrate and a lot to worry argues Desmond Lachman: Greece’s economy is still 25% below its pre-crisis level, has 20% unemployment and more than 400,000 of its more economically active citizens chose to leave the country. Italy, on the other hand, is the second most indebted eurozone country after Greece; Italian banks’ balance sheets are saddled with worryingly high levels of non-performing loans as well as with uncomfortably high levels of Italian government debt. As the global liquidity environment changes, the Italian economy will be the most vulnerable of the eurozone.

EU celebrates an end to Greek aid as an Italian storm looms
By: Desmond Lachman – American Enterprise Institute

A perspective on the Greek crisis

Hardouvelis and al. argue that uncertainty was a critical factor in generating the depth and length of the recent Greek economic crisis. They construct an Economic Policy Uncertainty (EPU) Index following Baker, Bloom and Davis (2016) for the Greek economy and find that during the first phase of the crisis (2009-2014) the index reflected the pattern of global economic uncertainty; in December 2014 when the second phase started, the Greek EPU index decoupled from the global EPU index and increased by more than three standard deviations. It was this spike in economic and political uncertainty that prolonged and deepened the Greek recession.
Economic Policy Uncertainty, Political Uncertainty and the Greek Economic Crisis
Authors: Gikas A. Hardouvelis, Georgios I. Karalas, Dimitrios I. Karanastasis, Panagiotis K. Samartzis
From: University of Piraeus, London School of Economics

The real problem with Italy

In the Italian macroeconomic context, many are convinced that if only we had a large enough fiscal lever, we could set in motion an economy that has stagnated for almost 20 years. But the author argues that the efficiency of Italian (public) investment is currently low. Specific measures can be taken to improve this situation, though, and only once this is done should the public investment lever be used forcefully.

The great fiscal lever: An Italian economic obsession
By: Alessio Terzi – Bruegel