Competition policy protects consumers and when a cartel is established a negative effect on consumers is presumed. In the Euribor case, virtually everybody can directly or indirectly be affected: a householder with a mortgage, a small firm asking for a loan, a public entity buying ‘swaps’, a consumer using her credit card, an investor buying derivatives for millions of euros. These customers enter into a deal with banks.  But the price of that deal is set afterwards through anchoring to an independent benchmark, the  Euribor. The Euribor is the average rate at which a number of banks believe prime credits would be exchanged. Naturally, it would be rather silly to enter into such a deal if you know that your counterpart will be able to adjust the price to its advantage at a later stage.

The  Euribor case is about whether and to what extent such an ex-post manipulation happened via a network of traders from different banks. The European Commission’s antitrust chief, Joaquin Almunia, has repeatedly said that the Commission will take a tough stance if allegations are confirmed. Almunia does not need to show that banks explicitly coordinated. To identify a breach of European competition law, it may be enough to show that the platform used to define the benchmark allowed for extensive information sharing among competitors and created sufficient incentives to align banks’ submissions and lead to a concerted definition of Euribor rates.

It will not help the banks’ case to show that shareholders were not aware of traders’ wrongdoing. As the recent decision against Microsoft shows, the European Commission does not consider lack of internal control to be a mitigating factor. Microsoft attributed its non-compliance to the promise of offering a choice of Web-browsers to its users to a “technical error”. That did not spare the company from a €561 million fine.

Fines should account for the probability that a cartel will be discovered. Since this probability is low, researchers suggest that fines should be six to seven times higher than the expected gains yielded by the infringement in order to ensure deterrence. In the case of Euribor, the potential benefits are large so that fines would have to be huge. But in practice such fines are never levied. Often, fines do not even match the excess profits. One of the reasons for this striking outcome is that the Commission will not impose a fine that would jeopardise the economic viability of the infringer. Empirical analysis shows that during the crisis, the Commission considerably reduced its fines. Companies are allowed to claim that they are ‘unable to pay’. If they truly are, the fine has to be reduced.

A fine in the Euribor case that would offset the profits made from the infringement, and would achieve the deterrent level suggested by economic theory, would simply be unrealistic. Banks would not be able to pay it. And pushing a bank out of the market because of regulatory sanctions would do more harm than good to the economy.

Ex-post enforcement is good, but in this case it is certainly not enough. Future collusion needs to be prevented through tighter regulatory control and the use of data-based estimation to complement banks’ subjective contributions. More generally, more transparency is needed. Without bold moves from EU and national legislators and more stringent supervision, Euribor-style scandals could happen again.

The first arrow – extraordinary quantitative and qualitative monetary easing – signalled the strong will of the Bank of Japan to end 15-year-long deflation. It has been launched towards the right direction to reach this aim. But, as the benchmark bond yield rose above 1%, concerns about its side effects (e.g. an asset price bubble, a sharp decline of bond prices, and difficulties in exiting from extraordinary monetary easing) started to rise. Indeed, these concerns are rooted, to a greater extent, from a sceptical view on the second and third arrows which are comprehensively described in Prime Minister Abe’s “Basic Policies for Economic and Fiscal Management and Reform” released today.

In order to realise sustained economic growth, the government priorities should be first to reduce its debt and to raise its growth potential, taking into account the current miserable situation (figure1). The second arrow – increased spending on public investment – has already been launched at the wrong direction. Last January, the government decided the bigger-than-ever supplementary budget, and it has speeded up the amount of spending to support the economy. Now, Japan’s economy recorded 1.0% growth (quarter-to-quarter) in the first quarter this year and is expected to grow by 2.5% in FY2013. Those figures confirm that fiscal measures are not necessary to stimulate Japanese growth.

The target of the second arrow should have been the fiscal reform. Current fiscal situation in Japan is not sustainable, and this view has been shared by a number of papers. According to the simulation by Hoshi and Ito, the debt level will exceed private sector saving by 2024. This means that the government would run out of room to sell more bonds domestically in 2024 at the latest. Their simulation also clarifies that, even if interest rates are favourable throughout the projection period, the government should increase its tax burden ratio by 1% each year form 33% in 2016 to 46% in 2029 and keep that ratio until 2070. In the early 2000s, the LDP government made efforts for fiscal consolidation by setting the ceiling of its new bond issuance at 30 trillion yen and the amount of debt began declining after 2005. However, after the Lehman Shock occurred and the DPJ became in office, the ceiling was set at 44 trillion yen in 2010 and Abe government took over it. Most advanced countries now try to shrink their budget deficit which expanded during the crisis period, but only Japan kept it crisis level (figure 2).

Japan  has no choice but raises its total factor productivity (TFP) growth, stuck on low levels for the last 20 years (except the period of so-called Koizumi reform between 2001-06; figure 3) by facilitating regulatory reforms and openness of the country in order to ensure its long-term sustained growth without accumulating the amount of debt. For the third arrow – a growth strategy –, the Council for Regulatory Reform submitted its recommendation to the government early this month, which was incorporated into the growth strategy, together with public projects and investments. In addition, according to the Basic Policies the proportion of the volume of trade with using FTA should be increased from current 19% to 70% within five years. The growth strategy sees agriculture and healthcare industries as an example of promising industries as well as knowledge-based industries. Therefore it will promote public projects for these industries.

The growth strategy, however, does not include some crucial structural reforms which attract investment in Japan, such as reduction of corporate tax rates and deregulation on dismissal of workers. For promising industries, reforming some regulations which promote new entries to or raise competitiveness, such as further deregulation on entries of private enterprises and public insurance reforms, are pigeonholed partly due to the leading party’s anxiety that it might lose supports by relevant interest groups at the election.

The expression “three arrows” derives from a maxim by a “busho” (warrior) of the warring states period in Japan, Motonari Mouri. He preached the importance of getting united to his vassals, saying that even if a single person (arrow) is weak, a group of people is always stronger(a bundle of three arrows). With Abenomics the story is different. Every arrow should be sufficiently strong alone and all the three measures should be addressed to the same direction. An early stage exit from monetary easing would give the fiscal side a heavier burden to bridge its output gap. Ill-coordinated fiscal expenditures would not contribute to sustained growth. The failure of either fiscal reform or growth strategy would postpone the exit from extraordinary monetary easing even after the target of 2% inflation rate is achieved, which might cause greater side effects to the economy such as an increase in the interest rate. A vicious circle may appear.  The right direction is to seek a moderate, sustained and productivity-driven growth. That way the word “Abenomics” will represent a model of a fiscal and monetary policy mix, with a solid growth strategy implementation.

Reference;

Hoshi, T., and T. Ito (2012), Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?, NBER Working Paper 18287.

What does a 50% youth unemployment rate mean?

Daniel Gros notes that a youth unemployment rate of 50% does not mean that half of the young population is unemployed. The youth-unemployment rate in Greece does not mean that close to two-thirds of young Greeks are unemployed. Only 9% of Greek teenagers are, for example, labor-market participants; two-thirds of that number cannot find a job. The unemployment ratio – the percentage of the unemployed in the reference population – among teenagers in Greece is thus less than 6%. Among those in the 20-24 age group [youth unemployment refers to those from 15 to 24 years old], the difference between the reported unemployment rate and the percentage of youth without a job and looking for one is less stark. But, even among this age group, one finds that the unemployment ratio is often about one-half of the widely reported unemployment rate.

Johannes Schweighofer writes that taking a broader picture into account, i.e. NEET rates, employment rates, unemployment ratios and unemployment rates, it would be fair to say: the labor market situation for young people is particularly favorable in the Netherlands, Austria, Denmark and Germany, according to an unweighted average of these indicators. But if labor market conditions for young people are defined relative to the overall labor market situation in a country to highlight the situation of 15-24 years old persons, Austria moves somewhat closer to the EU27 average. Seen from this perspective, the situation for young people is particularly bad in Sweden, Luxemburg, and Italy; this comes somewhat as a surprise.

Derek Tompson writes in The Atlantic that lurking under the rise of youth unemployment among the richest countries is an even scarier trend – the rise of long-term youth unemployment. About half of Europe's unemployed youth have been out of work for more than six months, according to 2011 data.

Is youth unemployment a discrete problem?

Daniel Gros writes that there are several reasons to doubt that youth unemployment is a discrete problem meriting special treatment. In those countries where the problem makes the biggest headlines, youth unemployment accounts for less than a quarter of overall unemployment. By contrast, youth unemployment contributes relatively much more (about 40%) to overall unemployment in countries like Sweden and the UK. One could argue that the latter two should worry about their youth unemployment more than Spain or Greece should. The fact that youth unemployment is just a part of a larger problem leads to the real policy question: Why should officials spend limited time, energy, and public funding specifically on unemployed young people, rather than on all of the unemployed? Europe has a general macroeconomic problem, owing to demand factors that interact with a rigid labor market, rather than a specific youth-unemployment problem. This implies that there is no need for ad hoc measures for young people, which merely risk overloading welfare systems with even more exemptions and special rules.

Paul Krugman writes that you hear talk about a “new normal” of much higher unemployment, but all the reasons given for this alleged new normal, such as the supposed mismatch between workers’ skills and the demands of the modern economy, fall apart when subjected to careful scrutiny. If Washington would reverse its destructive budget cuts, if the Fed would show the “Rooseveltian resolve” (see our previous issue on the economics of a regime change) that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment.

Types of policies and policy principles

In its report Global Employment Trends for Youth 2013, the ILO ­discusses five key policy areas to promote decent work for youth:

1. Employment and economic policies to increase aggregate demand and improve access to finance;
2. Education and training to ease the school-to-work transition and to prevent labor market mismatches;
3. Labor market policies to target employment of disadvantaged youth;
4. Entrepreneurship and self-employment to assist potential young entrepreneurs;
5. Labor rights that are based on international labor standards to ensure that young people receive equal treatment.

In a recent policy brief, the Kiel Institute argue that any employment policies targeted at youth need to take possible crowding-out effects for other age groups into account. IDEA runs the typical pros and cons about whether youth unemployment merits a special treatment.

A short guide to recent initiatives

EU leaders will certainly based their actions on a number of ongoing initiatives:

• The Youth Employment Initiative (2013) proposed at the EU Council of Ministers’ meeting in February, which aims to reinforce and accelerate measures that were recommended in a Youth Employment Package (2012) in December
• Youth Employment Package (2012), which is the follow-up to the actions on youth laid out in the wider Employment Package. The YU package includes:

          a.      A proposal for a Council Recommendation to introduce a Youth Guarantee (The Youth Guarantee Recommendation was adopted by the EU's Council of Ministers on 22 April 2013. The Youth Guarantee, based on experience in Austria and Finland, seeks to ensure that all young people up to age 25 receive a quality offer of a job, continued education, an apprenticeship or a traineeship within four months of leaving formal education or becoming unemployed

          b.      A Quality Framework for Traineeships

          c.       A European Alliance for Apprenticeships

• Youth on the Move, which is a comprehensive package of policy initiatives on education and employment for young people in Europe
• EU Skills Panorama, which is an EU-wide tool gathering information on skills needs, forecasting and developments in the labor market

For a more detailed presentation of these ongoing initiatives, we recommend BrusselsDiplomatic.

Specific proposals on mobility

In a recent speech, Androulla Vassiliou – Commissioner for Education, Culture, Multilingualism and Youth – argued that in spite of high unemployment, the number of job vacancies in EU is increasing.  This paradox reveals a mismatch between the skills provided and the needs of the world of work, and so the failure of our education systems to a certain extent. The EU Skills Panorama points that vacancies are hard to fill in the health, ICT, engineering, sales and finance sectors, the new European Vacancy and Recruitment Report says.

Androulla Vassiliou also outlined that the feature of the European Commission proposal Erasmus for All programme, which is now under discussion by the Council and aims at increasing mobility within the EU. About twice as many people as now could get the chance to study or train abroad with a grant from Erasmus for All. Among them would be nearly 3 million higher education and vocational students. Full-time Masters' students would also benefit from a new loan guarantee scheme set up with the European Investment Bank Group.

Specific proposals on training

Bob Hancké writes that there is one country in Europe where, for highly idiosyncratic reasons, an emphasis on training might be relevant: Spain. Over the last 15 years (i.e. more than half of a generation) many young people forewent higher education in favor of higher wages in relatively low-skilled sectors such as construction and tourism. The country is the only one, in fact, where the number of people graduating from universities has fallen over the last 20 years.

Timothy Taylor notes that Germany and Switzerland educate roughly 53 percent and 66 percent of students, respectively, in a system that combines apprenticeships with classroom education — the dual system. This approach brings young people into the labor force more quickly and easily. The United States is an outlier: By international standards and official definitions, it has virtually no vocational education and training program.

Specific proposals on labor market segmentation

In a recent CESifo report, Giuseppe Bertola, John Driffill, Harold James, Hans-Werner Sinn, Jan-Egbert Sturm and Ákos Valentinyi write that the two tier labor markets that have emerged in Spain, Portugal, Greece, and to some degree Italy, have thrown the burden of job cuts onto a particular segment of the labor market, those individuals on temporary contracts. Meanwhile, the heavily protected workers in regular jobs feel little pressure from the existence of many unemployed persons to moderate wage claims or change working practices to increase productivity.

Tuesday’s hearing began with statements of the complainants. Most of the issues raised pointed to the fact that the ECB’s policy actions may have calmed down markets, but lacked some form of democratic legitimisation because the ECB is not mandated to undertake such policies in the first place. Others criticized that policymakers slowly and piecewise confer more power to the EU. In their view, the FCC should define clear boundaries and guidelines according to which a further conferral of power to the EU should be subject to a national referendum. Gregor Gysi of the left party Die Linke also called for a treaty change and claims that the fiscal compact is the “central element of authoritarian crisis policy in Europe which could ultimately trigger racial sentiments and right-wing extremism.”

Wolfgang Schäuble, Germany’s finance minister, argued that the strong independence of the ECB, which was agreed upon in the Maastricht Treaty 20 years ago – not least due to German insistence, justifies discretion in the ECB’s policy choices. This discretion has to be respected by courts. He also emphasized that the ECB’s policies are not subject to the Federal Constitutional Court (FCC)’s ruling and that OMT first and foremost is an announcement that would have to be operationalized through a legal act. On enquiry of the Court Jörg Asmussen of the ECB agreed that OMT would first have to be activated and that national parliaments would have to consent.

Asmussen speaking for the ECB argued in his statement (see full statement here) that “the announcement of OMTs was and is the necessary and appropriate step to eliminate the disruption in the transmission of monetary policy caused by concerns that there would be an unwanted break-up of the euro. The risks of not acting would have been greater.” He reaffirmed that while the OMT program in theory is unlimited, in practice it is capped because the pool of bonds that can be purchases, namely those with a maturity of three years maximum, is limited. In light of democratic participation, Asmussen pointed out that the OMT can only be enacted jointly with ESM and EFSF programs. Yet if a country does not fulfil the OMT program’s conditionalities it may face the prospect of a euro zone exit. He further confirmed that the ECB would buy government bonds of all countries disregarding their economic size if and only if the country would subject itself to an ESM program.

Jens Weidmann speaking for the Bundesbank began his arguments by stressing the disciplining forces of bond markets that could be threatened and undermined by the ECB’s OMT program (full statement in German here). Monetary and fiscal policies have to be separated clearly and institutionally – between the ECB and national governments. Ultimately, Weidmann said, monetary policy cannot be the remedy for the EU’s problems - this is the task of politics. If time has to be bought, this should be done with the help of ESM and EFSF, but to use Draghi’s OMT program for that end is an “illusion.” Finally, he also sided with other critics and argues that the OMT program is not subject to sufficient parliamentary oversight.

Wednesday’s hearing began with the statement of the expert witnesses. Clemens Fuest of ZEW argued that the ECB is acting on hazy grounds and blurring the boundaries of fiscal and monetary policy with its OMT program. The ECB’s bond purchasing program, in his view, lowers the financing costs of ailing governments which is part of the fiscal policy realm and not part of the ECB’s mandate. Fuest sheds doubt on the ECB’s reasoning that high risk premia are driven by irrational believes about a potential break-up of the euro zone. Higher risk premia could as well be attributed to expectations of a debt restructuring. Moreover, the alleged irreversibility of the euro zone is an illusion because sovereign nations can exit the euro zone if they want to. Ultimately the ECB has been pushed further into the fiscal policy realm by policymakers and is thereby exceeding its mandate increasingly.

Hans-Werner Sinn of the ifo-Institute argued that the OMT program essentially works as an insurance mechanism for governments. Yet if the ECB is offering this insurance free of charge as it is currently doing, it is de facto subsidizing national governments. He blamed politics for not having imposed tougher regulation on banks, in particular through Basel-II. This has, in his view, led banks to loosen their credit policies and, arguably, contributed to the outbreak of the financial crisis. He also challenged the view that the OMT program is de facto capped by suggesting that at some point in time all governments bonds that can be purchase by the ECB would have a maturity of less than three years. Accordingly, he estimated the total volume of OMT bond purchases to amount to 3 tn EUR. Overall he portrayed the ECB’s action as “regional fiscal policy” because these countries received central bank money for consumption and debt repayment.

Harald Uhlig of the University of Chicago claimed that the price the ECB is paying for the purchase of bonds on the secondary market is too high. To prevent this from happening further he suggested that the ECB should only be allowed to buy these bonds at the market price. Judging the market sentiment, Uhlig shared his view that the market no longer believes that the OMT program is truly unlimited. In the eyes of investors, the ECB could change “the rules of the game” at any time as they wish, he says.

Asmussen defended the policy stance of the ECB once again: in times of crisis and in a heterogeneous economic area, the standard tools of monetary policy such as changes in the interest rate would no longer suffice to guarantee price stability in the euro zone. He further emphasised that the ECB has and will not use the secondary market as a vehicle to circumvent the prohibition of government bond purchases in the primary market.

Dieter Murswiek, representative of Peter Gauweiler (CSU), argued that precisely because the ends do not justify the means the mandate of the ECB has to be construed narrowly. Bond purchases are then not in line with the constitution if they are not covered under the mandate. Invoking the legal “identity control”, he suggested that in that case Germany should never have given its consented to the Maastricht Treaty in the first place. The logical conclusion would be that the ECB’s statute should be re-negotiated. It is clearly noteworthy that President Voßkuhle and other judges had asked several times throughout the hearing about the possibility to change the ECB’s mandate – not least because the core of the debate appeared to be the compatibility of the OMT program with the ECB’s monetary policy mandate.

Latvia has just emerged from a wrenching experience. Having lived beyond its means for years—the current account deficit in 2007 was nearly 25 percent of GDP - a crisis was inevitable. From a peak in 2007, GDP fell 20 percent to the bottom in 2010 and the unemployment rate reached nearly 20 percent. Through this free fall, the Latvian authorities stuck to their commitment of maintaining the lats at a fixed parity with euro.  That decision was controversial. Many argued, on the basis of good evidence, that allowing the lats to depreciate would have been the better of the two unhappy options. But to the Latvian authorities, maintaining the exchange rate commitment was paramount. The strongest economic reason for staying with the parity was the fear of so-called balance sheet effects: the burden of euro-denominated debts may have been overwhelming for the holders of a highly depreciated lats. While it will be many years before output and employment recover to pre-crisis levels, the worst is over. Indeed, investors have been happy to buy Latvian debt at increasingly higher prices.

The argument for now adopting the euro is that the commitment to the fixed exchange rate would become irrevocable. And, presumably, access to the European Central Bank’s vast liquidity pool is a plus. Moreover, the European Commission’s assessment is that Latvia is ready to adopt the euro by virtue of its low inflation and low public deficit—and that these are durable achievements.

But the economics does not favor euro adoption by Latvia. The Latvian authorities are giving up the extremely valuable option of floating their exchange rate at a future time. And what may be the offsetting gain? Establishing policy credibility is not one of them. Having proven to the world that Latvia will endure the most intense economic pain to preserve its exchange rate parity, why is a further commitment needed? If the argument is that a future government may be irresponsible and the country may be faced with a new crisis, it is presumptuous to judge that the floating option will not be right one at that time. Binding a future government in this manner is particularly overreaching given how little Latvian public support there is today for a move into the Eurozone.

Two of the last five new entrants into the Eurozone are facing critical problems. True, every unhappy country has its own story to tell. But it is remarkable how entry into the Eurozone spurs reckless banking. Cyprus and Slovenia may each have their own history to blame, but it cannot be a coincidence that they share with earlier members the experience of banking sectors gone out of control—banking sectors that are now in the intensive care of the Eurozone authorities. Perhaps, it is the knowledge that the ECB stands behind them that induces such wanton behavior.

The admission criteria—low inflation and low public deficits—are poor guides to eventual performance in the Eurozone. Latvia got into trouble in 2008 because it failed the competitiveness test—Latvian demand for foreign goods galloped and was not matched by the world’s demands for Latvian goods and services. Why will that change now? Private sector wages have barely fallen and the current account deficit has disappeared mainly because consumption and imports have collapsed.

More importantly, long-term competitiveness requires a healthy pace of technical change and higher quality products. Olivier Blanchard has pointed out that Latvia’s best hope is its large productivity distance from the world technology frontier, a gap that offers the potential to grow. But Blanchard has also—only recently—chronicled the Portuguese experience, where such potential never blossomed into reality. If Latvia does successfully climb the technology ladder, it will do as well outside of the Eurozone as inside it; but if it fails that bigger competitiveness challenge, it will face an unpleasant rerun of its recent crisis. Again, Portugal offers a warning: the competitiveness problems that forced a painful adjustment under the Exchange Rate Mechanism in 1993 remerged less than two decades later.

Moreover, the Eurozone is itself largely dysfunctional. By the admission of its own stewards, the “monetary transmission mechanism” is inoperative. Put simply, when the ECB changes its interest rates, its member countries feel no impact. It is as if the countries were operating on their own. This may improve with time. Those in the Eurozone have no choice; but does Latvia need to rush into this setting?

Indeed, if there was a moment for Latvia to float its exchange rate, this would be it. Policy credibility is strong, the markets are reassured, and the risk of balance sheet disruptions is minimal. Countries with floating exchange rates in Eastern Europe have, on average, done much better than the fixed rate countries since the start of the crisis. Latvian trade with the Eurozone economies is not especially large and, similarly, it has extensive financial connections outside the Eurozone.

Are there reasons why Latvian entry will help the Eurozone? It is hard to think of any. At best, as a small country, Latvia will have no influence on ECB policy or on the economic and financial conditions of other Eurozone economies. But, Cyprus has only recently demonstrated that even a small country can cause tremors.

If policymaking is in large part the art of risk management, then the decision is simple. There is no evident upside to this initiative. The downside risks today appear small, but those could change quickly and the costs of that unlikely event could be large, especially for Latvia.

Latvia’s integration into Europe must be viewed through the lens of powerful historical forces. For Latvia and for Europe, deeper integration is the only right way to go. But the euro is not evidently the right symbol of that forward movement. The euro is often thought of as a political project, one that will bring the nations of Europe into a greater political union. But Latvia is joining the euro at a moment when history is fiercely contesting the architecture of that greater political vision. Over three-fifths of the Latvian population does not wish to join the Eurozone now. Does that not count?   

Currently, only 16 countries allow victims to sue for antitrust damages. And because of legislative fragmentation within the single market, large-scale lawsuits are rare. Differences in the way rights to damages are guaranteed in the member states distort the incentives to comply with EU competition law and imply differences in the level of deterrence within the single market. Recent studies suggest that when actions for damages in courts are a credible threat, they help to reduce the incentives that companies might have to breach antitrust laws. Moreover, the lack of a consistent EU framework creates uncertainty and therefore makes it difficult for companies, particularly those that operate in multiple countries, to predict the risk they face if they breach antitrust law. Harmonisation is therefore good news.

The key issues of substance in the draft directive concern information disclosure and damage quantification. On the first issue, the Commission’s proposal attempts to strike a balance between the right of claimants to obtain all the necessary information to support their claim in Court, and the need to preserve the incentives for companies to reveal information about ongoing conspiracies. The proposal suggests that specific types of information provided by infringing companies should not be disclosed to claimants (namely: corporate statements by whistle-blowers and submissions aimed at settling cases amicably). Whistle-blowing companies should also be liable only for the damage they directly caused, that is they would not pay for the indirect damage caused by the establishment of a cartel, such as an overall increase in market prices by all market players. Quantification of damages is a tricky issue. It requires estimating the ‘counter-factual’ scenario, ie how the market would have performed had the infringement not been committed. This estimation will depend heavily on the starting assumptions and on the level of detail and accuracy of the available data.

The European Commission appears less bold on the more general issue of collective redress. On that subject, the proposal contains only guidelines that member states will be free to ignore. It is therefore doubtful if the guidelines will have any effect at all, given the strong domestic resistance from industry that EU governments face. US-style class-actions may cause an excessive and unjustified burden on companies, but the Commission’s proposal establishes a number of safeguards to limit the risk of litigation abuse. For example, it suggests that only state-appointed non-profit entities can act on behalf of claimants. Moreover, in the Commission’s framework, affected consumers would not join the action by default (as happens in the US). The so-called ‘opt-in’ option requires consumers to take the initiative to join the claimants’ group in order to be entitled to compensation. If these safeguards are considered sufficiently effective in preventing abuse or excessive burden for companies, it is therefore difficult to understand why these rules should just come in the form of guidelines and not be uniformly enforced throughout the single market.

The EC’s proposal will be presented and discussed at Bruegel on June, 20.

At the heart of the hearing is the ECB’s controversial OMT program. In essence, two views prevail over how to interpret the OMT program and reconcile it with the ECB’s mandate and existing EU law. Proponents of the program argue that it is yet another instrument in the arsenal of monetary policy tools that is geared towards stabilizing interest rates across the euro zone. By contrast, critics like Peter Gauweiler, a CSU backbencher, the interest group “Mehr Demokratie”, and Jens Weidmann, President of the Bundesbank, argue that the program is rather an instrument of fiscal policy because it essentially provides funding to ailing governments through the purchase of government bonds.

Before the hearing started, the FCC’s President, Andreas Voßkuhle, reminded the audience that the court shall not consider the purpose and significance of the rescue policies and the ECB’s policies. This remains the task of policymakers. Nor shall the Court use the success of the instrument as guiding benchmark to judge the legality of the instrument. Otherwise the goal would justify the means. In a democracy, Voßkuhle argues, policymaking has to be guided by commonly agreed basic rules instead of daily politicking. Rather, the question is whether the ECB has, through the OMT program, overstretched its mandated judged by the German basic law. The predicament of course is that the ECB is only subject to EU law. Voßkuhle concludes by suggesting that the Court will have to decided to what extent the ECB is assuming powers that it has never has been granted or it should never have been granted in the first place by the German Bundestag. In turn, the question then becomes whether (national) citizens can accuse the ECB of unlawful action on these grounds through a constitutional complaint.  

Two issues were debated in the public that bear importance for the hearing. First, the selection of the expert witnesses by the Court was considered by some commentators (for example Mark Schieritz here) as unbalanced because most of the experts, which include Hans-Werner Sinn (Ifo), Kai Konrad (Max Planck Institute), Harald Uhlig (HU Berlin), Franz-Christoph Zeitler (former board member of the Bundesbank), Clemens Fuest (ZEW), and Marcel Fratzscher (DIW), have a critical view on the ECB’s OMT program. Only Fratzscher’s views allegedly side more with the ECB.

Second, in an interview with the German channel ZDF Draghi affirmed yesterday that the ECB will not intervene in order to safeguard a government’s solvency in general. In principle, a government could become insolvent. This is an important statement in line of newspaper interpretations of the ECB’s statement before the FCC. According to that statement, which was drafted by the German law professor Frank Schorkopf (German version here), the OMT program contains a natural cap because it is limited to the purchase of short-term bonds with a maturity of less than three years. For example, the total value of those outstanding bonds for Portugal, Italy, Spain, and Ireland amounts to 524 bn EUR, says the FAZ. In practice, however, the ECB will have to buy much less because the overarching aim of the program is to safeguard the transmission mechanism, not deficit financing. The ECB immediately issued a denial of this interpretation. 

So why do the different institutions come to such a different assessment? After all, they both have excellent economists that are using the same data and base their assessment on similar technical methods. The difference is due to the different institutional and political objectives. The IMF has been increasingly critical due to its large exposure to the euro area. 56% of IMF lending now goes to the euro area. While IMF lending enjoys seniority status, important IMF shareholders in particular from emerging economies have become increasingly concerned about the supposedly different treatment of Europe compared to the previous crises in Asia and Latin America. And indeed, the IMF had to adapt its own working rules in order to provide loans to Greece, where already on it had put debt sustainability in serious doubt.

The European institutions instead follow different rules and a different logic. Being responsible for an incomplete and still fragile monetary union, they tended to be more risk averse. They were ready to do so despite the doubtful debt sustainability. Yet, at the same time, major European creditor countries were not ready to agree on an outright transfer or official sector involvement. The result was a fragile approach that was based on overly optimistic assumptions. These overly optimistic assumptions proved completely wrong. The Troika had predicted a small recession in Greece with GDP falling during 2010-13 by only 3.5%. Instead, the actual contraction amounted to 21%. True, some of the reasons for the collapse of GDP could not be predicted. Who would have thought that the entire euro area would be in crisis and that an exit of Greece from the euro was a seriously debated option. Yet other factors were clearly too optimistically assessed. For example, it was hoped that Greece would quickly be able to adjust its production structure and be able to export much more so as to compensate for the drop in domestic demand. Projected privatization receipts were increased to unrealistic numbers when the programme derailed.

How should the Troika evolve to prevent similar failures from happening? In a recent report, we have argued that the IMF should be less financially involved. As a catalytic lender, it would provide only 10% of the overall financing of the programme. This would allow it to fully adhere to its own standards and in case of disagreement drop out of the Troika programme. At the same time, a decision by the IMF not to participate in the programme would provide a strong signal that indeed the foundations of the programme may be less robust than desirable.

On the European side, a programme may still be considered desirable, also from the point of view of financial, political and social stability. To render a programme more easily feasible and more operational, we would consider it useful that the ESM gradually evolves towards a European Monetary Fund with a clearly defined mandate and lower voting thresholds. The European Commission would thereby be relieved of its currently difficult dual role of being a community institution responsible for the treaty while at the same time implementing tough programmes as an agent of the Eurogroup. Finally, the ECB should remain part of the Troika but play a less decisive role in the day to day negotiations. Such a reformed Troika would be better for Europe and also for the IMF.

This comment draws on a joint report with Jean Pisani-Ferry and André Sapir.

The boom period in Southern Europe was marked by large current account deficits and corresponding capital inflows. The crisis led to significant private capital outflows (Merler and Pisani-Ferry 2012), which stabilized around the middle of last year as documented in an earlier post. The crisis did not, however, lead to a sudden reversal in total capital inflows to Southern Europe because the decline in private inflows was coupled with an offsetting increase in liquidity provided by the Eurosystem (as recorded in Target2) and official programme money (for Greece, Ireland and Portugal). This post is an update on the current account developments in Southern Europe and the composition of corresponding financial flows.

Figure 1 plots the evolution of the current account in the crisis countries. On a seasonally adjusted basis, Ireland reached surplus already in the first quarter of 2010. The other four countries reduced their average current account deficit from -6 % of GDP in 2011 to -1.7 % in 2012. As documented by Wolff (2013), the adjustment since the crisis has come to a significant extent from increased exports. This is true for all countries except Greece, where the declining deficit is almost exclusively due to import compression. Concerning the most recent data, Spain exhibited a positive current account balance in both 2012Q4 and 2013Q1 on a seasonally adjusted basis. The balance turned also positive for Italy and Portugal in 2012Q4 and 2013Q1 respectively.

Figure 1: Current account balance (%/GDP) 2006Q1-2013Q1, seasonally adjusted.

Declining current account deficits have halted the increase in total capital inflows to Southern Europe (Figures 2–5 at the end), which were negative for Portugal and Spain in the first three months of 2013. This relative inertia, however, masks changes in the composition of capital flows. A decline in Target2 liabilities has partly been offset by continuing public disbursements relating to adjustment programmes (Greece, Ireland and Portugal) or bank recapitalization (Spain). This offset has not been perfect, though, as manifested by the return of private inflows particularly in Greece, Italy and Spain during the first three months of 2013. To the extent that Target2 credit has been replaced by private inflows, this represents a normalization of financing conditions.

Financial account data is released with a lag and therefore we are not able to comment on the evolution of capital flows in the second quarter of 2013. However, Target2 data is available until April 2013 for most countries and May 2013 for Italy and Spain among others[1]. In April, Target2 net liabilities increased in Greece, Portugal and Ireland by 12bn in total after having generally declined in previous months. This was coupled with an increase of 19bn in claims by Germany after five months of declines. Aside regular variation, this might reflect wobbles in the euro area macroeconomic outlook leading investors to shun small vulnerable economies. Nevertheless, Italy and Spain continued to decrease their Target2 liabilities (by a total of 8.4bn in April and 17.6bn in May). What is more, Germany’s Target2 claims decreased again by 18.7bn in May, close to March levels.

Southern countries achieving external balance means that (as a whole) the economies are becoming no longer reliant on foreign financing. Before sectoral problems such as distressed banking systems or indebted sovereigns are overcome, however, Southern Europe will partly rely on official liquidity from abroad.

Figures 2–5: Components of cumulative net capital inflows (Jan 2002–Mar 2013).

Source: Bruegel based on Datastream (financial account data), Osnabrück University (Target2) and IMF, European Commission, EFSF, ESM (programme disbursements).

[1] Osnabrück University helpfully maintains a database of Target2 positions at eurocrisismonitor.com.

But it also has potential downsides. It can undermine long-term economic growth by reducing the quantity of labour, and also the quality if the most talented people leave. It is typically the young who move, thereby undermining the sustainability of the social security system. Exoduses also depress consumption (and consequently, consumption taxes), and housing prices if the emigrants wish to sell or rent out their properties back home.

It has long been know that mobility in the European Union is much lower than in the United States – a reason why many academics concluded that regions of Europe form a less effective single currency area than US states (see for example a 1995 article by Jörg Decressin and Antonio Fatás). Yet intra-EU migration increased before the crisis, especially into booming countries like Ireland and Spain. What happened during the crisis? Table 1 shows the aggregate data for twelve European countries (see note 1 at the end on the data we use). In Lithuania and Latvia, two hard-hit countries, population declined by more than 10 percent between January 2008 and January 2012, with migration playing a decisive role. (Note: data for the third Baltic country, Estonia has to be wrong so we do not report it; see note 2 at the end). Net emigration was less significant from Iceland, Portugal and Ireland, and there was even net immigration into Greece and Spain, and into some ‘northern’ EU countries with lower unemployment rates.

Table 1: Population change from 1 January 2008 to 1 January 2012

Note: countries are ordered according to the percent contribution of migration to population change. Source: author’s calculation using Eurostat data. See  note 1 at the end for details on the data.

Correction: This table was updated on 10 June 2013, because in the original version the number for the contribution of deaths to UK's population change was incorrect

The right-hand half of Table 1 refers to the 2008-11 period, during which there was a change in migration patterns between euro-area members. In southern Europe there was net immigration in 2008 and net emigration in 2011, while  Germany experienced the opposite. Yet even in 2011, net emigration rates were low from Spain and Greece, about 0.1 percent of total population. In Portugal, net emigration was 0.2 percent in 2011, in Ireland it was 0.7 percent; all are still below the 1.1-1.3 percent net emigration rates in the two Baltic countries in this year.

The total population figures hide important generational differences. Figure 1 below shows the percent change in each age group for each country not due to death (ie due to migration, and possible data errors). For Latvia, for example, the panel shows that 19 percent of 25-year old people who were residing in Latvia in January 2008 left the country between 2008-2011. In Lithuania, net emigration by young people was even higher, more than one quarter in certain age groups. These two countries really suffered from an exodus of the young. About 6-8 percent of young people left Iceland and Portugal, and somewhat fewer left Ireland.There was net emigration from southern euro-area countries in 2011 as indicated by Figure 2 (it is likely that net emigration from these countries rose in 2012, but data is available only till 2011), yet the rates are very small, which is striking in light of very high youth unemployment rates (Figure 3).

On the other hand, countries with better labour market situations received a lot of young people: the number of 20-year olds increased by about 9 percent in the United Kingdom, 7 percent in Austria and 4-5 percent in Germany and the Netherlands. Not surprisingly, older people tend to move less: in the four receiving countries there was a rather small net migration of people older than 40.

Do migrants send more money home? Unfortunately, this is not the case, except in Spain. Table 2 shows that the net inflow of worker's remittances has gradually declined in Greece since 2007, and was more or less stable in Lithuania up to 2011, but declined in 2012. Data for three other countries with high emigration rates (Latvia, Ireland and Iceland) is unfortunately not available. But in three main receiving countries, Austria, Germany and the Netherlands, the net outflow of worker's remittances was rather stable, suggesting that the net immigration of the young people into those countries has not led to increased transfers to their homelands.

Overall, there was a youth exodus from Latvia and Lithuania, with 20-25 percent of young people leaving, which is really dramatic and underlines the pain these countries went through during the past few years. The recent fall in their youth unemployment rates, which are still higher than 20 percent, must be seen in this light. People are less mobile in the south of the euro area, which is puzzling given the extremely high youth unemployment rates. Yet despite increased immigration into countries with healthier labour markets, net remittance outflows from Germany, Austria and the Netherlands have not increased. These findings suggest that migration has not so far greatly helped to reduce the social pain in the south, while the youth exodus from the Baltics raises questions about long-term sustainability.

Figure 1: Net migration during 2008-2011 (i.e. change in population not due to death or birth), percent of the 1 January 2008 number of people in the age cohort

Source: Author’s calculation using Eurostat as described in note 1 at the end.

Figure 2: Net migration during 2011 (i.e. change in population not due to death or birth), percent of the 1 January 2011 people in the age cohort

Source: Author’s calculation using Eurostat as described in note 1 at the end.

Figure 3: Youth unemployment rate (seasonally adjusted, percent), January 2007 – April 2013

Source: Eurostat. Note: data ends in February 2013 for Greece and the UK and in March 2013 for Latvia.

Table 2: Worker's remittances, net (€ billions)

Source: Eurostat. 

Notes

[1] Data: it is difficult to get reliable data on migration. Instead, we used population and death data by age cohorts (less than 1-year old, 1-year old, 2-year old, …, 80-year old; we do not consider people older than 80) to get an indirect estimate of migration (the source of all data is Eurostat). For example, when we know the number of 20-year olds on 1 January 2008, the number of 21-year olds on 1 January 2009, and the number of deaths by those who reached (or were supposed to reach) 21 during 2008, we can estimate the number of net migrants who were 20-years old on 1 January 2008, and who left during 2008. Births matter for the total population, but obviously not for, eg the cohort of 20-year old people. As we checked, this indirect estimate was sometimes close to officially reported migration data (in the case of the UK, for example), but in some cases there were major differences (eg Latvia).

For the UK, migration data indicates the net arrival of 812,357 people into the UK during 2008-11, while our indirect estimate from population and death data suggest 842,839 people, in all age groups up to 80 years old. The difference between the two numbers is 4 percent. This difference is relatively small, and may even be explained by a data assumption we had to make: death data by cohorts was available only till 2010 and for 2011 we assumed that the same number of people died as in 2010 in each cohort.

But for Latvia there is a major difference. Migration data indicates the net departure 38,301 people during 2008-2011, while our indirect estimate from population and death statistics suggest 190,170 people, in all age groups up to 80 years old.

[2] Population and/or death data has to be wrong for Estonia: for each age cohort from 1-year old to 70-year old, the change in population from one year to the next equals the number of deaths of the particular age cohort (in a few cases the discrepancy is one person), implying zero migration in all age cohorts, in each year between 2008 and 2011. This is inconceivable, since the youth unemployment rate exceeded 40 percent in early 2010.

So. is the ECB acting beyond its mandate? The answer is clearly no. The situation in the eurozone was dramatic before the announcement of the OMT programme. Nominal interest rates had hugely diverged, banks’ access to finance was severely hampered, and the eurozone’s financial system was deeply fragmented. Changes in the monetary policy stance of the ECB were not transmitted and the ECB was therefore not able to fulfil its mandate of ensuring the proper conduct of monetary policy in the euro area.

To fix this untenable situation for the ECB, bold action was required. The ECB’s governing council decided on the OMT programme, which consists of the option to buy unlimited quantities of sovereign debt with a maturity of less than 3 year in the secondary market if the necessary but not sufficient condition of an agreement on an ESM programme is fulfilled.

The decision has led to a dramatic improvement in the monetary policy transmission. Sovereign bond yields in Spain and Italy fell by 100 and 50 basis points in the first month after Draghi’s ‘whatever it takes’-speech in July 2012 and are now 300 and 230 basis points lower. Financial fragmentation was reversed and the so-called Target2 net liabilities fell by EUR 134bn in Spain and EUR 38bn in Italy between July 2012 and April 2013. Contrary to the possibility of a pure ESM programme, the OMT programme was thus successful in re-establishing the monetary policy transmission, even though the transmission mechanism is not fully restored yet.

Why was the OMT programme so successful? It was so successful primarily because it addressed a fundamental problem of the monetary union: A monetary union with decentralized fiscal policies is inherently unstable. Countries in the eurozone do not have direct influence on monetary policy, but issue debt in Euros. This constellation resembles a situation where governments issue debt in a foreign currency– and the breeding ground for a self fulfilling crisis is established. Once investors start losing trust in the government’s fiscal sustainability, they will start selling bonds and push up interest rates. Yet, it is only raising interest rates that eventually render government debt unsustainable and thereby the initial doubt is self-fulfilling.

Only the ECB has the capacity to address this problem and to credibly prevent a self-fulfilling crisis. An ESM programme alone could not achieve this. It is impossible for a pure ESM programme to address the sovereign as well as the resulting private sector fragilities due to the large size of capital withdrawals in case of a crisis. The credibly flexible scope of the OMT programme was thus necessary in order to fix the monetary policy transmission,

So, has the ECB with its OMT programme taken on board excessive budgetary risks? Has this undermined the budgetary sovereignty of the German Bundestag? The answer is again a clear no. Arguably, before the OMT announcement, the budgetary risks for Germany were higher due to its exposure in the standard liquidity operations by the ECB. Only the OMT programme managed to bring down financial fragmentation and thereby helped the ECB to reduce its current role as a financial intermediary between banks in the fragmented financial system.

Overall the ECB clearly acted within its mandate of ensuring the proper conduct of monetary policy. The pure announcement of a potential OMT programme helped to reduce fiscal risks and to coordinate markets in a good equilibrium. Going forward, it is desirable for the euro area to move ahead with further fiscal integration in order to complement centralized monetary policy and to deal with unsustainable fiscal fiscal situations, for which the OMT programme is not designed.   

Im Vorfeld der Verhandlungen über die Gesetzesvorlage der EU-Kommission wurden von deutscher Seite vorwiegend drei Bedenken gegen eine Zentralisierung von Aufsichtsrechten in der Europäischen Zentralbank (EZB) geäußert. Der aktuelle Entwurf hat das aufgegriffen und entwirft ein zufriedenstellendes Modell einer gemeinsamen Bankenaufsicht.

Erstens, Bedenken bezüglich einer unzureichenden Trennung von Geldpolitik und Bankenaufsicht innerhalb der EZB werden institutionell durch die Gründung eines neuen Gremiums in der EZB berücksichtigt, das weitgehend unabhängig vom EZB-Rat agiert. Eine zentralisierte Aufsicht verfügt über mehr Informationen und hat auch die Möglichkeit, frühzeitig eine Bankenrestrukturierung zu forcieren.

Zweitens, die gemeinsame Aufsicht berücksichtigt die Interessen von Ländern außerhalb der Euro-Zone und unterwirft teilnehmende Staaten den gleichen Regeln wie Mitgliedstaaten innerhalb der Euro-Zone. Auch wenn diese Länder nicht den gleichen Status wie Länder des Euro-Raums haben, so können sie doch an dem Mechanismus teilnehmen.

Drittens, Sorgen, dass kleine Finanzinstitute wie Sparkassen nun von der EZB beaufsichtigt würden, werden durch das Subsidiaritätsprinzip ausgeräumt. Ich gehe davon aus, dass für Deutschland die Aufsicht für circa 45 Institute direkt von der EZB ausgeübt würde. Dies entspricht einer Aufsicht von bis zu 90 Prozent der Bilanzsumme des deutschen Bankensystems. Wie Erfahrungen mit den spanischen Cajas jedoch gezeigt haben, können Risiken für die Finanzstabilität auch von kleineren Instituten ausgehen. Insofern ist es richtig, dass die EZB sich in Krisenzeiten das Recht vorbehält, die Aufsicht von risikobehafteten Banken an sich zu ziehen.

Eine gemeinsame Bankenaufsicht ist der richtige Schritt in Richtung Bankenunion, die zudem Bankenrestrukturierungsmechanismen und Lastenteilungsregelungen beinhaltet. Diese Konstruktion erleichtert es, private Gläubiger deutlicher an den Kosten von Bankenrettungen zu beteiligen, ohne die Finanzwelt zu erschüttern.

Diese Kolumne wurde zuerst im Handelsblatt veröffentlicht.

Under EU rules, the Commission has the authority to determine whether the provisional duties are enacted. But opposition from member states would weaken Commissioner De Gucht’s hand as the investigation moves toward a conclusion in December, when they can ultimately block his proposal. The Commission is investigating alleged dumping of Chinese solar panels and also whether subsidies provided by the Chinese government to the Chinese solar industry amount to an unfair trade practice. The recent imposition of anti-dumping duties ranging from 18.32 percent to 249.96 percent on solar-energy cells imported from China by the U.S. Commerce Department supports the EU Commission’s case.

As in the case of any dumping dispute, reactions vary between the affected units bemoaning loss of competitiveness, profitability and jobs and those of consumers and producers benefiting from the lower priced imports; given the modern distributed production chains across countries, import content of exports is about 40 percent today while the share of intermediate goods in trade has risen to 50-60 percent of global merchandise trade.

The former group usually supports turning to trade instruments to offset the consequent competition effects in the affected economic sector, while the latter also fear economic consequences on other sectors and cross-sectoral efficiency issues. Furthermore, research on average efficiency and costs in the US/European solar manufacturing vis-à-vis production in Chinese facilities do indicate that about 18-30 percent of the price advantage in Chinese solar cells do emanate from cost efficiency of vertical integration, economies of scale, and negotiated discounts from vendors of intermediate inputs, and machinery and equipment. These are in addition to the advantages from lower Chinese labour costs and cheap trade credit availability.

But how, if at all, does this row impact the other Asian giant focused on renewable energy as a means of decarbonising its current and future GDP growth? Several analysts have bridged India into the picture by arguing that India will be a beneficiary as anti-dumping duties on Chinese manufacturers will lead India to become an “alternative manufacturing destination” for companies. The Commission is also assessing the dumping investigations by comparing the prices Chinese companies charge for their photovoltaic products in Europe with those they charge in India, where they are much higher than in China.

The expected gains for India are however contestable, as India’s ability to capture vacated Chinese manufacturing space is a function of ease of doing business in the country, physical infrastructure necessary for manufacturing and domestic policy environment (other than the much disputed labour laws), all of which are not yet amenable for large scale manufacturing processes and units a la China. Despite the local content requirements under the National Solar Mission (NSM), industry experts contend that it is the lack of direction and policy support from the Indian government that is currently holding back solar manufacturing in India.

Additionally, the said local content requirements under NSM are now being subjected to a US-led dispute consultation at the WTO (WT/DS456/1). According to the US, the benefits for solar power developers, contingent on their purchase and use of domestic solar cells and solar modules, would include subsidies through guaranteed, long-term electricity rates, and hence contravenes the TRIMS and SCM obligations of India to the WTO. This is sure to have implications for the NSM provisions as well as the domestic anti-dumping case that India initiated late last year on solar PV imports from Malaysia, China, Taiwan and USA. One also wonders whether the US request for consultation is a retaliatory measure against India’s anti-dumping investigations.

Thus, in view of the protracted slowdown in trade growth below their long-term average rates worldwide and particularly in Europe, it is unclear whether it is the economics or the politics that is motivating these safeguard actions. In fact, research has indicated that advantages from Chinese industrial policy and state subsidy account for only about 3-5 percent of the total price competitiveness. It is uncertain yet how the safeguard actions will redress the relative competitiveness and cost efficiency concerns which is essential for a longer term and viable resolution of the problem.  

The French’s government’s approach is understandable. They attribute to booksellers an important role in society. Traditional booksellers are guardians of cultural niches that would be lost if not protected from the pressure of mass marketing. They preserve a traditional experience that some could define as ‘magical’. Who has not at least once chanced upon an old bookshop, felt compelled to enter, touch the books, exchange a word with the seller and discover previously unknown titles? It is quite different to scrolling through the pages of an online bookseller.

The traditional experience is however considered not charming enough to attract a sufficient number of buyers, so that traditional booksellers can prosper in the national market. Consciously or unconsciously, buyers may be attracted by traditional bookshops, but they are also very much attracted by low prices. And they hardly can resist Amazon’s offers.

The French government therefore aims at correcting this market failure: they probably consider that traditional booksellers  generate positive ‘externalities’ that should be preserved, like providing an in-depth information on books that do not have a market appeal. The proposed methodology to address their concern is however not desirable, for two reasons.

First, if Amazon’s behaviour is truly anti-competitive, antitrust laws will kick-in. There is no need for additional governmental measures.  The accusation laid before Amazon translates into what antitrust laws define as ‘predatory pricing’. In broad terms, predatory pricing occurs if a company sells below its variable costs, making a short-term loss this is compensated for in the longer term by a bigger gain when the company dominates the market, because its competitors have been pushed out of business. If that were true in this case, the French or European antitrust authorities would fine Amazon and compel it to stop this anti-competitive practice. To date, however, no antitrust investigation against Amazon has been (at least formally) opened. One should therefore presume that Amazon is not acting anti-competitively. Most likely, Amazon is simply more cost efficient. That is not surprising, given the global scale of its business.

Second, imposing some sort of ‘discounts ban’ on Amazon or preventing Amazon to offer free shipping services, besides being arguably incompatible with the rules of the European Union single market, would be tantamount to imposing a tax on actual or potential consumers who buy from Amazon’s website. This value would be drained from consumers who may well be the same customers who the French government wants to protect, such as students or under-educated social classes. Those measures, if adopted, would ultimately raise the average price of books, making access to culture more expensive and possibly unaffordable to a significant proportion of French citizens.

The way to deal with the perceived threat to traditional booksellers is appropriate use of subsidies within the EU state aid framework. European state aid rules allow for correction of market failures such as the one described above and to preserve a country’s cultural heritage.  Moreover, it is easier to identify who pays for state subsidies: taxpayers. The government can use subsidies and taxes to correct market failures and accomplish its redistribution policy. It would then be for citizens to judge whether they consider supporting booksellers an appropriate use of their money.

On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will once again debate and consider the legality and conformability of the European Stability Mechanism (ESM) in general and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In September last year, the court preliminarily approved the ESM on condition that German financial liabilities have to remain within the amount set by the German parliament (Court decision from September 2012 here). In the current hearing the FCC will consider several constitutional complaints (“Verfassungsbeschwerde”). According to the FCC’s press statement (here), the court will evaluate (1) scope and boundaries of the ECB’s monetary policy mandate, in particular the independence of the ECB and the OMT programme, (2) consequences of the OMT programme on the parliament’s budget right, (3) the role of the Bundesbank in the European System of Central Banks, and (4) possibilities of the parliament and the government react and respond to the ECB’s policies. The Court will invoke a joint assessment of whether or not the ECB acts ultra-vires and violates Germany’s constitutional identify. 

The focus of this hearing will be on the ECB’s rescue policies and specifically whether or not the ECB’s OMT is indirectly circumventing the prohibition of financing euro zone countries’ budgets. While the programme eases borrowing costs of struggling states, critics stress that it also eases pressure on governments to reform their fiscal policies and render the independent central bank dependent on governments’ policy choices. The ECB argues that its primary goal to safeguard price stability has to be accompanied by secondary goals, in particular maintaining the stability of financial markets.  The Bundesbank, by contrast, argues that OMT exceeds the boundaries set by the ECB’s mandate. In December last year, a statement by the Bundesbank in which the ECB’s OMT program is criticised was leaked and published by Handelsblatt.

The case is receiving wide coverage in the German press. The Welt writes that it is unlikely that the Court will deviate from its previous stance regarding the ESM, but that the constitutional complaints regarding the ECB’s OMT programme are a more delicate matter. The newspaper considers four potential decision scenarios: (1) The complaint is not admissible because the ECB is not subject to German but EU law and, hence, only the European Court of Justice (ECJ) has the competence to rule on the ECB’s policy. This scenario, however, is deemed highly unlikely because the FCC has already raised concerns that OMT might indirectly finance government deficits and because of the detailed structure of the hearing itself. (2) If the Court were to decide that the ECB is acting beyond its mandate, the ECB’s policies will no longer be covered by the German consent to EU treaties and OMT will violate German basic law. Such a decision, however, would necessitate the involvement of the ECJ, which in the past has always adopted a pro-European stance. But thus far the FCC has never referred a case to the ECJ. In extremis, the court may force the German government to complain against the OMT at the ECJ. (3) The FCC might consider ECB policies at odds with German basic law because they deprive the Bundestag of its budget right. In the eyes of the Handelsblatt such a verdict also seems unlikely because it is solely based on German law and therefore non-binding for the ECB and would essentially prohibit Germany’s participation in the common monetary policy. (4) Finally, the most likely outcome is that the FCC will turn down the appeal but still raise doubts and scepticism about OMT. Such a decision could potentially curb the scope of the programme and strengthen its critics in the Governing Council, most notably Bundesbank president Weidmann.

The Handelsblatt recently analysed the Bundesbank’s criticisms of the ECB’s policy. The Bundesbank’s main points of criticism are that the ECB’s Governing Council is not subject to parliamentary oversight and therefore should not be allowed to reach decisions that will lead to Germany having to take over financial liabilities. Stabilisation policies should rather be enacted through the ESM, while the ECB should restrict itself to the conduct of monetary policy. OMT also overstretches the ECB’s mandate of safeguarding price stability by supporting fiscal policies of heavily indebted countries and thereby threatening its institutional independence. While the ECB argues that OMT will also align interest rates across the euro zone and thereby keep monetary policy effective, the Bundesbank dismisses this justification because diverging level of interest rates across the euro zone only reflect different levels of economic strengths in the respective countries. Overall the Handelsblatt is confident that in the end the FCC will conditionally approve of the ECB’s rescue policies.

The Welt further quotes the German law professor Christoph Schalast who suggests that it seems unlikely that the FCC will stop the OMT and the complaint is rather “an act of despair of Euro sceptics”. Another law professor, Joachim Wieland, said that “if the FCC would rule that OMT is beyond the ECB’s mandate, not only the common monetary policy, but also the EU would be finished.” While most German law experts believe that OMT is at least problematic, they also share the view that the FCC will shy away from bluntly accusing the ECB of violating EU and German law. Still, according to the FAZ Udo Di Fabio, a former constitutional judge and professor of constitutional law, argues in a statement for the Stiftung Familienunternehmen, an interest group of family-owned companies, that if the ECB is indeed indirectly financing governments’ budget deficits through OMT, the FCC ultimately has to obligate the German government and the parliament to leave the euro zone should recommendations to change policies of the main German political institutions (“Einwirkungsaufträge”) remain unsuccessful. Other measures according to Di Fabio contain changes in the basic law as well as rules for a structured sovereign default in order to strengthen national governments’ fiscal responsibilities.

Most German newspapers, for example FAZ and Handelsblatt, portray the hearing before the FCC as a showdown between the Bundesbank and the ECB, where two Germans, Jörg Asmussen of the ECB and Jens Weidmann of the Bundesbank will defend the opposing views of the institutions they are representing. Asmussen and Weidmann shared a trust- and respectful working relationship due to their prior jobs, when Asmussen was working for the finance ministry and Weidmann for chancellor Merkel as an economic advisor. Regarding the ECB’s rescue policies, however, both now share diametrically opposed views. Mario Draghi’s choice to send Asmussen to justify the ECB’s policy instead of Yves Mersch, who was previously considered to testify before the Court, also reflects Asmussen’s knowledge of the Court’s procedures and peculiarities. Some members of the governing coalition, however, would still like to see Draghi testify before the Court. According to the FAZ, Rainer Brüderle, vice chairman of the Liberal parliamentary group (FDP) in the Bundestag and front runner for the party in the upcoming national elections, wrote a letter to Draghi requesting that he himself instead of Asmussen should testify before the FCC; the importance of the matter subject would require his attendance.

Es wird empfohlen, dem Gesetzesentwurf für eine Verordnung des Rates zur Übertragung besonderer Aufgaben im Zusammenhang mit der Aufsicht über Kreditinstitute auf die Europäischen Zentralbank (EZB) zuzustimmen. Die gemeinsame Bankenaufsicht ist von zentraler Bedeutung für die Bankenunion, welche als notwendig für die Stabilität des Euroraums eingeschätzt wird. Eine gemeinsame Aufsicht kann auch dazu beitragen, die aus Bankenkrisen resultierenden Kosten für den Steuerzahler zu reduzieren. Bedenken bezüglich der Trennung von Geldpolitik und Aufsicht, der Interessen der Länder außerhalb des Euroraums und des Subsidiritätsprinzips bei der Aufsicht kleiner Institute sind in der Einschätzung des Gutachters im derzeitigen Entwurf zufriedenstellend berücksichtigt worden, so dass empfohlen wird, zügig zuzustimmen.

Begründung

In einem auf europäischer Ebene integriertem Bankenmarkt kann ohne eine Regulierung und Aufsicht der Banken auf gleicher Ebene keine Finanzmarkstabilität gewährleistet werden. Der gemeinsame Finanzraum in der Euro-Zone ist im Zuge der Krise immer weiter fragmentiert worden (Merler und Pisani-Ferry 2012). Ein entscheidener Grund für diese Fragmentierung war die negative Rückkopplung von schwachen Banken mit schwachen Staatshaushalten. Dies hat zu einer massiven Divergenz der Finanzierungsbedingungen in Europa geführt, die sich negativ auf Wohlstand und Beschäftigung auswirken. Diese Divergenz ist zum Teil auch auf nationale regulatorische Handlungen zurückzuführen.¹ Die europäischen Staats- und Regierungschefs haben deshalb im Gipfelbeschluss vom Juni 2012 beschlossen, diese negative Rückkopplung zwischen Banken und Staaten zu beenden.²

Zum Erreichen dieses Zieles wird gemeinhin eine sogenannte Bankenunion als unerläßlich betrachtet. Zu ihr gehören eine gemeinsame Bankenaufsicht, Bankenrestrukturierungsmechanismen und Lastenteilungsregelungen (Pisani-Ferry, Sapir, Véron, Wolff 2012). Eine so konstruierte Bankenunion wird es auch erleichtern, private Gläubiger deutlicher an den Kosten von Bankenrettungen zu beteiligen, ohne massive Finanzinstabilitäten zu riskieren (Véron und Wolff 2013). Hauptgrund hierfür ist, dass eine Privatgläubigerbeteiligung in einem System ohne gemeinsame Institutionen immer wesentlich stärker das gesamte Land, in dem die Bank ansässig ist, betrifft. Dies kann, wie im Falle Zyperns zu sehen, sogar letzlich zur Einführung von Kapitalverkehrskontrollen führen.

Europäische Verhandlungen über eine gemeinsame Aufsicht sind jetzt abgeschlossen und es bedarf nur noch der letztinstanzlichen Entscheidung des europäischen Gesetzgebers. Auf Grund des Artikel 23(1) des deutsche Grundgesetzes ist der deutsche Bundestag und der deutsche Bundesrat an dem Verfahren beteiligt. Nach der Zustimmung der beiden deutschen Kammern wird der deutsche Ratsvertreter dem Verordnungsentwurf zustimmen.

Die rechtliche Grundlage des Verordnungsentwurfs ist Artikel 127(6) AEUV. Diese Rechtsgrundlage wurde auch auf deutschen Wunsch früh gewählt und stellt die Europäische Zentralbank in den Mittelpunkt der neu zu schaffenden gemeinsamen Aufsicht. Hieraus sind in der deutschen Debatte insbesondere zwei Bedenken entstanden: die Sorge um eine unzulässige Vermischung von geldpolitischen und Aufsichtsfunktionen und die unzureichende Beteiligung von EU-Ländern außerhalb des Euroraums. Eine weitere Sorge ist die der übermäßigen Zentralisierung von Aufsichtsfunktionen bei der EZB, die zu einer Schwächung kleiner Finanzinstitute führen könnte. Alle drei Punkte werden im folgenden entkräftet.

1. Ist dieTrennung von Geldpolitik und Bankenaufsicht in der EZB gewährleistet worden?

   1. Die EZB ist eine glaubwürdige Institution und institutionell bestens geeignet, klar definierte Aufsichtssaufgaben wahrzunehmen. Artikel 18 des Verordnungsentwurfes definiert klare Prinzipien und Mechanismen.

   2. International ist es durchaus üblich, Aufsichtskompetenzen bei Zentralbanken anzusiedeln (siehe Anhang). Es gibt keine Anzeichen, dass dies einen systematischen negativen Einfluss auf die Qualität der Aufsicht oder auf die Höhe der Inflationsraten des Landes hat.

   3. Der bestehende Verordnungsentwurf trennt Geldpolitik und Bankenaufsicht innerhalb der EZB weitestgehend. Für aufsichtsrechtliche Fragen wird eine neues Gremium geschaffen, das unabhängig vom Gouverneurs-Rat agiert und für die Bankenaufsicht zuständig ist. Eine vollständige Trennung kann aber nicht gewährleistet werden, da die EU Verträge die letzliche Entscheidungskompetenz im EZB Rat ansiedeln.

   4. Eine Zentralbank fungiert als Lender of Last Resort (explizit oder implizit) und stellt die Liquiditätsversorgung des gesamten Bankensektors innerhalb der Euro-Zone sicher. Durch das Erlangen der Aufsichtsverantwortungen können die Risiken für geldpolitische Fehlentscheidungen reduziert werden. Insbesondere ermöglicht die Aufsicht der EZB, insolventen Instituten eben gerade die Banklizenz frühzeitig zu entziehen. Hierdurch wird der Bedarf an Liquiditätsbereitstellung reduziert und man kann verhindern, dass es über lange Zeit Liquidität an insolvente Banken vergeben wird. Sorgen, dass eine Ansiedelung der Aufsichtsfunktionen bei der EZB Interessenskonflikte zwischen der Wahrung der Preisstabilität und Liquiditätsprovision für das Bankensystem in sich bergen könnte, erscheinen insofern unbegründet. Der beschriebene Interessenskonflikt besteht auch, wenn Aufsichtsfunktionen in anderen Institutionen wahrgenommen werden. Eine verantwortlich handelnde Zentralbank wird auch in einem getrennten System die Stabilität des Finanzsystems im Auge behalten. Gleichzeitig hat sie in einem getrennten System weniger Möglichkeiten, präventiv zu handeln.

2. Interessen von EU Ländern außerhalb der Euro-Zone.

   1. Länder außerhalb der Euro-Zone können durch eine „enge Zusammenarbeit“ mit dem SSM kooperieren (Artikel 6). Der Verordnungsentwurf wurde im Laufe der Verhandlungen diesbezüglich wesentlich verbessert und in der Einschätzung des Gutachters ist eine weitere Berücksichtigung der Interessen der Länder außerhalb des Euroraums bei der derzeitigen vertraglichen Rechstsgrundlage nicht möglich.

   2. Die nationalen Aufsichtsbehörden müssen sich analog zu den Regelungen der Mitgliedsländer innerhalb des Euroraums den Richtlinien der EZB unterwerfen und notwendige Informationen bereitstellen. Sie können den SSM jederzeit verlassen und daher selbständig entscheiden, ob sie sich einer SSM Aufsichtsentscheidung unterwerfen möchten. Allerdings erscheint diese exit Option als unrealistisch.

   3. Artikel 127(6) des EU Vertrag begrenzt die Einbindung von Ländern außerhalb der Euro-Zone in Entscheidungsprozesse im Rahmen des SSM, da finale Entscheidungen vom Governeursrat der EZB getroffen werden müssen. Länder außerhalb der Euro-Zone werden allerdings das gleiche Stimmrecht im EZB Aufsichtsgremium haben wie Länder innerhalb der Euro-Zone. Dieses Gremium wird de facto die Bankenaufsichtsentschei-dungen fällen.

   4. In Zentral- und Osteuropa ist das Bankensystem stark mit dem Bankensystem Westeuropas verwoben. Darvas und Wolff (2013) diskutieren die Vor- und Nachteile eines Beitritts der Länder ausserhalb des Euroraums im Detail und sprechen sich grundsätzlich hierfür aus.

   5. Ziel der Aufsicht ist die Finanzstabilität innerhalb der gesamten EU. Dieses Ziel wird unabhängig von der Größe des jeweiligen Landes oder des Mitgliedschaftsstatus in der Euro-Zone verfolgt. Bedenken, dass die Interessen kleiner Länder in der gemeinsamen Aufsicht unzureichend berücksichtigt würden erscheinen unbegründet.

3. Übermäßige Bündelung der Aufsichtskompetenzen bei der EZB?

   1. Der Verordnungsentwurf definiert klare Kriterien dafür, welche Banken direkt von der EZB beaufsichtig werden und bei welchen Banken die Aufsicht grundsätzlich weiter von nationalen Behörden durchgeführt wird.

   2. Im Anhang wird eine Einschätzung für jedes EU Land durchgeführt, wie viele Banken hierbei unter die direkte EZB Aufsicht fallen. Diese Einschätzung ist nicht entgültig, da einige Parameter dem Gutachter nicht zu Verfügung stehen und sollte somit nur als indikativ betrachten werden. Für Deutschland würde die Aufsicht für ca. 45 Institute direkt von der EZB ausgeübt werden. Dies bedeutet die Beaufsichtigung von bis zu 90% der Bilanzsumme des deutschen Bankensystems.

   3. Ein Großteil der Banken, insbesondere kleine Banken wie Sparkassen, würde somit nicht direkt von der EZB beaufichtigt werden. Das Subsidiaritätsprinzip der EU Verträge ist somit gewährleistet.

   4. Die EZB behält sich aber das Recht vor, Aufsichtsbefugnisse für Banken an sich zuziehen. Das Recht, Aufsichtsbefugnisse für jede Bank an sich zu ziehen, leitet sich aus Artikel 13b(1) ab. Die spezifischen Rechte der EZB werden in Artikel 13b(2) beschrieben.

   5. Diese Möglichkeit ist grundsätzlich zu begrüßen. Da auch kleinere Finanzinstitute als Ganzes Risiken für die europäische Finanzmarktstabilitiät bedeuten können (z.B. spanische cajas), ist es sinnvoll und notwendig, das grundsätzliche Aufsichtsrecht für alle Banken bei der EZB anzusiedeln. Auch bei einer zentralisierten Regulierungsaufsicht würden Kompetenzen nach dem Subsidiaritätsprinzip an nationale und sub-nationale Einheiten deligiert sein. Die Informationsvorteile nationaler Aufsichtsbehörden für kleinere Banken würden daher noch immer genutzt.

Die Übertragung von Aufsichtskompetenzen auf die EZB ist der wahrscheinlich wichtigste europäische Integrationsschritt seit der Gründung der Währungsunion. Eine Verzögerung oder Unterbrechung des Gesetzgebungsverfahren könnte zu einem Vertrauensverlust führen. Der Verordnungsentwurf sieht zahlreiche demokratische Kontrollmechanismen vor. So billigt z.B. das Europäische Parlament die Ernennung des Vorsitzenden und stellvertretenden Vorsitzenden des Aufsichtsgremiums (Artikle 19(2)). Mehr demokratische Kontrolle sollte mittelfristig angestrebt werde, kann aber im bestehenden Vertragsrahmen nur schwer erreicht werden. Die gemeinsame Bankenaufsicht ist ein wichtiger Baustein, um Stabilität in Europa wiederherzustellen. Auch ohne die Schaffung einer gemeinsamen Bankenabwicklungsbehörde wird sie schon einen wichtigen Beitrag zum Gelingen des europäischen Projektes leisten.

Schliesslich sollte man feststellen, dass aus einer gemeinsamen Aufsicht keine direkten Konsequenzen für die Lastenteilung folgt. Die Diskussion über Lastenteilung zwischen privaten Gläubigern, nationalen Steuerzahlern und europäischer Haftung steht erst am Anfang. Grundsätzlich ist anzumerken, dass das Ziel ist, die Kosten für Steuerzahler durch Privatgläubigerbeteiligung zu minimieren. Weiterhin ist zu empfehlen, dass - wenn Steuerzahler an Bankenrettung beteiligt werden müssen – die nationalen Steuerzahler immer einen spürbaren Anteil an den Lasten tragen sollten.

Referenzen

Bloomberg (2013). ‘EU Warns of ‘Disproportionate’ Crackdown on Cross-Border Banking’ (4. Februar 2013)

Darvas, Zsolt und Guntram B. Wolff. (2013) ‘Should non-euro area countries join the single supervisory mechanism?’, Bruegel Policy Contribution 2013/06

Merler, Silvia und Jean Pisani-Ferry (2012) ‘Sudden stops in the euro area’, Bruegel Policy Contribution 2012/06

Pisani-Ferry, Jean, André Sapir, Nicolas Véron und Guntram B. Wolff (2012) ‘What kind of banking union’, Bruegel Policy Contribution 2012/12.

Véron, Nicolas und Guntram B. Wolff (2013) ‘From supervision to resolution: next steps on the road to European Banking Union‘, Bruegel Policy Contribution 2013/4

Anhang 1: Anzahl und Bilanzsumme der von der EZB beaufsichtigten Banken

Quelle: The Banker Database³ und Berechungen von Bruegel. Anmerkungen: Die Schätzungen basieren auf den folgenden Signifikanz-Kriterien:

1. eine Bilanzsumme von mehr als 30 Mrd. EUR aufweisen oder,

2. eine Bilanzsumme von mehr als 20% des Bruttoinlandsproduktes des Mitgliedstaates, in dem die Bank gegründet wurde, jedoch weniger als 5 Mrd. EUR, ausweisen oder,

3. zu den drei bedeutendstens Kreditinstituten des Mitgliedstaates gehören, oder

4. als Tochterinstitut oder Filiale einer Bankengruppen in teilnehmenden Mitgliedstaaten eine der drei oben genannten Kriterien auf konsolidierter Basis erfüllen.⁴

Die vorliegende Schätzung sollte als eine Annäherung verstanden werden. Die „The Banker“ Datenbank enthält keine Informationen über Filialen sondern ausschließlich Informationen auf der Ebene der Bank-Holding und der Tochterinstitute (sowohl im in- als auch ausländischen Besitz). Daher ist insbesondere die Abgrenzung zwischen Tochterinstituten und Filialen von der Konzernholding aufgrund der Limitierung der Daten nicht möglich und kann zu Verzerrungen in den Ergebnissen führen. Werte für Mittel- und Osteuropa basieren vorwiegend auf Schätzungen nach Kriterium (iv), da dass Bankensystem in diesen Ländern von Tochterinstituten und Filialen von Banken aus Ländern der Euro-Zone geprägt wird. In Darvas und Wolff (2013) findet sich eine detaillierte Analyse, wie sich der SSM auf Länder außerhalb der Euro-Zone auswirkt.⁵

Anhang 2: Übersicht der Bankenaufsichtskompetenzen in G8 Staaten

Quellen: Nationale Zentralbanken und Aufsichtsbehörden.

This week the OECD released its latest biannual Economic Outlook. The world GDP growth forecast for 2013 has been revised down from 3.4 percent in June 2012 to 3.1 percent. The group of 34 OECD countries is also expected now to grow slower than projected 6 months ago—from 1.4 to 1.2 percent. But, the OECD projects that the second half of 2013 will see a modest revival of growth and the outlook for 2014 is decidedly better.

Source: OECD

Is the OECD’s promise of better times ahead credible? Consider the euro area:  the projection for the euro area was already a bleak contraction of 0.1 percent; the contraction now is expected to be 0.6 percent.  But the expectation nevertheless is that growth will be 1.1 percent in 2014. How reliable is the 2014 projection?

In June 2011, the OECD projected that, in effect, the crisis was over. GDP in the euro area was expected to grow at around 2 percent a year. Then, in the fall of 2011, the financial flare-up led to a sharp downward revision of growth forecasts for 2012, but with an expected pick up in 2013. Every six months since then, the growth projections for 2013 have been scaled down.

Thus, from December 2011 when the euro area was expected to be growing by almost 1.5 percent in 2013, the latest forecast is for -0.6 percent, a turnaround of over 2 percent in 18 months.

Although such downward revisions have been most pronounced for the euro area, they have been a widespread feature of the forecasts. In particular, the growth projections for emerging economies—Brazil, China, and India—have been similarly scaled down.  

To be fair, these persistent downward revisions are not confined to the OECD. The same pattern features in the IMF and European Commission forecasts.

Source: OECD

Are forecasting techniques biased to produce overly optimistic forecast during downturns? Or are the downward revisions the consequence of unexpected negative shocks?

Kahneman and Tversky suggest that human beings have a general tendency to be overoptimistic and to underestimate downside risks. It is possible that policymakers underestimated the contractionary effects of fiscal consolidation and also the spillovers to the global economy from the slowing growth in Europe.

But the large error in 2013 does call for a pause. Unlike in the fall of 2011, when there was a real financial scare, the financial conditions globally have steadily improved. The drag from the fiscal consolidation cannot explain the magnitude of and the repeated occurrence of the downgrading of forecasts. Perhaps, there is more going on? The balance-sheet constraints in the eurozone’s private sector are weighing more heavily than has been recognized? At the same time, emerging economies face greater structural challenges than has been recognized? If so, is there a global growth engine to lift the world economy?

Until we know the answers to these questions, projections will remain suspect. A bounce back in growth may occur in 2014, but don’t count on it.

The idea of economic defeatism

Paul Krugman writes that in a sense, the really remarkable thing about “Abenomics” is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism. In Europe, there is no hint of a major change in policy. At best, we may be looking at a slight relaxation of the savage austerity programs.

Christina Romer and David Romer show that what are widely viewed as the two largest errors in Federal Reserve history – inaction in the wake of banking panics early in the Depression, and inaction in the face of high and rising inflation in the 1970s – were both borne of excessive pessimism about the power of monetary policy. Fear that policies might not work or might be costly led policymakers to conclude that the prudent thing was to do nothing. Yet there is now widespread consensus that action would have been effective in both these periods.

Christina Romer argues that last September, the Fed changed its tone and actions substantially. But the truth is even these moves were pretty small steps. With its most recent action, the Fed has pushed the edges of its current regime. Nevertheless, the key fact remains that the Fed has been unwilling to do a regime shift. And because of that, monetary policy has not been able to play a decisive role in generating recovery. Joseph Gagnon (HT NYT) gives this analogy to illustrate the economic defeatism of policymakers: it’s as if we went to the biggest fire we’ve ever seen and we poured more water on it than we’ve ever poured, and the fire isn’t completely out. Well, we should try more water.

The end of one big deflation: the US (and UK) in the 1930s

Christina Romer argues that through a combination of actions, the most important of which were monetary, Franklin Roosevelt managed to turn our ocean liner of an economy on a dime. Roosevelt’s actions were bold enough and different enough from what had been done before that people had no choice but to notice. Industrial production climbed 57% in the first four months of the Roosevelt administration. And real GDP continued to grow at an average rate of nearly 10% per year between 1933 and 1937. The video below suggests that Roosevelt’s ideas of reflation were getting through to ordinary Americans.

Source: YouTube

In their 1990 EEH paper Peter Temin and Barry Wigmore analyze the beginning of the recovery in the US within the framework used by Sargent (1983) to study the end of hyperinflations. Sargent argued that the key to costless stabilization was the establishment of a new policy regime. Actions were needed to establish the new regime and its credibility, but the immediate effects were through rapidly revised expectations.

Peter Temin and Barry Wigmore’s argument is that FDR established a new macroeconomic policy regime shortly after his inauguration in March 1933. The Hoover administration had been financially conservative, adhering to the rules of the gold standard and fiscal orthodoxy. Its policy stance in the troubles of the early 1930s therefore, was decidedly deflationary. Roosevelt broke with this ideology, devaluing the dollar within 6 weeks of his inauguration, promoting fiscal expansion, and championing the virtues of inflation-or reflation as he termed it. The problem with the traditional focus on the National Industrial Recovery Act (NIRA) as a source of the recovery is it came too late to explain the turn around.

Source: Gauti Eggertsson

Gauti Eggertsson writes that it is hard to overstate how radical the regime change was. “This is the end of Western civilization,” declared Director of the Budget Lewis Douglas. During Roosevelt’s first year in office, several senior government officials resigned in protest. These policies violated three almost universally accepted policy dogmas of the time: (a) the gold standard, (b) the principle of balanced budget, and (c) the commitment to small government. Interestingly, the end of the gold standard and the monetary and fiscal expansion were largely unexpected, since all these policies violated the Democratic presidential platform.

Nicholas Crafts writes that the years from 1933 through 1936 also saw a very strong recovery with growth of over 4% in every year in the UK. The policy framework adopted by the Chancellor of the Exchequer, Neville Chamberlain (in office from November 1931 to May 1937) from mid-1932 has a strong resemblance to the so-called ‘foolproof way’ of escaping from the liquidity trap (Svensson, 2003) and to ‘Abenomics’ in today’s Japan. A key aspect was that the Treasury under Chamberlain, rather than the Bank of England under Montagu Norman, ran monetary policy after the exit from the gold standard. The classic problem with the ‘foolproof way’, especially for central banks, is whether they can credibly commit to maintaining inflation once recovery appears to be under way. Because of its problems with fiscal sustainability, the Treasury was in a good position to persuade markets that it wanted sustained moderate inflation as part of a strategy to reduce the real interest rate below the growth rate of real GDP and to benefit from this differential in reducing the public-debt-to-GDP ratio.

The end of another one big deflation: Abenomics

Christina Romer argues that the regime shift we are seeing in Japan is just the kind of bold action that might actually succeed in changing both inflation and growth expectations a substantial amount. She also writes that the initial indicators are consistent with Japan’s actions being perceived as a genuine regime shift.

Source: Martin Wolf

Source: NY Fed

Martin Wolf writes that Japan’s effort to get its economy moving entered difficult terrain last week. Bond yields rose and stock prices fell. True, the yield on 10-year Japanese government bonds was 34.7 basis points (0.347 percentage points) higher than on May 6. But it was still only 0.91 per cent. This is where it was just over a year earlier. The Nikkei stock market index fell 9.5 per cent between May 22 and 27. But this followed a jump of 80 per cent between November 13 2012 and May 22 2013. Yes, the yen rose a little against the dollar last week, but it is still 23 per cent below its level in early October 2012.

Kate Mackenzie writes in FT Alphaville that the big thing happening in the Abenomicsphere recently is of course rising JGB yields. This might be the precursor to something terrible, i.e. yields rising unsustainably high, but higher yields are also a necessary effect of moving away from deflation.

Paul Krugman explores three fundamental stories, each of which could explain a Nikkei plunge:

All of these imply a fall in stocks; but they have different implications for bond and currency markets. The impact of expected future monetary policy on long-term interest rates is ambiguous — rates might rise because they expect the BoJ to tighten, or fall because they fear that it will fail to end deflation. But worry about the BoJ’s resolve should have a clear impact on the yen, which should strengthen — which it did. So to the extent that this wasn’t just markets doing their occasional panic thing, it looks like a sudden outbreak of concern about whether the Bank of Japan has really changed as much as it seems. Scott Sumner sends us to a Reuters report, which explains that a rift within the Bank of Japan’s board was highlighted in the minutes of the April 26 meeting, which showed some policymakers opposed targeting 2 percent inflation in two years and called for more flexibility in guiding monetary policy.

In the eurozone, Germany is the only country still standing. Of the other so-called core countries, the Netherlands is struggling to overcome its financial excesses. France has embarked on long-term economic decline with little margin to support Europe – indeed, it is edging towards debtor status.

Although still standing, the blunt reality is that even Germany does not have the economic and financial strength either to spur European growth or to underwrite a financial stability net. Not surprisingly, therefore, the political pushback is vehement when Germany is called on to do more for Europe. But it does have a crucial role: to redirect European governance to fill the gaps revealed by the euro crisis. Because its voice counts more than that of others, Germany’s responsibility is correspondingly great.

The country has never been an economic locomotive for Europe. Its economy responds to the movements of the global economy, performing with great vigour when global trade is strong. When Germany’s exports to the world grow, it transmits the global impulses by stepping up its imports from other nations. But because its domestic consumption and investment largely respond to these external movements, Germany does not generate its own impulse to invigorate growth elsewhere.

For this reason, other nations have demanded greater German fiscal stimulus to accelerate the German economy, thereby increasing imports from – and raising growth in – struggling European nations. In 2008-10, Berlin participated in a globally co-ordinated fiscal stimulus that proved essential to pulling the world economy back from the abyss. Since then, Germany, like other leading economies, has turned fiscally conservative. Its room for fiscal stimulus is not evidently greater than that of other advanced nations. But even if a German stimulus could be engineered, studies show that the benefits to the rest of Europe – particularly to its most distressed parts – would be small.

These considerations are particularly important in view of Germany’s recent lacklustre economic performance. As world trade rebounded from its precipitous fall in 2009, Germany responded robustly. Chinese demand was especially strong and German companies were well positioned to take advantage. The country seemed poised for another miracle. Since then the global economy has slowed and world trade growth is crawling at 2 per cent a year. Even the dynamic emerging markets are slowing. Germany has avoided the recession in which much of the eurozone is mired but the problems elsewhere in Europe are weighing on it. This drag is likely to persist.

And yet the direction Europe takes rests crucially on the energy and style of German leadership. Writing almost 30 years ago, Helmut Schmidt, the former German chancellor, called for a co-operative framework to preserve and consolidate the Atlantic alliance. He complained that the US saw its role as presenting Europe with a fait accompli. “Dependency corrupts,” he lamented, “and corrupts not only the dependent partners but also the oversize partner who is making decisions almost single-handedly.” The challenge is to achieve a decisive move forward but one that respects national sovereignties.

The recent German proposal for a banking union is, in this light, intriguing. It is a small but vital step in the right direction. The continuing efforts to bring about common bank resolution and deposit insurance are stymied because they require the ceding of fiscal sovereignty, which Wolfgang Schäuble, the finance minister, has warned is inconsistent with existing treaties. More importantly, the political willingness to take that leap is absent. Giving up fiscal sovereignty is tantamount to a political union, which cannot be done through the back door.

Instead, the German proposal offers a practical way ahead – but Berlin must lead by example. Member countries would agree to and enforce common standards on bank resolution and deposit insurance. This will work if the standards for financial oversight and discipline are truly rigorous. Today’s incentives for preserving the status quo must be replaced by a push to shut down the growing corpus of zombie banks and bolster the viable institutions with greater capital and liquidity buffers. Healthy banks and growth support each other.

If Berlin is to lead, it must apply these principles to its own troubled banks and shed its reputation for diluting the new generation of international bank regulatory standards. That would be good for Germany and for Europe.

This article was first published in the Financial Times.

This endeavor was bound to have wide implications. The troika negotiated what ended up being the largest financial assistance packages ever: loans to Greece from the IMF and European partners are set to reach €240 billion ($310 billion), or 130% of the country’s 2013 GDP – far more in both absolute and relative terms than any country has ever received. Loans to Ireland (€85 billion) and Portugal (€78 billion) are also significantly bigger than those usually provided by the IMF.

Moreover, cooperation between the three institutions is unprecedented. Back in 1997-1998, during the Asian crisis, the G-7 flatly rejected Japan’s proposal for an Asian Monetary Fund. Now the IMF has even accepted a minority-lender role, with the bulk of assistance coming from the European Stability Mechanism (ESM), a new institution often viewed as an embryonic European Monetary Fund.

It is frequently argued that the size of the assistance packages is a testament to Europe’s clout within the IMF. Perhaps, but the packages are, first and foremost, a consequence of the constraints to which Europeans were (and still are) subject.

Economic adjustment is necessarily slower within a monetary union than it is for countries with their own currency, because, even for very flexible economies, prices change more slowly than the exchange rate. Delivering the same result therefore takes more time, and requires keeping countries in intensive care for longer – and at higher cost.

Three years later, the results are mixed at best. Unemployment has increased much more than anticipated and social hardship is unmistakable. There is one bright spot: Ireland, which is set to recover from an exceptionally severe financial crisis. But there is also a dark spot: Greece, where GDP has shrunk by 20% since 2009 and where the public debt/GDP ratio is now higher than anticipated at the launch of the program, despite the debt reduction negotiated with private creditors in February 2012. This is not because of a lack of fiscal consolidation. On the contrary, the Greek authorities have done more than planned on this front. But the collapse of GDP has necessarily implied a rising debt ratio, driving the country into a recessionary spiral as economic contraction forces further spending cuts.

Could the troika have done better? It was not responsible for existing monetary conditions – a currency union with a central bank focused on price stability. But European officials’ hesitant response to the crisis added to the difficulty. Prolonged controversies over the terms and conditions of assistance and the absurdly high interest rate initially set on official loans exacted a heavy toll on countries already under stress.

Furthermore, the troika made three mistakes. First, Greek debt reduction was postponed for too long. Once it became clear that the burden was unbearable, debt should have been cut expeditiously. Too many creditors were reimbursed at par on their maturing claims.

Second, the troika based its programs on overly optimistic assumptions. It misjudged the consequences of fiscal consolidation and credit constraints, underestimating the contraction of employment and overestimating exports and privatization receipts.

Finally, not unlike what happened during the Asian crisis in the late 1990’s, the troika took country cases one by one. As a result, it did not pay enough attention to cross-country spillovers and deteriorating conditions in the wider eurozone.

Should the troika survive? Its three participating institutions have different mandates and different roles. It was perhaps inevitable that initially they worked jointly; but there is reason to question such an approach now.

Operationally and financially, the IMF has become much more involved in Europe than its global shareholders deem sustainable. It should become a catalytic lender whose participation in eurozone programs remains desirable but not indispensable – giving it the possibility to disagree and walk away.

The ECB is in an odd position as well, but for different reasons. As the eurozone’s central bank, rather than a lending institution, it does not have a clear role in negotiations on behalf of creditors. If it remains in the troika, its participation should be mostly silent.

Finally, Europe should transform the ESM into a European Monetary Fund capable of providing policy assessment and advice, as well as financial assistance – possibly drawing on European Commission staff.

Beyond European specifics, the troika experiment answers a question of major importance to other parts of the world: Can the IMF cooperate with regional institutions? The answer is yes – but not easily. The troika has proved functional, and Europe would have been at pains to provide conditional assistance to eurozone countries without the IMF’s participation and support. But cooperation has proved to be difficult, if only because each participating institution has rules and constraints that are not easy to reconcile with the others’.

This column was first published here by Project Syndicate. It draws on a Bruegel report co-authored with André Sapir and Guntram Wolff.

How does collusion affect us? Bruegel has published a Policy Brief on collusion in Europe. Based on a number of conservative assumptions, we estimate that over 12 years, collusion could have drained value from customers in cartelized markets of up to €320 billion, or more than 3 percent of euro-area GDP in 2012. Agreements to limit competition have serious detrimental effects on the economy. This is not just a matter of ‘unfairness’. Economic theory suggests that these agreements shrink the pie. Restrictions of competition misallocate resources, so that opportunities to create value are blocked and total welfare in an economy is reduced. Moreover, with no competition, dynamic incentives to improve, to become more efficient and beat competitors, are lost. Final consumers may be harmed directly, because end-customer prices are directly increased. But, as it is often the case, they can also be indirectly harmed if cartels materialise further up the value chain. If raw input prices are increased, downstream producers increase their prices, shrink their production or exit the market. The economy’s engine slows down if its fuel cost increases. When banks manipulate interest rates it has ramifications for small enterprises’ ability to access credit. Artificially expensive oil derivatives would increase firms’ transport costs. Building a road, a school or a hospital may become unaffordable if cement producers split the markets so that they do not compete against each other.

Fighting collusion. The best way to fight collusion is to make it unprofitable.  Measures can be taken to make cartels less stable, for example by favouring the entry of new companies into markets. But it can also be made clear that if a company infringes the law and is caught, it will pay a high price. Antitrust fines serve that purpose. Optimal fines should take into account the expected profit yielded by collusion and the probability of a cartel being sanctioned. It is difficult to get the right numbers, but the consensus among researchers is that to ensure deterrence a fine should be at least six to seven times the extra profits yielded by collusion. The European Commission has toughened its fining policy since the introduction of the new fining guideline in 2006. However, fines still seem far from the deterrent level. We estimate that in a significant number of cases fines not only are far below their optimal value, they may even be so low that they do not to fully offset the profits to be had from cartels. In other words, with such fines, being in a cartel pays off, even if it is ultimately uncovered.

Increasing deterrence. Further increases in fines might be difficult to implement, however. High fines might hamper the economic viability of a company and are, therefore, not deemed credible. We observe that during the economic crisis, the European Commission adopted a more lenient approach. There would be little gain for consumers, if they first paid too-high prices because of a cartel, and then face high prices because competition is reduced if companies are pushed out of markets by overly heavy sanctions.

The solution must therefore be found elsewhere. Researchers increasingly support the view that corporate fines should be complemented by personal sanctions for company managers who take the decision to join a cartel on behalf of shareholders. Unlike the US administration, however, the European Commission does not have the power to impose criminal sanctions.

A more practical solution in the short term is for the Commission to reduce the time needed to complete cartel investigations. Currently, it takes between four and six years to see the end of a cartel proceeding after an investigation is launched. Taking into account the average cartel duration, this means that an infringer should expect to be sanctioned 10 to 20 years after making the decision to break the law. In that time, managers will change jobs or even retire, essentially reaping the benefit from the infringement without fearing any cost. Increasing resources dedicated to inquiries and cutting investigation time would reduce that risk. This would also increase corporate fines in net present value at the time of the starting of the cartel, since fines would be discounted for a shorter period of time. We estimate that halving investigation time would correspond to a 10 percent increase in the expected fine.

These results should be read in the context of the discussion about cuts to the Commission’s budget. While our analysis advocates an increase in resources dedicated to investigations, it conversely suggests that reducing the resources currently allocated could have critical consequences in terms of reduced deterrence and, therefore, increased collusion in the European economy.

Persistent optimism reflects a serious misdiagnosis of the global economy’s troubles. Most notably, economic projections have vastly underestimated the severity of the eurozone crisis, as well as its impact on the rest of the world. And recovery prospects continue to depend on the emerging economies, even as they experience a sharp slowdown. The WEO’s prediction of a strengthening recovery this year continues the misdiagnosis.

European Central Bank President Mario Draghi’s announcement last summer that the ECB would do “whatever it takes” to preserve the euro reassured financial markets. But, as pressure from financial markets has eased, so has European leaders’ incentive to address problems with the eurozone’s underlying economic and political dynamics. Easy ECB liquidity is now sustaining a vast swath of Europe’s banking system.

The eurozone is operating under the pretense that public and private debts will, at some point, be repaid, although, in many countries, the distress now is greater than it was at the start of the crisis almost five years ago. As a result, banks, borrowers, and governments are dragging each other into a vicious downward spiral. Politicians have exacerbated the situation by doubling down on fiscal austerity, which has undermined GDP growth while failing to shrink government debt/GDP ratios. And no decisive policy action aimed at healing private balance sheets appears imminent.

Moreover, Europe’s problems are no longer its own. Europe’s extensive regional and global trade networks mean that its internal problems are impeding world trade and, in turn, global economic growth. In 2012, world trade expanded by only 2.5%, while global GDP grew at a disappointing 3.2% rate.

Periods in which trade grows at a slower pace than output are rare, and reflect severe strain on the global economy’s health. While the trauma is no longer acute, as it was in 2009, wounds remain – and they are breeding new pathologies. Unfortunately, the damage is occurring quietly, enabling political interests to overshadow any sense of urgency about the need to redress the global economy’s intensifying problems.

Against this bleak background, it is easy to celebrate the success of emerging markets. After all, emerging and developing economies are growing much faster than the advanced countries. But even the world’s most dynamic emerging markets – including China, Brazil, and India – are experiencing a sharp deceleration that cannot be ignored.

Consider India, where growth is now running at an annualized rate of 4.5%, down from 7.7% annual growth in 2011. To be sure, the IMF projects that India’s economy will rebound later in 2013, but the basis for this optimism is unclear, given that all indicators so far suggest another dismal year.

The emerging economies’ supposed resilience, which has buoyed economic forecasts in recent years, needs to be reassessed. Like the advanced economies, emerging economies experienced a boom in 2000-2007. But, unlike the advanced economies, they maintained high GDP growth rates and relative stability even at the height of the crisis. This was viewed as powerful evidence of their new economic might. In fact, it was largely a result of massive fiscal stimulus and credit expansion.

Indeed, as the effects of stimulus programs wear off, new weaknesses are emerging, such as persistent inflation in India and credit misallocation in China. Given this, the notion that emerging economies will recapture the growth levels of the bubble years seems farfetched.

Economic forecasts rest on the assumption that economies ultimately heal themselves. But economies’ powerful self-healing capabilities work slowly. More problematic, a misdiagnosis can lead to treatments that impair the healing process. Overly optimistic economic projections based on mistaken assessments of the global economy’s ailments thus threaten recovery prospects – with potentially far-reaching consequences.

In Europe, the banks’ wounds must be closed – weak banks must be shut down or merged with stronger banks – before recovery can begin. This will require an extensive swap of private debts for equity. For the global economy, the malaise reflected in anemic trade growth calls for coordinated fiscal stimulus by the world’s major economies. Otherwise, the risk of another global recession will continue to rise.

This column was first published at Project Syndicate

Das 2005 eingeführte Europäische Emissionshandelssystem ETS ist die tragende Säule der europäischen Klimaschutz-Strategie - und es ist das größte Emissionshandelssystem der Welt. Doch es ist ins Gerede gekommen. Denn nach den Höchstständen im Mai 2008 ist der Preis für Emissionszertifikate eingebrochen. Industrie, Zivilgesellschaft und Politiker begannen, über eine „Reparatur“ des ETS nachzudenken.

Die für das ETS zuständige EU-Kommission schlug schließlich das so genannte „Backloading“ vor: Sie will die Herausgabe neuer CO2-Rechte um vier bis sieben Jahre verschieben. Dadurch soll  das Marktangebot verknappt und der Preis für Verschmutzungsrechte erhöht werden. Doch die Reform scheiterte vorläufig im Europaparlament. Seither sind die Preise für ETS-Zertifikate weiter gesunken.

Das Scheitern des „Backloading“-Vorschlages  sei kein Drama, meint Bruegel-Forscher Georg Zachmann. Trotz der aktuellen Probleme bleibe das ETS ein effektives und effizientes Instrument, um Treibhausgas-Emissionen zu beschränken. Obwohl die Preise nicht stabil waren, ist das System gewachsen. Es deckt heute mehr Industriesektoren und Treibhausgase ab denn je, und es ist robuster und weniger verzerrend geworden.

Um das ETS zu stabilisieren, sollte nicht kurzfristig in die Vergabe von Verschmutzungsrechten eingegriffen werden, sondern die langfristige Glaubwürdigkeit des Systems erhöht werden. Um diese Ziele zu erreichen, sollte die Europäische Investitionsbank Versicherungen verkaufen, die den betroffenen Firmen einen bestimmten ETS-Preis in der Zukunft garantieren. Dies würde das Risiko für klimafreundliche Investitionen senken und das ETS stabilisieren, bis Entscheidungen über die langfristigen Klimaziele der EU getroffen werden.

Wie das in der Praxis aussehen könnte, erläutert Georg Zachmann in fünf Fragen und Antworten:

Warum ist das „Backloading“ keine Lösung für die aktuellen Probleme?

Ich sehe das "Backloading" als ein Placebo. Wobei die Frage ist, ob das Placebo einen messbaren medizinischen Erfolg hat oder nicht. Man nimmt Emissionsrechte, die man eigentlich jetzt versteigern will, und verschiebt  die Auktion um fünf Jahre. Das dürfte keinen ökonomischen Effekt auf das gesamte System haben. Solange man die Möglichkeit hat, die zurückgehaltenen Emissionsrechte in Zukunft doch noch zu kaufen, sollte sich der Preis dadurch nicht massiv beeinflussen lassen.

Ist das ETS ohne die Reform zum Scheitern verurteilt?

Bis zum Krisenausbruch 2008 hat sich das ETS relativ gut bewährt. Das ETS war in der  Lage, zusätzliche Emissionsreduktionen anzustoßen. Das ETS war in der Lage, die Industrieproduktion zu modernisieren. Das ETS hat in unterschiedlichen Sektoren unterschiedlich stark gewirkt. Insgesamt war die Performance ziemlich gut. Jetzt ist der Preis eingebrochen und wir stehen vor der Frage, was zu tun ist. Strukturelle Maßnahmen sind wahrscheinlich nötig, um die Glaubwürdigkeit zu erhöhen. Aber das ETS als solches kann man nicht als klinisch tot bezeichnen, weil es juristisch gesehen ein in Stein gemeißeltes System ist - quasi mit Verfassungsrang. Nur auf Vorschlag der EU Kommission und mit qualifizierter Mehrheit der Mitgliedstaaten kann es abgeschafft werden. 

Drohen nun nationale Alleingänge?

Wir haben jetzt zugegebenermaßen die Situation, dass mit Großbritannien ein großer Mitgliedstaat auf dem Weg ist, seinen eigenen CO2-Preis zu etablieren, der über dem europäischen CO2-Preis liegen soll. Alle Ökonomen weisen darauf hin, dass das - gelinde gesagt - Unfug ist. Denn das wird nur dazu führen, dass mehr Emissionen in anderen Teilen Europas produziert werden. Die europäischen Zertifikate, die in Großbritannien durch das strengere nationale Ziel übrig bleiben, werden nicht verfallen, sondern in den Rest Europas exportiert, wo sie zu zusätzlichem CO2-Ausstoß genutzt werden. Den Mitgliedstaaten müsste sich eigentlich erschließen, dass sie damit eine Politik betreiben, die gegen ihre eigenen nationalen Interessen gerichtet ist.

Wie sieht das Bruegel-Modell aus?

Wir schlagen ein Art Versicherungsmodell vor. Firmen sollen bei der Europäischen Investitionsbank (EIB) Versicherungen kaufen können, mit denen ihnen ein bestimmter Preis für Emissionsrechte in der Zukunft garantiert würde. Ein solcher Vertrag würde beispielsweise verbriefen, dass das versicherte Unternehmen im Jahr 2030 das Recht hat, eine bestimmte Menge überschüssiger Verschmutzungsrechte zu mindestens 40 Euro zu verkaufen. Damit sichern sich Investoren gegen niedrigere Preise ab. Am Anfang macht der Staat oder die EIB beim Verkauf der Versicherung mit der Optionsprämie erst Mal einen Gewinn.

Wie würden die Zertifikate-Preise festgelegt?

Das Versicherungsmodell würde keinen fixen Zertifikate-Preis festlegen - die Ausübungspreise könnten beispielsweise gestaffelt werden. Selbstverständlich würden Investoren für das Recht, ein Zertifikat zu einem Preis von 40 Euro zu verkaufen, heute mehr bezahlen, als für das Recht, zu einem Preis von 10 Euro zu verkaufen. Die Marktakteure legen ihren langfristigen Investitionen Annahmen über den künftigen CO2-Preis zugrunde. Es ist nur fair, dass jetzt Geld auf den Tisch gelegt wird, um die Investoren abzusichern, die heute in CO2-Reduktionen investieren.

Die Statistikbehörde Eurostat hat Mitte Mai eine vorläufige Schätzung für das Wirtschaftswachstum im ersten Quartal 2013 vorgelegt: Die Wirtschaftsleistung der Eurozone schrumpfte im Vergleich zum letzten Quartal um 0,2 Prozent und um ein Prozent gegenüber dem Vorjahresquartal. Sogar das deutsche BIP fiel um 0,3 Prozent gegenüber dem Vorjahr. Die europäische Entwicklung steht in scharfem Kontrast zu den USA, die im ersten Quartal ein Wachstum von 1,8 Prozent meldeten. Dort steigt die Produktivität, die Investitionen kommen zurück, die Kreditvergabe zieht an, und der private Konsum wächst - nach einem großen Deleveraging des Immobiliensektors.

Die europäische Antwort auf das Wachstumsproblem besteht in Strukturreformen zur Erhöhung des langfristigen Wachstumspotentials und in einer fiskalischen Konsolidierung, die das Ziel verfolgt, das Vertrauen und die fiskalische Nachhaltigkeit wiederherzustellen. Weitere Kernziele sind - jedenfalls auf dem Papier - die Reform des Finanzsystems und einige weitgehend symbolische Initiativen, um die Nachfrageschwäche anzugehen. Dazu gehören die schnellere Bereitstellung von Strukturfonds, mehr Investitionen der EIB und die Ausgabe von Projektbonds. Doch sogar EU-Kommissionschef Barroso hat vor zwei Monaten eingeräumt, dass die Umsetzung des im letzten Jahr verabschiedeten Wachstumspakts „zu zaghaft und zu langsam“ vorankommt. In Wahrheit war die europäische Antwort auf die aktuellen Wachstumsprobleme extrem schwach.

Europa leidet unter einer gut dokumentierten Wachstumsschwäche (siehe unseren letzten policy brief). Doch nun kommt noch das Risiko hinzu, dass kurzfristige Konjunkturprobleme das langfristige Wachstumspotential weiter schädigen - und zwar aus sechs Gründen:

Erstens: Eine anhaltend hohe Arbeitslosigkeit entwertet berufliche Fähigkeiten und entmutigt die Betroffenen, am Arbeitsmarkt teilzunehmen. Dadurch wird das langfristige Wachstumspotential geschwächt. Die Jugendarbeitslosigkeit, die in einer ganzen Reihe von Ländern ein Rekordhoch erreicht hat, ist besonders alarmierend. Denn eine lange Zeit ohne Beschäftigung nach dem Schulabschluss kann die gesamte Karriere zerstören. Die EU-Politiker haben zwar versprochen, energisch gegen die Arbeitslosigkeit vorzugehen. Doch bisher ist noch kein Ergebnis zu sehen.

Zweitens: Unternehmensinterne Forschung und Entwicklung (R&D) ist ein prozyklisches Geschäft. Die Firmen geben dafür bei einem Abschwung deutlich weniger aus - vor allem dann, wenn sich keine Erholung abzeichnet. Eine lange Zurückhaltung bei R&D verringert jedoch die Effizienz von Unternehmen. Seit 2007 sinkt die totale Faktorproduktivität in fast ganz Europa. Durch die geringere Effizienz kann das Wachstum geringer ausfallen, wenn die Nachfrage wieder anzieht.

Drittens: Schwaches Wachstum und schwache Bankbilanzen verstärken sich wechselseitig, mit einem negativen Impact für das langfristige Wachstum. Eine schwache Wirtschaft führt zu Verlusten im Bankgeschäft, die wiederum die Bankbilanz verschlechtern. Banken mit einer schlechten Bilanz neigen dazu, zweifelhafte Darlehen ihrer Bestands-Kunden zu verlängern, anstatt weitere Verluste hinzunehmen (man nennt diesen Prozess „Zombifikation“). Gleichzeitig geben sie jungen und innovativen Firmen keine Kredite. Dadurch werden Notleidende Firmen, die wenig Wachstum generieren, am Leben erhalten, während neue und produktivere Firmen nicht wachsen können. Ähnliche Entwicklungen haben sich in den 90er Jahren in Japan abgespielt; sie führten zu einer verlorenen Dekade. Europa hat sich zwar bereit erklärt, seine Banken zu stützen. Doch die Politik war weitaus zögerlicher als in den USA, wo die Restrukturierung der Banken schon 2009 weitgehend abgeschlossen wurde.

Viertens: Vor der Krise hat sich die private Verschuldung der Haushalte und Unternehmen deutlich erhöht. In einigen EU-Länder erreichte sie zu hohe Marken. Doch das Deleveraging der privaten Schulden ging viel langsamer voran als in den USA. Die Geschichte lehrt uns, dass die Entschuldung sich in die Länge ziehen und das Wachstum hemmen kann. Die aktuelle wirtschaftliche Stagnation macht es schwerer für den Privatsektor, die Schuldenlast zu verringern. Dies kann das Deleveraging verlängern und das Wachstum mittelfristig unterminieren.

Fünftens: Die Stagnation schmälert die Attraktivität Europas für Investitionen. Wenn Investitionen in andere Regionen abwandern, schwächt dies das langfristige Wachstumspotential in Europa.

Sechstens: Eine anhaltende Periode schwachen Wachstums und hoher Arbeitslosigkeit unterminiert das Vertrauen der EU-Bürger in die EU-Institutionen, die richtigen Lösungen zu finden. Damit schwächt es auch die Akzeptanz von lebenswichtigen, aber schmerzhaften Strukturreformen, die ebenfalls von der EU vorangetrieben werden. Ein Zurückweichen bei Strukturreformen wurde das langfristige Wachstumspotential schwächen.

Angesichts vieler enttäuschender Konjunkturdaten braucht Europa eine umfassende Initiative für mehr Wachstum. Andernfalls könnte Europa genau wie Japan eine verlorene Dekade drohen. Die höchste Priorität hat jetzt die Sanierung des Bankensektors, sie muss noch 2013 in Angriff genommen werden. Wir brauchen Maßnahmen, die die Kreditvergabe erleichtern, auch an kleine und mittlere Unternehmen. Zweitens sollte man über verschiedene Maßnahmen zugunsten von Investitionen und Innovationen nachdenken. Die EIB braucht viel mehr frisches Kapital als die 10 Mrd. Euro, die im letzten Jahr freigegeben wurden. Zudem müssen die internen Strukturen der EIB verbessert werden, um schnellere Investitionen zu erlauben. Drittens muss das Problem der schwachen privaten Nachfrage angegangen werden. Dazu sollte die Fiskalpolitik der wirtschaftlichen Lage angepasst werden. Während die Konsolidierung in den hochverschuldeten Ländern Südeuropas weitergehen muss, gibt es gute Argumente für eine Neuausrichtung der Fiskalpolitik in Nordeuropa. Viertens müssen die großen Ungleichgewichte im Euroraum ausgeglichen werden. Dies kann nicht bei schwacher Inflation erreicht werden. Die EZB sollte daher sicherstellen, dass die Inflationsrate nicht unter den Zielwert von zwei Prozent fällt. Zudem sollten die Länder Nordeuropas alles vermeiden, was einen Anstieg der Inflation über die Zwei-Prozent-Marke verhindert. 

Sie sind neu bei Bruegel - könnten Sie sich kurz vorstellen?

Gern. Ich komme aus Italien und habe am European University Institute of Fiesole in Florenz studiert, wo ich einen Ph.D in Industrial Organization erworben habe. Von 2007 bis 2012 gehörte ich dem Chief Economist Team der Generaldirektion Wettbewerb in der EU-Kommission Brüssel an. Ich habe  an der ökonomischen Analyse wichtiger Wettbewerbsverfahren mitgewirkt. Außerdem habe ich zur wirtschaftspolitischen Expertise der Generaldirektion beigetragen und neue wirtschaftspolitische Instrumente mit entwickelt.

Warum sind Sie zu Bruegel gekommen?

Nun, die Arbeit bei Bruegel ist nicht allzu verschieden von dem, was ich in der Kommission zu tun hatte. Mir geht es weiter darum, die europäische Wirtschaftspolitik zu verbessern. Bei Bruegel werde ich versuchen, eine andere Warte einzunehmen und das „broader picture“ zu betrachten. Zu diesem Zweck will ich das Feld der Wettbewerbspolitik in drei Dimensionen erschließen: Durch Forschung, Monitoring und den Aufbau eines neuen „Policy labs“. Bei der Forschung geht es um die Frage, wie Industrienormen und Kartellstrafen auf der Makroebene wirken: Hilft ein funktionierender Wettbewerb in nationalen Märkten den europäischen Firmen auch auf internationaler Ebene? Beim Monitoring konzentriere ich mich auf die EU-Kommission. Die Wettbewerbsverfahren und -entscheidungen werde ich mit Kommentaren und Blogposts begleiten. Schließlich baue ich noch das Policy Lab auf - als unabhängige Plattform für Fachdiskussionen.

Welche Bedeutung hat die EU-Kartellpolitik?

Es geht um das Wohl der Konsumenten. Die EU möchte sicherstellen, dass die Unternehmen in einen fairen Wettbewerb eintreten. Die Kartell- oder Antitrustpolitik zielt zum Beispiel darauf ab, Preisabsprachen zwischen Unternehmen zu verhindern - oder zu vermeiden, dass eine Firma ihre marktbeherrschende Stellung ausnutzt, um einen Rivalen vom Markt zu drängen. Daneben haben wir noch die Fusionskontrolle. Die EU kann Unternehmenszusammenschlüsse verbieten oder Bedingungen stellen, wenn eine Fusion den Wettbewerb in einem Markt derart einschränkt, dass die Konsumenten am Ende höhere Preise zahlen müssten.

Ist diese Politik erfolgreich?

Ja, durchaus, die EU-Kommission hat großen Erfolg. Natürlich weiß ich, dass die Kommission derzeit nicht in sehr hohem Kurs steht. Doch im Bereich der Wettbewerbspolitik leistet sie eine sehr schwierige und wertvolle Arbeit.

Könnten Sie uns einige Beispiele nennen? Wie sieht es mit den laufenden Verfahren gegen Microsoft und Google aus?

Gern. Nehmen wir die letzte Entscheidung zu Microsoft. Dies ist ein einfacher Fall, denn die EU-Kommission bezieht sich dabei auf eine Einigung mit Microsoft aus dem Jahr 2010. Microsoft hat die damaligen Auflagen nicht eingehalten und wurde deshalb jetzt - als erstes Unternehmen überhaupt - mit einer Sanktion wegen Nichteinhaltung von Auflagen bestraft. Das ist eine fundamentale Entscheidung, die eine völlig neue Lage schafft. Sie bedeutet, dass Microsoft und jede andere Firma, gegen die die Kommission ermittelt, die Auflagen der Behörde einhalten müssen - ganz so, als handele es sich um eine abschließende Entscheidung. Kommissar Almunia hat damit ein starkes Signal an alle Unternehmen gesendet, die sich in Gesprächen mit der EU befinden. Es richtet sich ganz offenbar auch an Google, das gerade versucht, eine Einigung mit der Kommission herbeizuführen. Nach der Microsoft-Entscheidung ist nun klar, dass Google empfindliche Strafen riskiert, wenn es die Absprachen nicht einhält, die es mit Brüssel eingeht.

Welche Bedeutung haben Geldstrafen?

Die Strafen sind sehr wichtig, denn sie signalisieren, dass eine Verletzung der EU-Regeln mit Kosten verbunden ist. Die große Frage ist jedoch, wie hoch die Strafen sein müssen, um zu wirken. Wenn man davon ausgeht, dass die Wahrscheinlichkeit, ein Kartell aufzudecken, höchstens bei 15 Prozent liegt, dann müssen die Strafen wesentlich höher sein als der Profit, der sich aus einem Kartell schlagen lässt. Es könnte jedoch schwierig sein, hohe Strafen durchzusetzen. Schon jetzt wird die Klage laut, die Strafen seien viel zu hoch. Wenn man jedoch genauer hinschaut, dann sind sie nicht so hoch, wie sie eigentlich sein müssten. Wie lässt sich dieses Problem lösen? Eine Möglichkeit wäre, die Entscheidungsträger in den Firmen haftbar zu machen. Hier stoßen wir jedoch auch ein weiteres Problem: strafrechtliche Sanktionen sind ausgeschlossen, da sie nicht in die EU-Zuständigkeit fallen.

Wo müssen Unternehmen höhere Strafen zahlen, in der EU oder in den USA?  

In der Regel sind die Strafen in der EU viel höher als in den USA. Dabei muss man jedoch bedenken, dass die Amerikaner strafrechtliche Sanktionen haben. Deshalb ist es schwer, beide Systemen miteinander zu vergleichen.

Ihre ersten Veröffentlichungen bei Bruegel drehen sich um das Thema Normung. Warum ist die Festlegung von Normen und Industriestandards so wichtig für die Wettbewerbspolitik?

Normen erlauben es der Industrie, ihre Produktion auf eine bestimmte Technologie auszurichten. Wenn Sie eine Norm setzen können, so bedeutet dies in der Regel, dass sie große wirtschaftliche Vorteile erwarten dürfen. Andererseits wird der Wettbewerb eingeschränkt, sobald einmal eine Norm festgelegt wurde. Dies kann ein Problem sein; der Normgeber könnte versuchen, die Gewährung von Lizenzen zu Erpressungsversuchen nutzen. Um dieses Problem zu lösen, versucht die EU faire, vernünftige und nichtdiskriminierende Regeln durchzusetzen - mit der so genannten FRAND-Prozedur. Doch wie kann man Fairness durchsetzen? Das war die Frage in den Samsung und Google-Motorola-Fällen. Eine Entscheidung der EU-Kommission steht noch aus. Sie wird für die Normierung überaus wichtig.

Wann rechnen Sie mit einer Entscheidung?

Bisher gibt es noch keinen Zeitplan. Sicher ist nur eins: Angesichts der Fülle von aktuellen und potentiellen Fällen, die mit dem Missbrauch von Normen und Patenten zu tun haben, können die Wettbewerbsbehörden unmöglich alle bearbeiten. Deshalb stellt sich die Frage, ob Wettbewerbsverfahren die richtige Antwort sind und - wenn ja - welche Fälle es wert sind, dass sich die Behörden damit befassen. Anders gesagt: die EU muss herausfinden, in welchen Fällen der größte Schaden für die Verbraucher entstehen könnte.

Noch einmal nachgefragt: Zeigt die Wettbewerbspolitik Wirkung? Wenn man sich die wachsende Konzentration auf dem Automarkt oder die Kartelle bei den Energieversorgern anschaut, könnte man ins Grübeln kommen...

Konzentration an sich ist nicht unbedingt ein Problem. Ein Unternehmen kann  Marktmacht schlicht dadurch gewinnen, dass es effizienter arbeitet als seine Wettbewerber. Dies ist sogar wettbewerbsfördernd. Im Automarkt könnte dies derzeit der Fall sein - deutsche Hersteller könnten Marktanteile einfach deshalb gewinnen, weil sie effizienter arbeiten. Dies vorausgeschickt, hat die EU-Kommission durchaus das Recht, Konzentrationsprozesse zu beobachten. Aber sie kann keine Sanktionen verhängen, das ist nicht vorgesehen. Wenn es in diesem Bereich ein Problem gibt, dann müssen die Mitgliedsstaaten die europäischen Behörden einschalten. Wenn die belgische Regierung der Meinung ist, dass es nicht fair sei, wenn die Autohersteller ihre Fabriken in Belgien schließen, dann müsste die Regierung erst einmal herausfinden, wo das Problem liegt. Letztlich ist dies wohl eher ein Thema für den Binnenmarkt, aber nicht für die Wettbewerbspolitik - es sei denn, eine Firma würde sich wettbewerbswidrig verhalten. Wenn es um einzelne Branchen geht, kann die EU-Kommission eine sektorale Untersuchung einleiten. Wenn sie Wettbewerbsprobleme sieht, kann sie Vorschläge zu ihrer Behebung machen - zum Beispiel, indem der Einstieg neuer Wettbewerber erleichtert wird. Das ist aber auch alles.

Die Fragen stellte Eric Bonse

nie war die Aufgabe von Bruegel klarer und seine Stimme lauter als im vergangenen Jahr. In den zehn Jahren, die seit der Gründungserklärung von Präsident Chirac und Kanzler Schröder aus Anlass des 40. Jahrestags des Elysée-Vertrags vergangen sind, hat sich Bruegel glänzend entwickelt. Der Thinktank ist zu einer Organisation herangereift, die ihre Mission erfüllt und die Entscheider in der Politik mit jener leidenschaftslosen und innovativen Expertise versorgt, die sie brauchen, um die fragile Lage in Europa und wichtige globale Probleme zu meistern.

Die führenden Industrienationen müssen mit der schlimmsten Finanzkrise seit dem 2. Weltkrieg fertig werden. Europa muss seine Gouvernance in der Wirtschafts- und Fiskalpolitik deutlich verbessern. In dieser Lage hat es Bruegel verstanden, den Weg zu dauerhaften Reformen und erfolgreichen Integrationsschritten zu zeigen. Seine führende Rolle bei der Entwicklung der Bankenunion illustriert sehr gut, was wir anstreben. Mit Workshops, Veröffentlichungen und Presseartikeln hat Bruegel die politischen Optionen und die Konsequenzen dieser Optionen aufgezeigt - und zwar sowohl die beabsichtigten wie die nicht beabsichtigten.

Ich freue mich besonders, dass die harte, innovative Arbeit 2012 auf fruchtbaren Boden fiel. Bruegel erfuhr mehr denn je Anerkennung innerhalb und außerhalb Europas. Zum einen aus der Politik: Die Bruegel-Forscher wurden regelmäßig gebeten, ihre Expertise nationalen, europäischen und amerikanischen Parlamenten zur Verfügung zu stellen. Sie wurden auch zweimal zum Ecofin, dem Rat der EU-Finanzminister, eingeladen. Zum anderen kam die Anerkennung auch aus dem akademischen Umfeld. Bruegel wurde als bester Thinktank in Westeuropa gerankt, als zweitbester weltweit (außerhalb der USA), und sogar als erster Thinktank in Internationaler Wirtschaftspolitik. Dies geht aus dem Global Go To Think Tanks Report 2012 hervor, der jedes Jahr von der Universität von Pennsylvania veröffentlicht wird. Erfreulich war auch, dass das Prospect Magazine Bruegel zum Europäischen und Globalen Thinktank des Jahres kürte.

Es ist eine Ehre und ein Privileg für mich, so einer dynamischen Organisation vorzustehen und seinem respektierten Gründungspräsidenten Mario Monti sowie meinem früheren Kollegen Leszek Balcerowicz nachzufolgen. Ich freue mich darauf, Bruegel durch künftige Erfolge und Herausforderungen zu führen. Dazu zählt auch der erste große institutionelle Wechsel mit dem Abschied des Gründungsdirektors Jean Pisani-Ferry.

Jeans unermüdlicher Enthusiasmus und sein unvergleichliches Talent haben das Bruegel-Abenteuer überhaupt erst möglich gemacht. Sein Bekenntnis zu Unabhängigkeit und Transparenz hat dazu beigetragen, die höchsten Standards für Bruegel zu setzen und den Thinktank zu einem Partner und Herausforderer der Politik zu machen. Sein Beitrag zur Wirtschaftspolitik, den er sowohl durch Forschung als auch durch Überzeugungsarbeit leistete, wird von unschätzbarem Wert bleiben.

The broken mechanism

The Economist writes that when the ECB lowered its rate by half a percentage point in 2003, firms’ borrowing rates fell by the same amount. When it tightened policy between 2005 and 2007, the pattern was the same. As the ECB rate went from 2% to 4%, firms’ borrowing rates rose from 4% to 6%. This predictable wedge between policy and market interest rates meant the ECB knew how its decisions would feed through to the interest rates that influence output and inflation. In 2008, as the euro zone started to contract, the ECB slashed its main rate from 4.25% to 1%. But firms’ borrowing rates fell by less than normal.

Brad Plummer writes that ECB interest-rate cuts have had little effect over the past five years on two of the countries that really need economic stimulus — Greece and Portugal — in part because their banking systems are in tatters. This “transmission mechanism” isn’t quite as broken for Spain and Italy, but even those two struggling countries get less of an economic boost from rate cuts than their neighbors up north.

Place du Luxembourg writes that the decline in M3 and EONIA volumes hide a wide divergence between the core and the periphery, caused by core banks considerably decreasing their exposure to the periphery. It meant that peripheral banks were largely unable to fund in the interbank market from their core competitors, who preferred to stash their cash at the ECB. Gregory Connor writes that the bank lending market dislocation in the Eurozone is arguably more severe than the CMO, CMO-CDS, CP market dislocation which sparked the 2007-8 credit-liquidity crisis.

Michael McMahon writes that this broken transmission mechanism is of particular concern given the importance of SMEs to the euro area economy (especially for jobs—SMEs account for about 75% of total euro area employment) and given the reliance of SMEs on bank lending for both investment but also, perhaps more pertinently, for working capital purposes. The ECB already has schemes, such as long-term refinancing operations (LTRO) that offer lower funding to banks. In fact, the ECB already allows banks to finance SME loans via the normal ECB operations at the refinancing rate. The problem is that there are large haircuts applied to the collateral; even if it is an Asset-Backed Security of SME loans, the haircut is 16%.

A negative interest rate on deposit

Place du Luxembourg writes that traditionally speaking the MRO is the interbanking target of the ECB, which means that a rate cut of the MRO is meant to make funds cheaper as measured by EONIA, but also EURIBOR, EUREPO and EURO-SWAP. However, since 2009 and the change from a variable rate/pro rata allotment to a fixed rate/full allotment of MRO funds at auction, the Deposit Facility has been the benchmark of the interbank market. As a result, cutting the MRO serves no purpose.

Source: Place du Luxembourg

Megan Greene writes that in its efforts to get banks lending again, the ECB is looking at excess reserves – some 120 billion euros the banks have been holding on deposit at the central bank for safekeeping. If the ECB were to introduce a negative interest rate on deposits, effectively charging a fee, the banks might choose to lend the money out rather than watch it lose value. This logic is far from ironclad. Instead of lending the money to businesses and individuals, the banks could simply park it elsewhere – for example, in the sovereign bonds of Germany and other countries perceived to be financially healthy. This might benefit Germany by further pushing down its borrowing costs, but would do little to unblock credit to businesses. Banks might even try to cover their losses on the ECB deposits by charging higher interest rates on business loans, precisely the opposite of the desired outcome.

Scott Sumner writes that Greene is right that the initial effect of negative IOR would be for banks to buy government bonds.  This means that banks would essentially be doing “QE.”  Why is that better than the ECB doing QE?  It’s not clear it is, although some people worry about the bloated balance sheets of the major central banks, and negative IOR would greatly reduce that “problem.”

Megan Greene argues that there are better ways for the ECB to encourage banks to lend. Banks might make more business loans, for example, if the ECB made it easier to use those loans as collateral for cheap central-bank credit. The ECB could do so by loosening requirements for the amount and type of business loans that it accepts in exchange for liquidity, and by lending more against a given value of loans. The central bank could go a step further and agree to purchase business loans in the secondary markets. Banks would be more willing to accept the risk of lending to small and medium-sized enterprises if they knew they could turn around and sell those loans to the ECB. For now, the ECB is unwilling to accept this degree of risk on its own balance sheet. That could change as the recession in the euro area deepens further.

The UK's Funding for Lending Scheme (FLS)

The Economist writes that Britain’s experience provides ideas the ECB can use. The Bank of England’s policy rate has been 0.5% since 2009, yet SME borrowing costs have been high and business lending has contracted. Since studies showed that tight loan supply was partly to blame, a new tool, the Funding for Lending scheme (FLS), was created in 2012. Banks first swap their assets, including bundles of SME loans, with the central bank. In return they get ultra-safe treasury bills. Banks can then offer this good collateral as security when they borrow. Because the bank’s creditor gets the safe assets if the bank defaults, this form of funding is cheap.

Michael McMahon writes that under the FLS all banks can get funding worth five per cent of their existing stock of loans at a funding cost of 25bps. Regardless of what the bank does with net new lending (lending net of repayments), the bank can get access to this five per cent; however, for every £1 of new net lending, they can access £1 more of FLS funding at 25bps. If they cut net new lending, they can still access the five per cent stock of funding, but the price on all the funding gradually rises up to a maximum of 150bps; this prevents deleveraging banks from taking the funding and using it to not expand lending. While the scheme in its first incarnation was successful at lowering banks funding costs, the concern was that banks were only expanding lending to safe borrowers (large corporates or high LTV mortgage borrowers). Therefore the UK authorities recently extended the original FLS and altered the incentive such that SME lending is worth ten times that of other types of new lending in terms of eligibility for new FLS funding; £1 of new net lending to SMEs would allow banks access to £10 of extra funding at 25bps.

Source: Bank of England

Implementation issues for a new program targeted to SMEs

Gavyn Davies writes that to make a difference, the new ECB program for SMEs needs to involve not just a liquidity provision, but a genuine risk transfer from banks or the EIB (which would package the loans) to the ECB itself. It also needs to be done in tens of billions of euros, which might take a while. The logistics of getting this done are not straightforward.

Michael McMahon lists a number of challenges for the ECB if it were to design a similar scheme:

• Will the ECB operate the scheme through any existing schemes, for example adjusting the haircut applied to SME loans in refinancing operations, or will it design a specific scheme to meet the challenge?

• How can the design of the scheme in order to ensure that SMEs facing the greatest credit restrictions see the greatest expansion of credit? Perhaps the scheme will involve some form of dependence on the state of the national macroeconomy? Or the relative contraction of SME lending compared to some previous norm? Perhaps it is possible to link available funding to those economies in which equivalently measured SME loan applications are turned down more frequently?

• Can the ECB, the national central banks and the supervisory authorities get access to sufficiently detailed data to proceed with such an approach? Can policy incentivize cross-border SME lending in weaker economies by banks in stronger economies?

In a recent email, Nivethan Tharmendiran wrote that a SME facility could take several forms.

• A supra national backed Bank Collaterized Loan Obligation (CLO)'s using SME pools or less likely supra-national issued CLOs both of which would be ECB eligible.

• A more broad-stroked approach could see an LTRO that uses SME collateral - UK FLS style.

Europe’s response to the growth problem consists of structural reforms to boost the long-term growth potential and fiscal consolidation to restore trust and fiscal sustainability. Also, key targets, at least in words, are the restoration of a healthy financial system and some largely symbolic initiatives to address demand shortage problems, such as the faster use of structural funds, more investments by European Investment Bank, and the issuance of project bonds. But even President Barosso acknowledged two months ago that the implementation of last year’s Compact for Growth and Jobs “is too low and too slow”. In fact, Europe’s response to the short-term growth problem has been extremely weak.

Europe has a well-known long-term growth problem (see our recent policy brief), but there is a major risk that short-term troubles will damage further the long-term growth potential, for six main reasons.

First, persistently high unemployment is eroding skills, discouraging labour market participation, thereby undermining the long-term growth potential. Youth unemployment, which is at record high in a number of countries, is especially alarming as a long period of unemployment after graduation, when a worker should acquire the first working skills, can undermine the whole career of a worker. EU leaders promised to act decisively against unemployment, yet no result is seen so far.

Second, business research and development (R&D) activities are rather pro-cyclical, ie firms spend much less on these activities in an economic downturn, especially when the timing of recovery is seen remote. But a long period of withheld R&D reduces the efficiency of companies. Since 2007, total factor productivity is sinking in most of Europe. At a lower efficiency, the growth of supply can be slower when demand returns.

Third, weak economic growth and weak bank balance sheet are mutually reinforcing each other, with negative implications for long-term growth. A weak economy leads to bank losses, thereby deteriorating bank balance sheets. Banks with weak balance sheet tend to roll-over the dubious loans of their existing clients, instead of realising further losses (a process frequently called “zombificaion”), and do not grant credit to young and innovative firms. Thereby, struggling firms that do not generate much growth are kept alive, but new and more productive firms are unable to grow. Similar developments characterised Japan in the 1990ies that has led to a lost decade. Europe committed to shore-up banks, but policies so far was clearly inferior to the US, where bank restructuring was largely completed by 2009.

Fourth, before the crisis, household and corporate debt increased substantially and reached too-high levels in a number of EU countries. But private debt deleveraging has been much slower in Europe than in the US since the crisis. History shows that deleveraging episodes can be protracted and can act as a drag on growth. Economic stagnation in the short run makes it more difficult for the private sector to deleverage and thereby can protract the period of deleveraging and undermine growth in the medium term.

Fifth, stagnation in Europe undermines the attractiveness of Europe for investment. When investment moves to other locations instead of Europe, the long-run growth potential of Europe is weakened.

And sixth, a protracted period of weak growth and high unemployment are undermining the EU citizens’ trust in the ability of EU institutions to provide useful policy advice. Thereby, it weakens domestic commitments to vitally important but painful structural reforms, which are also fostered by EU institutions. Backtracking on structural reforms would weaken the long-term growth potential.

After the so many disappointing growth and unemployment figures, a comprehensive effort is needed to revive growth in Europe. Otherwise, Europe may follow a Japanese-style lost decade. The top priority is to fix banks now, ie in 2013. Measures supporting lending, including lending to small and medium sized enterprises, are needed. Secondly, various measures for investment and innovation should be sought. The EIB needs much more additional capital than the €10 billion agreed last year and the internal procedures of the EIB should be revived to allow for much faster investments. Thirdly, the problem of private demand shortage should be addressed and fiscal strategies should be adapted to the economic situation. While in the highly-indebted southern European countries a gradual fiscal consolidation has to continue, there is a case for a new direction for fiscal policy in northern European countries. Fourth, the major imbalances inside the euro area have to be reversed, which cannot be achieved at a low inflation: the ECB should ensure that inflation does not fall below the two percent target, and countries in northern Europe should refrain from domestic policy actions that would prevent inflation from rising above two percent.

German wage growth rates have been increasing over the previous 8 years, except for a sharp decrease to 0.4 percent in 2010 when Germany had one of the lowest rates in Europe (see Figure 2). When looking at the net wage increase and taking inflation into account the picture becomes even more pronounced. In 2012 Germany had an inflation rate of 2.1 percent, resulting in a net rise in wages of 0.4 percent compared to 2011; meanwhile the Eurozone experienced 2.5 percent inflation, France 2.2 percent and Italy 3.3 percent causing a decrease in net wages of 0.8 percent in the Eurozone, 0.1 percent in France and even 2.2 percent in Italy[1].

In our blog post from December we further looked at the annualized wage growth rate coming from collective bargaining agreements in Germany’s main industries in 2012. However, many of the collective agreements had been reached in 2011 already. In 2013 many of the agreements have already ended or will end in the near future making it an interesting study to compare the newly negotiated wage increases and have a look at the wage development of this year. With expectations of a small increase in economic growth, German unions started the year with demands of wage increases of around 6 percent, several rounds later most of the main sectors have concluded the bargaining process resulting in an increase in the annualized growth rate for 2013 compared to the previous year. Overall, the average increased from 2.63 percent in 2012 to 2.84 percent in 2013.

The sector with the slowest wage growth remains the printing industry while the construction sector concluded negotiations with the highest annual increase in wages, especially in East-Germany. However, important sectors such as insurance and wholesale and external trade have not been able to conclude the bargaining process yet. Moreover, in retail the collective bargaining process seems to have reached a deadlock after employers all over the nation withdrew from the current contracts at the beginning of the year due to the need for a major update as job descriptions and titles have changed tremendously while the contract definitions remained the same. Even more importantly, the metal and electronics industry, one of Germany’s largest sectors, represented by one of the most powerful unions in the country (IG Metall) is also still in the middle of negotiations, but with employers offering 2.3 percent in the second round it appears likely this sector will experience an increased wage growth of above 2.5 percent as well (see Table 1 below).

Again, looking at real wages in Germany shows that with the latest inflation data lying at 1.8 percent in March 2013 and an AMECO forecast of 2 percent for 2013, most real wages in Germany will also increase this year.

This review confirms the conclusion made in December 2012; the adjustment process is continuing in the euro area. At the same time, the size of the differential between Germany and the euro area is still of a size that relative adjustment of wages may take 5 years.

[1] Source: Eurostat

[2] Faz.de (08.04.2013)

[3] Handelsblatt.de (06.05.2013)

[4] Ver.di (May 2013)

[5] Ver.di (May 2013)

[6] Deutsches Statistisches Bundesamt (2012)

The Commission lowered their real GDP forecast for the EU from 0.1% to -0.1% in 2013. For the euro area they expect -0.4% growth in 2013 (previously -0.3%). Growth is anticipated to “to turn positive gradually in the second half of the year before gaining some traction in 2014” (European Commission 2013). As a result, real GDP is expected to grow by 1.4% in 2014 (previously 1.6%) in the EU and by 1.2% (previously 1.4%) in the euro area.

The figure below shows the new forecasts by the EC. The Commission expects nine European economies (Cyprus, Czech Republic, France, Greece, Italy, Netherlands, Portugal, Slovenia and Spain) to be in recession in 2013. Seven of them are projected to return to growth next year.

Figure 1: Real GDP forecasts

Source: AMECO database.

While the latest batch of EC forecasts overall is slightly more cautious, the by far largest changes were made to the Cypriot outlook. Real GDP is expected to collapse by -8.7% in 2013 and by -3.9% in 2014. The following figure illustrates the massive revisions that were made to the winter real GDP projections for Cyprus as released in February.

Figure 2: Real GDP forecast for Cyprus

Source: AMECO database.

Overall the economy is expected to shrink by around 14% in 2012-2014. The Commission expects this as a result of the fast restructuring of the banking sector, fiscal consolidation and generally high economic uncertainty (European Commission 2013). Additionally, the report stresses the negative impact on growth of the temporary imposition of capital controls and the expected decline in private consumption and investment due to the bail-in of uninsured depositors; measures that obviously were not taken into account in the winter forecast. It does not come as a surprise that the unemployment rate is expected to push to unprecedented levels in turn.

The economic projections for Cyprus look similarly painful as the Greek recession in 2011 (real GDP -7.1%). However, bear in mind that for Greece 2011 was only one of several years with negative growth and the Greek economy did not have to cope with the side effects of capital controls and a bail-in of uninsured depositors. These factors make an even faster contraction in the case of Cyprus very likely. One thing is for sure however, they add to the high degree of uncertainty that these forecasts come with. It does not surprise that the Commission sees significant downside risks to their projections due to the implementation of the agreed macroeconomic adjustment programme. In their latest World Economic Outlook (see the report here), the IMF decided to simply exclude any projections for Cyprus due to the high degree of uncertainty that the on-going crisis comes with. The forecasts of the EC for the Cypriot economy have to be handled very carefully. Substantial downside risks exist. Neither of the institutions gives any indication on when the Cypriot economy will return to growth.

References

European Commission (2013), ‘European Economic Forecast Spring 2013’, European Economy, 2/2013.

International Monetary Fund (2013), ‘Hopes, Realities, and Risks’, World Economic Outlook, April 2013.