Over the past few months Germany has become the safe haven of Europe. Depositors fearing a euro break-up have moved their deposits away from the periphery, realizing effective insurance. As a consequence, peripheral banks’ funding has shifted from private to public sources (see e.g. Pisany-Ferry and Merler). The Target2 imbalances that capture this have risen to unprecedented levels. Read more
Bruegel blog
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Should we worry about Target2 imbalances? Why Central Bank negative equity does and doesn’t matter
3rd September 2012
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The Political Redefinition of Europe
3rd September 2012
For the past few years, headlines in Europe have been dominated by the financial and economic developments of the crisis, first in the banking system and then in sovereign debt markets. Throughout this period the urgencies of the moment have tended to divert attention from the bigger picture, which is political. To be fair, none of the political questions raised by the sequence of events in Europe since mid-2007 is entirely new. But the crisis has shed new light on them, and may allow Europeans to consider them with more lucidity. The attempt made here is not intended to be comprehensive or even consistent, but only to stimulate more thinking on issues which may become increasingly prominent in the next few months. Read more
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Governance of bank supervision is central to its success
31st August 2012
As the first reports start to leak about how the Commission intends to organise European bank supervision, it is worthwhile offering some remarks on the questions of governance of banking supervision. As Peter Spiegel in today's FT reports, the Commission intends to propose that 17 national representatives plus six independent members would form a "supervisory board", which would hold ultimate supervisory responsibility. This board will be separate from the governing council of the Eurosystem so that there is a Chinese wall between monetary policymaking and banking supervision. Three immediate remarks on this structure appear warranted. 1) Strong bank supervision requires swift decision making. It also requires the individuals on the decision-making committee to have the right incentives to search for… Read more
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Chart of the week: EU Cohesion Policy and the role of national governments
30th August 2012
The official mission of EU Cohesion Policy is to reduce “disparities between the levels of development of the various regions and the backwardness of the least favoured regions”. We run standard convergence analysis and find that this rather broad policy objective is only half-met. Countries and regions in Europe have been converging over the last decade but the dispersion in regional GDP per capita in each country is instead on the rise (Chart 1a). However, if we look at regional disposable income (after benefits and taxes) we do not find the same divergence pattern. This would suggest that governments, which are responsible for determining benefits and taxes, are able to successfully redistribute across regions. Even more interestingly, we do not… Read more
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Which way for Europe?
29th August 2012
August was quieter than feared on the European bond markets. While resting on Europe’s celebrated beaches and mountains, policymakers could therefore take a step back from the sound and fury of the last few months and think about the future. Is the euro area sleepwalking into the United States of Europe? Is it exploring unchartered territory? Or are its constituent nation states drifting apart? Read more
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Introducing the Bruegel dataset of sovereign bonds holdings (and more)
27th August 2012
Early this year Jean Pisani-Ferry and I wrote a policy contribution titled “Who’s afraid of sovereign bonds”, where we were investigating the role of euro area banks in holding of domestic government debt securities, one of the important aspects of the sovereign-banking crisis loop. In order to do so, we needed to know how the share of domestic banks in total holdings had evolved over time. This required a breakdown of sovereign bond holdings by the different sectors of the economy, for each country and at the highest possible frequency. But in the process, we discovered that there is neither a single source for this kind of information, nor any common practice across the institutions providing the data[1]. We therefore… Read more
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Blogs review: The gains from fundamental tax reforms
27th August 2012
What’s at stake: Greg Mankiw recently highlighted a John Diamond study, which finds that a base-broadening, rate-reducing, Romney type tax plan would increase GDP relative to baseline by 5.4 percentage points over the next decade. While the specifics of this study are prone to discussion, similar simulations support similar findings – recognizing that the income tax systems of most countries are a complex, inefficient, and costly way of raising revenues to finance government expenditures. Looking beyond the headline numbers, however, reveals that these large efficiency gains often rely on the political feasibility of (1) making a majority of the population worse off, (2) raising burdens on older people, and/or (3) taxing imputed rents from housing. Read more
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Is Germany heading towards a referendum?
24th August 2012
The question of the compatibility of the German constitution (officially known as the Basic Law), with further European integration is at the origin of current debates in Germany. The Federal Constitutional Court (FCC) will decide in September on whether the European Stability Mechanism (ESM) exceeds the limits of the Basic Law. Meanwhile, a debate on holding a referendum in Germany on the future of the EU and new EU treaties emerges. This column summarizes the discussion. Read more
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Triggering competitiveness: A 'decalogue' from new firm-level evidence
23rd August 2012
Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries, this column identifies the triggers of competitiveness. It argues that policymaking could be improved by firm-level evidence if there were less reluctance to the use of micro-founded indicators to inform policy decisions. Read more
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Europe should choose whether it wants Greece in or out
22nd August 2012
For the third time in three years the Europeans’ stance on Greece is economically inconsistent. One camp considers the country should leave the eurozone, while the other thinks this would have devastating contagion effects. It is not consistent to request more efforts from a country, while anticipating its exit from the euro. It is time for European leaders to choose. Read more