Cyprus Averts Disaster, but the Price is High

The European Union’s last-minute deal with Cyprus has headed off bankruptcy for now, but comes at a heavy price for uninsured bank depositors. Meanwhile, the move to impose losses on private creditors and growing complacency among policymakers could be storing up trouble for the future.

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Little Cyprus Sparks Big Contagion Fears

The situation in Cyprus is still very fluid and very serious—perhaps more so than in Greece last year. While the country may be too small to have a meaningful direct impact on the rest of the euro area, the big issue for markets is the potential for contagion to more systemically important countries.

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UK Budget: No Fiscal Consolidation, but Looser Money Ahead

We expect little change in UK fiscal policy in Wednesday’s budget. Instead the Chancellor George Osborne may try to nudge the Bank of England towards more aggressive monetary easing, putting further pressure on the pound.

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Cracks Appear in the French Economic Model

Today’s PMI data point to a deepening recession in France at a time when Germany is showing tentative signs of life. Is the euro crisis exposing the weaknesses of the French economic model?

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Chastened ECB Wary of Premature Monetary Tightening

Cyclical indicators have improved, but the economic and financial backdrop in the euro area remains fragile. The ECB has clearly learned from past mistakes and is keen to avoid a premature tightening of monetary conditions.

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UK Threat to Exit EU: Much Ado About Nothing

In a speech last week, British Prime Minister David Cameron raised the possibility that the UK might push the “nuclear button” and leave the European Union. We think both the threat and consequences of such a move have been exaggerated.

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Is the Euro “Dangerously High”?

Jean-Claude Juncker’s view that the euro is “dangerously high” isn’t shared by the European Central Bank (ECB). As long as this is the case, the single currency may continue to defy fundamentals and act as an unwelcome headwind for an economy still struggling to break out of recession.

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UK Economic Quagmire Adds Pressure for Monetary Policy Change

Bank of England governor-elect, Mark Carney, has raised hopes that the central bank may soon switch to a nominal GDP target. In our view, the costs outweigh the benefits, but the attractions of a radical new approach will grow if the economy remains stuck in the doldrums.

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Euro-Area Periphery Faces More Pain to Complete Rebalancing

Most peripheral euro-area countries have significantly improved their competitiveness recently, but more needs to be done. With currency devaluation ruled out, further downward pressure on labor costs is likely, which will probably deepen and prolong recessions and interfere with fiscal adjustment.

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Greece Still Needs a Long-Term Growth Plan

Even by the standards of the sovereign-debt crisis, the provisional agreement reached yesterday by euro-area finance ministers and the International Monetary Fund (IMF) on a second Greek rescue package looks like a messy fudge. It is clear that Greece’s euro-area partners are determined to avoid a near-term euro-area exit, but a long-term solution will require [...]

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