<![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Thu, 18 Dec 2014 06:51:57 +0000 http://www.bruegel.org/fileadmin/images/bruegel-logo.png <![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Zend_Feed http://blogs.law.harvard.edu/tech/rss <![CDATA[Licht- und Schattenseiten einer Gemeinsamen Arbeitslosenversicherung]]> http://www.bruegel.org/nc/blog/detail/article/1510-licht-und-schattenseiten-einer-gemeinsamen-arbeitslosenversicherung/ blog1510

Das Problem: Die Arbeitslosigkeit in Europa ist in große Höhen angestiegen. Gleichzeitig bleibt das Wirtschaftswachstum gedämpft. Deshalb ist es an der Zeit, eine Debatte über mögliche zusätzliche wirtschaftspolitische Instrumente anzustoßen, um diese Probleme anzugehen. Die so genannten automatischen fiskalischen Stabilisatoren - also höhere Staatsausgaben in Zeiten der Krise - haben nicht für eine ausreichende Stabilisierung gesorgt, und zwar weder in den Krisenländern noch in der Eurozone insgesamt.

Verschiedene Präferenzen und historische Entwicklungen haben zudem dazu geführt, dass die nationalen Arbeitsmärkte in den Euro-Ländern bis heute  unterschiedlich organisiert sind. Dies führt manchmal dazu, dass die Währungsunion nicht effizient genug arbeitet. Eine mögliche Lösung ist die Europäische Arbeitslosen-Versicherung (European Unemployment Insurance - EUI). Sie könnte das Management der Fiskalpolitik erleichtern und das Funktionieren der Arbeitsmärkte verbessern.

Die wirtschaftspolitische Herausforderung: Allerdings ist die Europäische Arbeitslosen-Versicherung nur eine Option, um die länderspezifischen ökonomischen Zyklen durch Risikoteilung zu stabilisieren. Die fiskalische Lage der gesamten Währungsunion würde eine EUI nicht substanziell verändern. Zudem ist mit signifikanten Problemen („moral hazard“, also Nachlassen der Reformbereitschaft) zu rechnen, die allerdings durch eine weniger großzügige Ausgestaltung der EUI und eine größere Harmonisierung der Arbeitsmärkte gemindert werden könnten. Ersteres würde allerdings wieder die gewünschte Stabilisierungs-Wirkung verringern. 

Eine tiefgreifende Reform und Harmonisierung der Arbeitsmärkte würde das Funktionieren der Währungsunion zwar verbessern, doch sie würde alteingesessene Präferenzen und Ideale aushöhlen, für die der Subsidiaritäts-Gedanke steht. Insgesamt gilt es also viele komplexe Probleme bei der Ausgestaltung und Umsetzung einer EUI zu berücksichtigen. Auch die rechtliche Grundlage ist ein Problem. Daraus folgt, dass es sich um ein langfristiges Projekt handelt - und nicht um eine Maßnahme, mit der den Millionen Arbeitslosen schnell geholfen werden kann.

Den vollständigen Beitrag (in Englisch) finden Sie hier. Zu diesem Thema steht auch eine interaktive Simulation auf unserer Homepage. Damit können Sie Ihr eigenes EUI-Modell entwerfen und ausprobieren.

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Wed, 17 Dec 2014 09:51:39 +0000
<![CDATA[Europa sollte sich nicht vor ausländischen Übernahmen fürchten]]> http://www.bruegel.org/nc/blog/detail/article/1509-europa-sollte-sich-nicht-vor-auslandischen-ubernahmen-furchten/ blog1509

Wenn ein Unternehmen von ausländischen Investoren übernommen wird, ist dies oft ein Problem für die Regierung. Die Bedenken können strategischer Art sein (zum Beispiel bei Deals im Rüstungssektor), oder auch allgemein wirtschaftspolitisch. In letzterem Fall wird in der öffentlichen Debatte oft die Sorge laut, dass ein ausländischer Investor Entscheidungen fällen könnte, die der heimischen Wirtschaft schaden - einfach, weil er physisch oder psychologisch weniger an das Gastland gebunden ist. Zum Beispiel heißt es, dass die Marke der Unternehmens geschwächt werden könnte, dass Arbeitsplätze wegfallen oder die Forschungsausgaben zusammengestrichen werden.

Ein Beispiel ist die Übernahme des britischen Unternehmens Cadbury durch den amerikanischen Konzern Kraft im Jahre 2010. Kraft erhielt von der britischen Genehmigung freie Bahn, weil es versprochen hatte, die Schokoladenfabrik in Somerdale nicht dicht zu machen. Doch nach der Übernahme setzte sich Kraft über seine eigene Zusage hinweg und verlagerte die Produktion aus Cadbury nach Warschau. Der Fall Kraft/Cadbury war denn auch in aller Munde, als Pfizer im Frühjahr 2014 versuchte, AstraZeneca aufzukaufen. Er löste in Großbritannien eine neue Diskussion  über ausländische Übernahmen aus. Die britische Regierung schlug vor, dem Staat zusätzliche Möglichkeiten zu geben, eine ausländische Übernahme an Bedingungen zu binden.

Fast zur selben Zeit wandte sich die französische Regierung auf der anderen Seite des Kanals gegen die versuchte Übernahme des französischen „Industrie-Champions“ Alstom durch den US-Konzern General Electric. Die Regierung erließ ein Dekret, das die „Financial Times“ als „Atomwaffe gegen ausländische Übernahme“ bezeichnet hat. Dieses Dekret weitet die Möglichkeit staatlicher Interventionen deutlich aus. Die Regierung kann nun Bedingungen stellen, wenn es um den Energie-, Transport-, Telekom-, Wasser-, Gesundheits- und Verteidigungs-Sektor geht. 2011 machten diese Sektoren zusammen genommen mehr als ein Viertel der französischen Wirtschaft aus.

Ähnliche Debatten gibt es überall in Europa. Der Ruf nach staatlicher Intervention zum Schutze öffentlicher Interessen wird immer dann laut, wenn ein ausländischer Investor versucht, eine wichtige nationale Marke zu übernehmen. Allerdings sollten die nationalen Regierungen eigentlich gar keine Rolle bei großen Übernahmen spielen, an denen Firmen aus unterschiedlichen Ländern beteiligt sind, seien sie nun aus Europa oder aus Nicht-EU-Ländern. Normalerweise sind dafür nämlich die Wettbewerbshüter der EU-Kommission zuständig. Daraus ergeben sich einige inter-institutionelle Spannungen. Denn das einzige handlungsleitende Prinzip der EU-Kommission bei der Untersuchung von Zusammenschlüssen ist der Schutz der Konsumenten. Demgegenüber verfolgen nationale Regierung oft andere Interessen.

Die Entscheidung der EU-Kommission darf sich jedoch nicht nach anderen Kriterien richten. Wenn ein Zusammenschluss zum Beispiel dazu beiträgt, die Standorte zu optimieren, die Produktionskosten zu senken und die Marktpreise zu drücken, so kann dies ein zureichender Grund für die Kommission sein, grünes Licht zu geben. Ob die Rationalisierung der Produktionsstandorte auch zum Abbau von Arbeitsplätzen führt, ist für die Entscheidung der Kommission nicht von Bedeutung. Das heißt jedoch nicht, dass die Kommission der Ansicht wäre, dass man diese Aspekte vernachlässigen oder gar  ignorieren könnte. In Brüssel herrscht jedoch die Meinung vor, dass andere politische Instrumente (wie Umverteilung und Beschäftigungspolitik) in solchen Fällen eher geeignet sind, als die Wettbewerbskontrolle.

In einigen ausgewählten Fällen dürfen die nationalen Regierungen allerdings intervenieren, um ihre „legitimen Interessen“ zu schützen und Zusammenschlüsse mit Konditionen zu belegen, auch wenn diese unter die Jurisdiktion der EU-Kommission fallen (Art. 21  der European Merger Regulation, EUMR). Dabei geht es um die öffentliche Sicherheit, die Pluralität der Medien oder um nationale Aufsichtsbestimmungen. Demgegenüber müssen andere Bedenken zunächst von der EU-Kommission als „legitim“ bezeichnet werden, bevor die Staaten einschreiten können.

Die Bedenken der nationalen Regierungen werden oft mit ökonomischen  Gründen verbrämt. In einem neuen Policy Paper sind wir 22 großen Übernahmen nachgegangen, bei denen ausländische Investoren in den vergangenen 15 Jahren in einem EU-Land aktiv geworden sind und wo die nationale Regierung interveniert hat. In den meisten Fällen (14 von 22) drehte sich die Debatte um vermutete negative Effekte auf die Produktivität, um den möglichen Verlust von Arbeitsplätzen oder um die Kürzung von Forschungs- und Entwicklungsgeldern. In der Mehrheit der Fälle, bei denen ökonomische Bedenken vorgetragen wurden, kam die Übernahme letztlich nicht zustande.

Zwar lässt sich ein direkter kausaler Zusammenhang zwischen ökonomischen Bedenken und dem Schicksal eines Deals nicht immer nachweisen (die potentiellen Käufer können ihr Angebot auch einfach deshalb zurückziehen, weil sie keine Einigung über den Preis erzielt haben, um nur ein Beispiel zu nennen). Dennoch lässt sich sagen, dass die Nationalität des Käufers den Prozess spürbar beeinflusst. Dies kann zu zusätzlichen Verzögerungen führen, zu Extra-Kosten oder zu spezifischen Verpflichtungen, die von den beteiligten Parteien erfüllt werden müssen. Dies kann den kommerziellen Vorteil eines potentiell wertvollen Deals mindern.

Das Problem wird noch dadurch verschärft, dass derzeit keine Klarheit darüber besteht, wo die Grenzen des staatlichen Eingriffs liegen. Es ist unklar, welche Art von Bedenken von der Kommission als „legitime öffentliche Interessen“ betrachtet werden können. Oft gelingt es den Regierungen, den Prozess zu beeinflussen - und zwar sogar dann, wenn ihr Eingriff möglicherweise nicht mit dem EUMR vereinbar ist. Zum Beispiel können die Regierungen einen Deal erfolgreich verhindern, indem sie einfach nur drohen, sich in die geplante Übernahme einzumischen. Denn einige Unternehmen sind nicht bereit, auf das Urteil der Kommission darüber zu warten, ob das Regierungshandeln „legitim“ ist - oder darauf, dass die Kommission die (informelle) Einflussnahme vor den europäischen Gerichten anfechtet.

In unserem Bruegel-Papier kommen wir zu dem Schluss, dass ökonomische Bedenken nicht als legitime Gründe für staatliche Intervention betrachtet werden sollten. Wir werten die Literatur aus und finden kaum Beweise für Einwände, die sich auf die Nationalität des Käufers beziehen. Daraus folgt, dass EU-Mitgliedsländer nicht das Recht haben sollten, nach eigenem Ermessen Bedingungen für eine ausländische Übernahme zu stellen - etwa die Verpflichtung, einen bestimmten Anteil an Forschungs- und Entwicklungsausgaben zu halten. Denn diese Möglichkeit ist mit erheblichen potentiellen Kosten verbunden: Jede Einmischung eines Mitgliedstaates könnte die normale Marktdynamik stören, den Wettbewerb verzerren und den Wert einer Übernahme mindern. Wenn die Einschätzung der Kommission korrekt ist, trägt eine ausländische Übernahme wahrscheinlich positiv zur Wertschöpfung der europäischen Wirtschaft bei, indem sie den Wettbewerb erhöht. Diese Wertschöpfung ist jedoch nicht möglich, wenn sich die Mitgliedsstaaten einmischen und den Ausgang des Übernahmeprozesses beeinflussen.

Um diese Probleme anzugehen, die Kosten für ausländische Investoren zu senken und das Risiko von Wettbewerbsverzerrungen und von Konflikten mit nationalen Regierungen zu minimieren, sollte die EU-Kommission das Regelwerk klarer fassen, das die Grenzen für Regierungsintervention definiert. Das Ziel sollte sein, dass Regierungen und Unternehmen die Vereinbarkeit nationaler Interventionen mit der EUMR leichter abschätzen können. Zum Beispiel könnte die EU-Kommission detaillierte Richtlinien zu der Frage vorlegen, wie das öffentliche Interesse definiert wird und wie nationale Gesetze bewertet werden.

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Wed, 17 Dec 2014 09:49:20 +0000
<![CDATA[„Der Gasstreit geht weiter“]]> http://www.bruegel.org/nc/blog/detail/article/1508-der-gasstreit-geht-weiter/ blog1508

Die EU hat im Gasstreit zwischen Russland und der Ukraine vermittelt. Kiew zahlt wieder seine Rechnungen, Moskau liefert wieder Gas. Ist der Streit damit beigelegt?

Nein, denn der Deal bezieht sich nur auf die Gasversorgung in diesem Winter. Das Ziel der EU-Vermittlung war es, den Gastransit durch die Ukraine zu sichern. Dieses Ziel wurde erreicht, doch die grundlegenden Probleme wurden ausgeklammert oder auf das Schiedsgericht in Stockholm abgeschoben. Deshalb fürchte ich, dass wir im nächsten Jahr eine neue Krise erleben werden.

Was sind denn die grundlegenden Probleme?

Dabei geht es weniger um den Gaspreis, als vielmehr um die Ausgestaltung des Liefervertrags zwischen Russland und der Ukraine. Auch die Transitregeln und die Altschulden zählen zu den schwierigen, ungelösten Problemen.

Was wäre im Interesse der Ukraine zu tun?

Die Ukraine möchte den Vertrag mit Russland revidieren, der 2009 unter hohem Druck ausgehandelt worden war. Es war ein unglaublich schlechter Deal, bei dem sich die Ukraine zum Bezug großer Mengen zu einem hohen Preis verpflichtet hat. Auch die Konditionen für den Gastransit nach Westen waren nicht vorteilhaft. Allerdings ist meiner Ansicht nach noch nicht der richtige Zeitpunkt gekommen, um den Vertrag neu zu verhandeln. Denn die ukrainische Eigenproduktion von Gas reicht noch nicht aus. Auch der so genannte „reverse flow“, also die Rückleitung von Gas aus der EU in die Ukraine, ist noch nicht zureichend. Die Regierung in Kiew würde deshalb wieder mit dem Rücken an der Wand stehen, wenn sie sich jetzt auf neue Verhandlungen mit Moskau einließe. Sie ist auf Hilfe aus der EU angewiesen.

Was müsste die EU tun, um die Gasversorgung für ihre Mitglieder dauerhaft zu sichern?

Bei der Gasversorgung zerfällt die EU in viele einzelne Staaten, von denen einige - wie Deutschland - vergleichsweise vorteilhafte Konditionen genießen. Gazprom versucht nun zu verhindern, dass Länder mit weniger vorteilhaften Preisen ihre Lage verbessern.

Was lässt sich dagegen machen? Sollte die EU ein Käuferkartell bilden, wie dies etwa Polen fordert?

Nein, ein Käuferkartell ist nicht die richtige Lösung. Vielmehr geht es darum, einen funktionierenden gemeinsamen Gasmarkt aufzubauen. Das gegenwärtig angestrebte Modell geht hier nicht weit genug, auch weil sich die Mitgliedsstaaten gegen einen harmonisierten Gasmarkt sträuben. Beispielsweise werden die wettbewerbsrechtlichen Instrumente, die der EU zur Verfügung stehen, sehr zurückhaltend eingesetzt - zum Teil auch aus Angst einzelner Staaten vor Vergeltung von Gazprom. Damit der Gasmarkt funktioniert, müssten die EU-Staaten solidarisch handeln, wenn es in einem Land Probleme gibt. Außerdem brauchen wir Überkapazitäten, um den Ausfall eines Versorgers ausgleichen zu können. Dazu sollten die Gasversorger verpflichtet werden, jederzeit einen Teil ihrer Lieferverpflichtungen aus alternativen Quellen, wie beispielsweise Speicher, Flüssiggas oder Nachfragereduktion, ersetzen zu können. Dies wäre besser als eine staatliche Reserve; wir bevorzugen eine marktwirtschaftliche Lösung.

Sollte die EU das South-Stream-Projekt für Südosteuropa weiter verfolgen? Oder geht es auch ohne?

Zur Zeit ist die Nachfrage auf dem Gasmarkt niedriger als das Angebot. Eine neue Importpipeline ist deshalb nicht unbedingt nötig. Auf jeden Fall könnte man sie sich sparen, wenn der Gastransit durch die Ukraine gesichert wäre.

Kanzlerin Merkel hat Russland im Zusammenhang mit South Stream als zuverlässigen Gaslieferanten gewürdigt; ist das eine rein deutsche Sicht?

Nein. Alle Länder und Firmen, die mit Gazprom Geschäfte machen, heben hervor, dass es bisher keine Probleme gab. Allerdings wird die Abhängigkeit von russischem Gas zunehmend als Verletzlichkeit wahrgenommen. Was passiert denn in einem Krisenfall? Könnte ein Transitstopp durch die Ukraine provoziert werden? Das ist nicht auszuschließen. Gazprom hat im Herbst beispielsweise seine Exporte in einzelne Länder zum Teil massiv reduziert; in Polen oder der Slowakei wurde dies als Warnschuss empfunden.

Russlands Präsident Putin wendet sich in der Energiepolitik zunehmend China und der Türkei zu - ist das ein Problem für Europa?

Die russische Reaktion ist verständlich. Bisher erzielt Gazprom fast alle kommerziellen Erlöse im Geschäft mit Europa; aus russischer Sicht ist eine Diversifizierung sinnvoll. Allerdings zeigen die jüngsten Deals mit der Türkei und China, dass dies kein einfacher Weg ist. Der Vertrag mit China ist sehr ungünstig für Russland. Zudem wird das Gas für China aus ostsibirischen Feldern kommen; es wird also nicht das für Europa bestimmte Gas umgeleitet. Ich gehe deshalb davon aus, dass Europa ein attraktiver Gasmarkt für Russland bleibt. Allerdings dürfte es künftig mehr Wettbewerb geben - ähnlich wie im Ölmarkt. Russland kann damit leben.

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Wed, 17 Dec 2014 09:45:26 +0000
<![CDATA[Brainless recovery - brain drain in the aftermath of the crisis]]> http://www.bruegel.org/nc/blog/detail/article/1507-brainless-recovery-brain-drain-in-the-aftermath-of-the-crisis/ blog1507

Throughout the 2000s, European countries have been broadly successful at attracting large numbers of highly-skilled individuals. The euro area crisis has most likely significantly altered these pre-existing trends. As growth remains subdued and unemployment stabilises at high levels, spending cuts in R&D might leave countries in the periphery more exposed to “brain drain”. 

The number of migrants in OECD countries increased by 38% between 2000 and 2010

Over the past decade, as part of a broader globalisation trend, migration has been intensifying at global level. The number of migrants (aged 15+) in OECD countries increased by 38% between 2000 and 2010, to 106 million (see Arslan et al., 2014). Of these, about 35 million had tertiary education. However, some countries were more successful at attracting and retaining highly-educated workers than other. Although far from perfect, this measure can give us a sense of whether a country is on balance a brain gainer.

Building on the Database of Immigrants in OECD countries (DIOC), released a few weeks ago, Figure 1 details the net flow (immigrants minus emigrants) of highly-educated workers for selected OECD countries in 2010, normalized by population. Several interesting trends can be identified: (i) small countries at the heart of Europe (Switzerland, Luxembourg) had a particularly positive balance; (ii) within Europe, among the large countries, the UK was a top brain gainer; (iii) Ireland and Finland, in 2010, were seeing a larger outflow than inflow of highly-educated individuals.  

Data on migration by educational attainment level is currently available only up to 2010. Although in normal times this would not be a major problem, given that migration patterns tend to be relatively stable in time, at the current juncture 2010 sounds like a remote past. As suggested by Machado and Walsh (2014), the euro area crisis, with its disruptive effects on the labour market and growth rates in several countries, is likely to have acted as a structural change also in terms of migration patterns of the highly educated. As now countries progressively return to grow, it will be interesting to observe whether these changes in migration patterns will prove temporary in nature or more permanent.

In certain European countries, my hunch is they will not. Veugelers (2014) shows how fiscal consolidation has led countries that were already ‘innovation laggards’ within the EU to cut disproportionately their Research and Innovation (R&I) expenditure with respect to other categories of public expenditure. Lower private and public spending on research is likely to have a significant impact on the capacity of countries to attract and retain talents in the longer term. With no pretence to trace a direct causality link, Figures 2 and 3 (below) illustrate the strong correlation between highly-skilled migration flows and R&D expenditure (both public and private).

Note: Emigration rates are constructed as the ratio of high-education emigrants over the number of people within their origin country with similar educational characteristics (taken from Barro and Lee, 2013).

Low spending on R&D is correlated both with a weaker pull factor (capacity to attract talents) and a stronger push factor (retaining talents)

What the charts illustrate is that low spending on R&D is correlated both with a weaker pull factor (capacity to attract talents) and a stronger push factor (retaining talents). Survey evidence [1] on the mobility determinants of researchers somewhat points in a similar direction: career progression, research funding, facilities, and equipment (all of which are likely to be highly associated with R&D spending) appear among the top reasons for moving both to another EU country and outside the EU.

A country that gives a high priority to R&D is one that is likely to generate growth in innovative sectors over the medium to long term (see Veugelers, 2014). This is true for both the public sector (within universities’ fields of research) and the private sector (in innovative business sectors). In turn, an economy where growth originates from innovative sectors is well placed to attract talents from abroad or create jobs for the highly-qualified individuals it has trained.  As such, one can envision that countries in the EU periphery where R&D spending has been slashed will see a higher incidence of brain drain in the years to come. Veugelers (2014) suggests these to be Ireland, Spain, Italy, and Greece.

Interestingly, Veugelers (2014) shows how also the UK saw its R&I spending slashed over the period 2007-2012. This, coupled with the potential for tougher migration laws, could harm the country’s position as a leading brain gainer in Europe going forward.

The impact of R&D on innovation, migration patterns, research facilities, and high-skilled wages is likely to manifest only over long periods of time. As such, our analysis traces the likely scenario for these European countries only in the case in which the cuts to R&D spending are not reversed: something that would be advisable, as fiscal space materialises.

Research assistance by Alvaro Leandro is gratefully acknowledged.

This blog post presents some of the broader findings of a chapter written for ‘The Handbook of Global Science, Technology, and Innovation’ (Archibugi D. and Filippetti A. eds.). The Handbooks of Global Policy series, Wiley-Blackwell, forthcoming 2015.

 


[1] See 2012 MORE2 survey of DG Research. 

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Tue, 16 Dec 2014 16:04:29 +0000
<![CDATA[Has a stronger renminbi contributed to financial tightening?]]> http://www.bruegel.org/nc/blog/detail/article/1506-has-a-stronger-renminbi-contributed-to-financial-tightening/ blog1506

The People’s Bank of China (PBC), the Chinese central bank, finally cut its benchmark interest rates on 21 November, after easing its policy in a shadow-boxing fashion for more than six months. This is a vindication of our strong and non-consensus view that China ought to ease its monetary policy. There is more Chinese easing to come, in my view.

Of the many arguments I have put forward for a timely and measured monetary easing, one important consideration is that China’s financial conditions have tightened considerably since the global financial crisis. Hence, as an insurance policy, the PBC ought to ease. 

One obvious possible source of financial tightening could be the substantial real effective appreciation of the renminbi (RMB), one of the five financial asset prices underlying our constructed financial condition index. The past twenty years have witnessed a 50 percent-plus real effective appreciation of the RMB, a record matched by few major emerging market currencies (Graph 1). 

Note: CNY stands for Chinese renminbi, USD for US dollar, EUR for euro, JPY for Japanese yen and GBP for sterling.   2    BRL for Brazil real, INR for Indian rupee, IDR for Indonesian rupiah, KRW for Korean won, MXN for Mexican peso, and TRY for Turkish lira.

To what extent would such sizeable real effective appreciation add to China’s broad-based financial tightening? This is a tricky question. By definition, a change in the real effective exchange rate (REER) comes from two sources and their interaction: nominal effective exchange rate (NEER) and inflation differentials vis-à-vis trading partners.

One popular story goes like this: the PBC has heavily intervened in the foreign exchange market to slow the appreciation of the NEER, as evidenced by the bulging Chinese official foreign exchange reserves, which rose 70-fold between 1994 and 2014 to a staggering pot of US$4 trillion. Buying a large amount of dollars and euros of course means lots of printing of money by the PBC. This could compromise the autonomy of its monetary policy. Thus the burden of the REER adjustment might fall heavily and expensively on Chinese inflation, which could go through the roof.

Moreover, the resulting higher local consumer price inflation would pressure the PBC to hike domestic interest rates, further tightening China’s financial conditions. And higher interest rates might in turn hurt the real economy and hit the local equity market, which has lost more than a quarter of its value since the global financial crisis prior to the latest boom. Thus, all five underlying financial asset prices would collectively tighten China’s aggregated financial conditions, according to our constructed financial condition index

So Chinese financial tightness is in part self-inflicted, owing to its rigid exchange rate. Effectively, this story predicts that the REER of the RMB has appreciated mostly via China's much higher domestic inflation relative to its trading partners, rather than mainly through a marked strengthening of its NEER. 

Fortunately or unfortunately, this story is mostly imaginary, once we decompose the RMB’s big REER appreciation over the past two decades into relative contributions from the NEER and trade-weighted CPI differential. To put the matter into perspective, I benchmark the RMB against six weighty emerging market currencies. From the following table, three important observations can be made.

Note: natural logs of REER and NEER. A positive (negative) number indicates appreciation (depreciation). Contribution from CPI is computed as the natural log of REER less that of NEER. The BIS REER and NEER take into account third-market competition.

 the RMB has strengthened by more than 50 percent in real effective terms, the most among the major emerging market currencies over the past two decades

First, the RMB has strengthened by more than 50 percent in real effective terms, the most among the major emerging market currencies over the past two decades. This observation also broadly holds for the last decade. Rather than exerting competitive devaluation pressure on its major emerging market peers, it appears that China has instead endured it. The main exceptions perhaps are the resource-based emerging market currencies, mostly because of big hikes in commodity prices over the past two decades, until the latest corrections.

Second, the Chinese RMB has demonstrated remarkable long-term trade-weighted ‘currency flexibility’, as three quarters of this 50 percent-plus REER appreciation have come from nominal appreciation over the past twenty years. Indeed, the RMB NEER has strengthened the most among the six emerging market currencies listed in Table 1.

Third, relative inflation has played a reinforcing but secondary and minor role in the REER appreciation of the RMB. The Chinese trade-weighted inflation differential has averaged slightly higher than those of its trading partners but apparently way lower than most of its major emerging market peers. 

These three observations combine to highlight one marked contrast between China and these six big emerging markets. In the RMB’s case, both its NEER and trade-weighted CPI differential have complemented each other to share the sizeable adjustment burden of real effective appreciation, whereas for most major emerging market currencies, typically much higher local inflation has interacted and probably forced sharp nominal currency depreciation, floating or otherwise, resulting in either noticeable real depreciation or tiny real appreciation.

it is the much stronger nominal exchange rate and not inflation that has principally delivered the substantial real effective appreciation of the RMB

In short, it is the much stronger nominal exchange rate and not inflation that has principally delivered the substantial real effective appreciation of the RMB over the past two decades. A much stronger RMB on its own tightens China’s financial conditions but is not the principal cause of its broad-based financial tightness. Instead, China’s decent inflation record since 2000 should reduce its inflation risk premium, warranting lower rather than higher domestic interest rates and thus easier financial conditions. 

After all, why should a much stronger RMB still need to pay or offer a higher and rising interest rate? In my view, this makes little or no sense, except perhaps for the chuckling currency carry traders or fat coupon clippers!

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Tue, 16 Dec 2014 14:11:30 +0000
<![CDATA[Bad banks in the EU: the impact of Eurostat rules]]> http://www.bruegel.org/publications/publication-detail/publication/864-bad-banks-in-the-eu-the-impact-of-eurostat-rules/ publ864

• At least 12 European Union member states used publicly created asset management companies (AMCs), otherwise known as a ‘badbanks’ to respond to the recent financial crisis. This tool remains an option for future bank resolutions under the EU Bank Recovery and Resolution Directive.

• We assess the design of AMCs in the recent crisis and why their form has changed. Through its role as definer of statistical concepts used under the Stability and Growth Pact, Eurostat has affected the design of AMCs. Increasingly stringent rulings on whether AMCs count as debt have pushed member states to create similar types of AMCs, namely those with majority private-sector ownership.

• We argue that privately owned AMCs act differently to publicly owned ones. In particular, private AMCs usually impose larger haircuts on the price they pay for the assets they acquire. This haspositive benefits for how profitable the AMC will be and how much it will help in avoiding the creation of zombie banks and zombie badbanks.

• There are important caveats. The effect of Eurostat’s accounting rules on decision-making is stronger in countries with more strained budgets. Also, when the public owns a failed bank, Eurostat rulesare likely to have little impact on AMC ownership decisions. Governments tend to use publicly owned bad banks to resolve publicly owned failed banks. This is because it is difficult to compel private sector involvement in these situations

Bad banks in the EU: the impact of Eurostat rules (English)
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Tue, 16 Dec 2014 08:21:06 +0000
<![CDATA[Europe should not fear foreign takeovers]]> http://www.bruegel.org/nc/blog/detail/article/1505-europe-should-not-fear-foreign-takeovers/ blog1505

Foreign takeovers are often a source of concern for national governments. Concerns might be of a strategic nature (for example over deals in the defence sector) or of a more economic nature. In the latter cases, the public perception is often that, because they are less physically or psychologically attached to the host country, foreign investors could more easily take decisions that harm the host economy, such as downgrading the acquired company’s brand or cutting jobs or research expenditure.

There might be some substance to such concerns. In 2010 when United States food group Kraft purchased British chocolate maker Cadbury, the takeover was in part facilitated by an undertaking from Kraft that it would reverse a Cadbury decision to relocate some production from the United Kingdom to Poland. After the merger, however, Kraft went ahead with the plan to move production to Warsaw. Such events can make politicians wary of foreign takeovers. In the UK, similar concerns arose in spring 2014 when US company Pfizer attempted to buy Britain’s AstraZeneca. The UK government's concern was to avoid loss of R&D jobs following the deal. In this case, however, Pfizer ultimately dropped its offer and the merger did not take place. The government proposed to strengthen the ability of public authorities to impose conditions on buyers when mergers are attempted.

There are frequent calls for intervention by governments to protect the public interest when the takeover is attempted. But national governments are not supposed to play a role in the process.

Such debates occur everywhere in Europe. There are frequent calls for intervention by governments to protect the public interest when the takeover of a relevant national brand by a foreign investor is attempted. However, mergers of significant size that involve companies of different origins, be they European Union or non-EU companies, are normally subject to the European Commission’s scrutiny in its capacity of antitrust authority. National governments are not supposed to play a role in the process. This may create some inter-institutional tension since the guiding principle followed by the Commission during its merger assessments is to uphold the interests of the consumer only, while national governments might pursue other interests. No other criteria can affect the Commission’s decision. If, for example, a merger helps to rationalise production plants, reduces marginal costs of production and leads to lower market prices, this may be a sufficient condition for merger clearance. If the rationalisation of production plants also entails redundancies is not relevant to the Commission’s assessment. However, this does not mean that the Commission believes that these are negligible issues that should be ignored, but that other institutional instruments (such as redistribution and employment policies) are more appropriate to handle them rather than antitrust control.

In certain cases, namely when the merger affects public security, plurality of the media or prudential rules, national governments are allowed to intervene to protect these “legitimate interests” and impose conditions on mergers that fall in the jurisdiction of the European Commission (Art. 21 of the European Union Merger Regulation, EUMR). Other public interest concerns must be deemed ‘legitimate’ by the European Commission before governments can take action.

National governments’ concerns are often of a presumed economic nature. In a recent paper published by Bruegel, we look at 22 major acquisitions in which a foreign investor attempted to buy a domestic company in an EU country in the last 15 years, and the national government intervened in the process. In most cases (14 out of 22), concerns about the effects of an acquired company’s productivity, potential losses of jobs or reduction in R&D expenditure were key elements of the debate [see Figure 1 below]. In the majority of the cases in which economic concerns were expressed, the merger ultimately did not take place.

 

Number of major EU cross-border mergers in which buyer's nationality triggered government intervention (1999-2014)

Note: cases in the sample were identified through a review of the literature on foreign takeovers and merger control in Europe. Because sometimes those cases are not explicitly publicly reported, the list is not exhaustive. The sample includes the following cases: BSCH/A.Champalimaud, Secil/Holderbank/Cimpor, Thomson-CSF/Racal, Novartis/Aventis, ABN Amro/Banca Antonveneta, BBVA/BNL, Unicredito/HVB, Danone/PepsiCo, Enel/Suez, E.ON/Endesa, Abertis/Autostrade, Mittal/Arcelor, Gazprom/Centrica, MAN/Scania, Enel/Acciona/Endesa, AT&T/Telecom Italia, Air France-KLM/Alitalia, Kraft Foods/Cadbury, Lactalis/Parmalat, Edison/EdF, GE/Alstom, Pfizer/AstraZeneca. Economic concerns are identified if concerns about the effect of the merger on productivity, jobs or R&D by key players such as members of the government, the national parliament or trade unions were reported in the contemporary media

While a direct causal link between economic concerns and a deal’s outcome does not always exist (buyers might simply drop an offer because they do not reach an agreement on the price, for example), the public debate around the nationality of the buyer would normally significantly affect the process. This could take the form of additional delays, costs or specific commitments to be fulfilled by the parties, reducing the business appeal of a potentially valuable transaction. This problem is exacerbated by the fact that there is currently no clarity about the boundaries of government intervention. It is unclear what types of concerns could be considered ’legitimate public interests‘ by the Commission, and often governments succeed in influencing the process, even if the compatibility of their intervention with EUMR is questionable. For example, governments can successfully frustrate a deal by just threatening to interfere with the merger: companies might not be willing, to wait for the Commission to assess whether the action of the government is ’legitimate’ or to see if the Commission will challenge the member state’s (informal) interference before the European courts.

In the Bruegel paper we find that concerns of economic nature should not be considered legitimate reasons for government intervention. We examine the literature and find little backing for concerns related to the nationality of the acquiring company. It follows that EU member states should not be allowed any leeway to impose conditions to address economic concerns to the merging parties when a foreign takeover takes place, such as imposing an obligation to maintain a certain level of R&D expenditure in the host country. There is in fact a significant potential cost if that route is taken: any interference by a member state could affect normal market dynamics, distort competition and reduce the scope of the value that a transaction can bring. If the Commission correctly assesses a takeover, a foreign acquisition is likely to bring value to the European economy through increased competition, but that value might not be created if member states interfere to alter the outcome of the merger assessment process.

the Commission could publish detailed guidelines on how the public interest is defined and how national laws will be assessed. 

To address these issues, reduce costs for foreign investors and minimise the risk of distortions in the process and of conflicts with national governments, the European Commission should clarify the institutional framework that defines the boundaries for government intervention, so that governments and companies can more easily anticipate the compatibility of any national intervention with EUMR. For example the Commission could publish detailed guidelines on how the public interest is defined and how national laws will be assessed. 

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Mon, 15 Dec 2014 13:01:33 +0000
<![CDATA[The economics of P2P lending]]> http://www.bruegel.org/nc/blog/detail/article/1504-the-economics-of-p2p-lending/ blog1504

What’s at stake: Lending Club has captured the attention this week as it became listed on Thursday on the NY Stock Exchange and its share spiked nearly 70% in trading debut. While the growth of marketplace lenders has been exponential over the past few years, questions remain as to whether P2P lenders will manage to move beyond the niche of middle-class credit card borrowers and will be able shoulder the next recession.

Tracy Alloway and Eric Platt write that Lending Club, the San Francisco start-up that set out to bypass traditional banking, captured the attention of Wall Street on Thursday as it listed on the New York Stock Exchange and shot to a valuation of $8.5bn. The listing is widely viewed as a coming of age moment for the entire peer-to-peer, or marketplace lending, industry. Already two other alternative lenders — OnDeck and SoFi — are waiting in the wings for their own IPOs.

The basics of P2P lending

Ian Galloway writes that P2P lending sites match individual borrowers with individual lenders. Borrowers share information about themselves—both personal and financial—and lenders decide whether or not to contribute to their loan request.

The Economist writes that the growth of marketplace lenders has been exponential. Doing banking without the expensive bits of the industry—branches, creaking IT systems and so on—means that peer-to-peer loans offer lower rates, reflecting their reduced costs (see chart). Most borrowers are refinancing their credit-card debt, swapping a loan on which they paid 16-18% for 12% or so at Lending Club. The company’s focus has been on smaller loans (up to $35,000) to individuals with decent credit ratings, although it is also catering to businesses now.

In its registration statement to the Securities and Exchange Commission, Lending Club writes that a technology-powered online marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system. Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has historically been closed to individual investors and only available on a limited basis to institutional investors.

Jonathan Ford writes that peer-to-peer lending is often described in the same breath as disruptive new web technologies such as Uber. But the way mainstream banks have responded to the P2P challenge is much more laid back than the response of taxis. What the bankers seem ultimately to be betting is that P2P will struggle to scale its business. It may be easy to arbitrage a few old credit card loans. But when it comes to riskier advances, whatever whizzy algorithm-based underwriting systems P2P lenders have concocted will prove no match for their own — which are based on a deep knowledge of a full range of a customer’s financial transactions.

The Risk/Return tradeoff

Felix Salmon writes that Lending Club’s most valuable innovation, it turns out, wasn’t its mechanism for matching borrowers with lenders; instead, it was its uncanny ability to use proprietary algorithms to identify which prospective borrowers were most likely to repay their loans. Lending Club wasn’t the first peer-to-peer lender—that honor goes to its main competitor, Prosper, which was launched by entrepreneur Chris Larsen in 2005. Prosper was, however, soon overrun by people who would take out loans and never pay them back. It also had to close down for six months after it ran into trouble with the SEC. Into the breach stepped its biggest competitor.

The Economist writes that P2P lenders use credit scores as a starting-point to establish a borrower’s creditworthiness in the same way as banks and credit-card companies do. But they say their snazzy credit-scoring algorithms will enable them to weed out probable defaulters better than conventional financial firms do, leading to smaller losses. That is plausible but unproven. Doling out cash in good times is far easier than getting it back in a recession, as seasoned bankers know. Elaine Moore and Tracy Alloway write that unlike banks rates are largely determined by the people who lend the money.

Jonathan Ford writes that publicly available credit data has allowed Lending Club to cherry pick middle-class credit card borrowers. Its lack of expensive branches and legacy IT systems then allowed it to refinance their debts at lower cost, while still generating juicy returns for lenders. But as the P2P business expands, operators will need to find riskier borrowers to lend to. The industry is already doing so, moving into areas such as small business lending where there is an appreciable need.

Calculated Risk looks at the average Lending Club loan (that they call "quality"):  it’s an unsecured personal loan to an individual so they can pay off $14,000 in credit card debt with interest rate at 17%. The person has a 15-year credit history, a FICO score of 699, an annual income of $73,000 and a DTI of 17% (excluding mortgage debt). Maybe I'd consider helping for a close friend or family member if I knew all the circumstances.  However, for everyone else, my answer isn't no, it is Hell No!

Patrick Jenkins writes that the interest rates on offer to investors in this lightly regulated industry probably look too good to be true because they are. A 15 per cent interest rate can only mean you are in grave danger of losing your money altogether. Historic P2P loan default rates look flattering because they only go back a few years.

Lending Club writes that they make payments ratably on an investor’s investment only if they receive the borrower’s payments on the corresponding loan. If they do not receive payments on the corresponding loan related to an investment, the investor will not be entitled to any payments under the terms of the investment. Further, investors may have to pay them an additional servicing fee of up to 35% of any amount recovered by their third-party collection agencies assigned to collect on the loan.

The Economist writes that funds placed with P2P lenders are not covered by the state-backed guarantees that protect retail deposits in banks. Some platforms offer something of a substitute. Zopa and most other British companies have started “provision funds”, which aim (but do not promise) to make good on loans that sour.

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Mon, 15 Dec 2014 08:35:50 +0000
<![CDATA[TLTRO spoils Christmas holidays at the ECB]]> http://www.bruegel.org/nc/blog/detail/article/1503-tltro-spoils-christmas-holidays-at-the-ecb/ blog1503

It’s beginning to look a lot like Christmas, but it does not look like Santa Claus has any intention to stop by Frankfurt. Yesterday, the ECB revealed the outcome of the second Targeted Longer Term Refinancing Operation (TLTRO) auction, which definitely were not good enough to ease pressure on the Central Bank to act.

As previously discussed, the TLTRO potential initial amount for the first two operations was in the order of 400 billion, i.e. 7% of the outstanding banks’ loans to non-financial private sector borrowers, excluding mortgages as of 30th April 2014. Take-up of the first TLTRO in September was low, at 82.6 billion, leaving a potential available 317 billion for banks to borrow in the second round.

The final figure came in at bit less than 130 billion, bringing the total take up to 212 billion, i.e. slightly more than half the potential total amount, and the number of participating banks increased but only slightly (from 255 to 306). To put things in perspective, the total allocated between the two operations is less than the 270 billion of previously-borrowed LTRO funds that banks have reimbursed before maturity since the beginning of this year alone (not to mention the 720 billion reimbursed since the possibility of early reimbursements was introduced, in 2013).

Moreover, repayments of previously borrowed LTRO funds had increased considerably after the first September auction, signalling that banks had basically used the TLTRO to swap part of the LTRO into new 3y liquidity (something that could easily happen this time as well).

Excess liquidity in the euro area is shrinking to record low levels

As a result, excess liquidity in the euro area is shrinking to record low levels (figure 2), and the effect of the weapon on which the ECB had pledged a non-negligible portion of its reputational capital look tiny (at best). True, this is not the final act of the TLTRO saga. Between March 2015 and June 2016, in fact, banks will be able to borrow additional amounts in a series of TLTROs conducted quarterly and depending on banks’ net lending, with the reference point being 30th April 2014. But there are uncertainties about banks’ appetite for leveraging these funds as well as more generally about the effect of this measure on actual lending to the real economy.

Note: excess liquidity is computed following the ECB definition as deposit facility net of the use of marginal lending facility plus current account in excess of the minimum reserve requirement

 

The ECB said at the last meeting that it "intended" to bring its balance sheet back to the levels it held in early 2012, which would imply a 1 trillion increase. Yesterday's results are not bringing the ECB any closer to that and if anything, they show that banks instead do not "intend" to help much, at least not by taking up much additional liquidity. As a consequence, ECB’s balance sheet has in fact not grown since the first round the TLTRO, despite ongoing purchases of covered bonds and (disappointing) purchases of ABS.

At the last meeting the ECB said that it intended to bring its balance sheet back to 2012 levels. This would imply a 1 trillion increase

In the meantime, risks to price stability are increasing further. The price of oil slided to 65$ per barrel (which is even below the “shock” assumption in the ECB’s sensitivity analysis of inflation forecasts for 2015). CPI inflation for Germany was confirmed at +0.6% for November 2014 - with a lower rate of price increase than the one recorded in November 2014 dating back to 2010. And in France, HICP inflation was -0.2% compared to November and +0.4% only year on year. But most importantly, French core inflation turned into the negative territory for the first time since the indicator has been measured (i.e. since 1990). And if this does not convey the urgency of the situation, it’s hard to imagine what could.

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Thu, 11 Dec 2014 17:39:23 +0000
<![CDATA[A new departure for the EU]]> http://www.bruegel.org/nc/events/event-detail/event/493-a-new-departure-for-the-eu/ even493

For the fifth year in a row, ten leading European Think Tanks will join forces to host the annual Brussels Think Tank Dialogue (BTTD). This will be a unique opportunity to hear leading voices debate pressing issues, forecast major trends for the coming year, and put forward recommendations for the new European leadership. More than ever, guidance is needed.

Join us for a full day of debates with: Pierre Defraigne, Executive Director, Madariaga, Aart De Geus, Chairman, Bertelsmann Stiftung, Daniel Gros, Director, CEPS, Giles Merrit, Secretary General, Friends of Europe, Marc Otte, Director General, Egmont Institute, Guntram Wolff, Director, Bruegel, Fabian Zuleeg, CEO, EPC.

The BTTD 2015 will focus on such topical issues as:

  • Revisiting Energy Security
  • Towards a single European Labour Market
  • The EU Migration Policy of tomorrow

Register now to have the chance to listen to, and share your views with, some or Europe's foremost thinkers.

Click here to register.

Practical details

  • When: Wednesday 28 January 2015, 10:00 – 18:00
  • Where: Polak Room, Residence Palace

Jointly organised by the Bertelsmann Stiftung, Bruegel, CEPS, Confrontations Europe, the Egmont Institute, the European Policy Centre (EPC), Friends of Europe – Les amis de l’Europe, the Institut français des relations internationales (Ifri), Madariaga – College of Europe Foundation and the Stiftung Wissenschaft und Politik (SWP), the Brussels Think Tank Dialogues are annual policy forums for critical reflection on the state of the EU and the joint development of analysis and recommendations to improve EU policies. The Dialogues are designed to address pressing political concerns as well as to offer recommendations on specific issues.

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Thu, 11 Dec 2014 12:44:27 +0000
<![CDATA[Rebalancing the EU-Russia-Ukraine gas relationship]]> http://www.bruegel.org/publications/publication-detail/publication/862-rebalancing-the-eu-russia-ukraine-gas-relationship/ publ862

The October 2014 agreement on gas supplies between Russia, Ukraine and the European Union did not resolve the Ukraine-Russia conflict over gas. The differences between parties in terms of objectives, growing mistrust and legacy issues make it unlikely that a long-term stable arrangement will be achieved without further escalation. Without EU pressure and support, Ukraine is likely to enter a new unfavourable gas arrangement with Russia, which could have repercussions beyond the energy sector.

Key highlights:

  • To reduce prices and increase the security of imports, the EU as a bloc should redefine its gas relationship with Russia and Ukraine and overcome the diverging interests of EU member states on second-order issues.

  • Implementation of a joint strategy rests on enforcement of EU competition and gas market rules, a strengthened role for the Energy Community and the establishment of a market-based instrument for supply security.

  • For Ukraine, the EU should serve as an anchor for comprehensive gas sector reform. Contingent on Ukraine’s reform efforts, EU financial and technical assistance, the enabling of reverse flows from the EU to Ukraine and pressure on Gazprom, should eventually enable Ukraine to obtain a sustainable gas-supply contract with Russia. This should make a sustainable and mutually beneficial Russia-Ukraine-EU gas relationship possible. However, during the transition, the EU should be prepared for possible frictions.

Rebalancing the EU Russia Ukraine gas relationship (English)
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Thu, 11 Dec 2014 09:53:28 +0000
<![CDATA[Competition Policy: the Japanese experience]]> http://www.bruegel.org/nc/events/event-detail/event/492-competition-policy-the-japanese-experience/ even492

We are pleased to announce a workshop with Hiroyuki Odagiri, Commissioner of the JFTC, on the Japanese experience of Competition Policy.

Please note that the programme is still under construction and more information will be available shortly.

Speakers

  • Hiroyuki Odagiri, Japanese Commissioner for Competition

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Tuesday 24th March 2014, timing to be announced
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Registration for this event is not yet open.

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Wed, 10 Dec 2014 14:45:27 +0000
<![CDATA[How fair and effective are our financial markets?]]> http://www.bruegel.org/nc/events/event-detail/event/491-how-fair-and-effective-are-our-financial-markets/ even491

Misconduct in financial markets has rarely been out of the headline since the scandal over Libor – the London-based inter-bank lending benchmark – emerged in 2012. More allegations have followed. The market in foreign exchange is only the most recent to come under scrutiny, with regulatory investigations resulting in a number of banks being fined hundreds of millions of euros for attempted manipulation.

Nemat Shafik, Deputy Governor of the Bank of England, is chair of the UK Fair and Effective Markets Review. This Review has been set up to uncover the root causes of the misconduct we have seen affecting fixed income, currency and commodity markets. Its aim is to help restore public confidence in these markets, the effective operation of which remains essential for Europe’s economic recovery. The Review seeks to reinforce the progress made by regulatory responses already in train, notably Mifid II, by considering whether vulnerabilities may remain in certain markets – and developing proposals for how market participants or public authorities can take action to resolve those problems.

Please note that the programme is still under construction and more information will be available shortly.

Programme

  • 12:45 Registration and lunch
  • 13:00 Opening remarks by Nemat Shafik, Deputy Governor of the Bank of England
  • 13:30 Comments by discussant
  • 13:45 Roundtable discussion
  • 14:30 End

About the speakers

Nemat Shafik is the Chair of the Fair and Effective Markets Review. She became Deputy Governor for Banking and Markets at the Bank of England in August, having previously served as Deputy Managing Director of the IMF and Permanent Secretary of the UK Department for International Development.

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday 21st January 2014, 12.30-14:30.
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Registration for this event is not yet open.

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Wed, 10 Dec 2014 14:34:12 +0000
<![CDATA[World Bank Regular Economic Report on Eastern Europe]]> http://www.bruegel.org/nc/events/event-detail/event/489-world-bank-regular-economic-report-on-eastern-europe/ even489

We are happy to announce a public panel on the presentation of the World Bank Regular Economic Report on Europe and Central Asia Region.

The EU11 Regular Economic report is a semiannual publication of the World Bank’s Europe and Central Asia Region. It monitors macroeconomic and reform developments in 11 EU member states that joined after 2004 (excluding Cyprus and Malta)- Estonia, Latvia and Lithuania (North); the Czech Republic, Hungary, Poland and the Slovak Republic (Continental); and Bulgaria, Croatia, Romania and Slovenia (South). The report also provides in-depth analyses of key policy issues in the region. Previous issues of the EU11 Regular Economic Report, including the latest one Strengthening Recovery in Central and Eastern Europe can be found under the links below:

www.worldbank.org/en/country/centraleuropeandthebaltics

issuu.com/world.bank.europe.central.asia/stacks/db73be1583804ed98137badc4136f127

The event is public and will be live streamed on this page. No registration is required to follow the live stream.

Please note that the programme is still under construction and more information will be available shortly.

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday 21st January 2014, 12.30-14:30
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Registration for this event is not yet open.

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Wed, 10 Dec 2014 14:08:44 +0000
<![CDATA[The new European research agenda]]> http://www.bruegel.org/nc/events/event-detail/event/488-the-new-european-research-agenda/ even488

We are pleased to announce a panel discussion with Carlos Moedas, Commissioner for Research, Science and Innovation on the new European research agenda.

Europe has great expectations on science, research, technology and innovation as the sources of future sustainable growth. New ideas from fields such as digital technology, new materials and biotechnology are expected to generate economic growth and competitiveness, while addressing new global societal demands related to ageing, health, the environment, security and inclusion. But these expectations have to be squared with a history of not brilliant performance, despite ambitious EU research policy plans, like the Lisbon 3% target, the Innovation Union Flagship, the European Research Area, along with Horizon2020. Will more of the same do, do we need a game changing new perspective in the EU research agenda or do we just need to walk the talk?

Commissioner Moedas will present his views on the European research agenda.

The event will be introduced by Bruegel senior fellow Reinhilde Veugelers, sketching the main challenges for the European Research Agenda. The debate will be fed by testimonies from real life “actors” on the European research scene: excellent researchers based in Europe trying to bring their frontier ideas closer to the market and companies trying to exploit European research ideas to feed their innovation process.

Please note that the programme is still under construction and more information will be available shortly.

Speakers

  • Carlos Moedas, European Commissioner for Research, Innovation and Science
  • Chair: Reinhilde Veugelers, Senior Fellow at Bruegel

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Thursday 22nd January 2014, exact timing to be confirmed
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Registration for this event is not yet open.

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Wed, 10 Dec 2014 13:48:04 +0000
<![CDATA[Deepening Economic and Monetary Union]]> http://www.bruegel.org/nc/events/event-detail/event/486-deepening-economic-and-monetary-union/ even486

We are happy to announce that on Monday 19th November, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, will be coming to Bruegel to speak about his ideas about deepening the European economic and monetary union.

The new European Commission intends to be proactive in taking forward the debate on the further deepening of the Economic and Monetary Union in the coming five years. Commissioner Moscovici will work closely with President Juncker and Vice President Dombrovskis on this matter.

Truly convinced the eurozone needs stronger economic and political governance, Commissioner Moscovici will talk about the realistic and step-by-step approach the Commission intends to take to deepen the European economic and monetary union.

This event is public and will be live streamed from this page. Registration is not required to follow the live stream.

Due to the large number of registrations we have closed the registrations for this event. You are of course welcome to follow the live stream on this page starting at 13.00 on 19 January 2015

Speakers

  • Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs
  • Luc Frieden, Vice Chairman of Deutsche Bank
  • Guntram Wolff, Director, Bruegel

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Monday 19th January 2014, 12.30-14.30. Lunch will be served at 12.30 after which the event begins at 13.00.
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

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Tue, 09 Dec 2014 16:12:11 +0000
<![CDATA[Foreign takeovers need clarity from Europe]]> http://www.bruegel.org/publications/publication-detail/publication/861-foreign-takeovers-need-clarity-from-europe/ publ861

The Issue:foreign takeovers are often a source of concern for national governments. Concerns might be of a strategic nature (for example in cases of deals in the defence sector) or of a more economic nature. In these cases,the public perception is often that a foreign investor, being less physically or psychologically attached to the host country, could more easily take decisions that would harm the economy, such as downgrading the acquired company’s brand or cutting jobs or research expenditure. However, the only consideration in merger assessment that matters for the European Commission which is responsible for cross-border merger control in the EU, is whether the merger will harm consumers. Member states can intervene only in exceptional circumstances.

Policy Challenge:This policy brief raises two questions about foreign takeovers: (1) is the likelihood of domestic welfare loss greater when a foreign investor buys a national company? (2) are economic concerns legitimate reasons that could justify interference by member states in the European Commission’s current approach to cross-border mergers? A thorough analysis of the literature suggests that the answer to both questions is no. Granting leeway to member states is unnecessary and potentially harmful, given the increased uncertainty about outcomes. In order to increase transparency and stimulate foreign investment in Europe, the Commission should clarify the parameters of permissible intervention by member states.

Foreign takeovers need clarity from Europe (English)
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Tue, 09 Dec 2014 13:27:54 +0000
<![CDATA[An investment plan for Europe]]> http://www.bruegel.org/nc/events/event-detail/event/485-an-investment-plan-for-europe/ even485

We are pleased to announce that on 12 January 2015 Jyrki Katainen, Vice President of the European Commission, will be at Bruegel to& present the European Commission's new investment plan.

On 26 November 2014 the new European Commission launched a three-year €315 billion investment plan with the aim of reviving economic growth and creating jobs. The Commission's approach is based on three pillars: structural reforms to put Europe on a new growth path; fiscal responsibility to restore the soundness of public finances and cement financial stability; and investment to kick-start growth and sustain it over time.

Due to the large number of registrations we have closed the registrations for this event. You are of course welcome to follow the live stream on this page starting at 13.00 on 12 January 2015.

The event is public and will be live streamed on this page. No registration is required to follow the live stream.

Registrations are subject to availability.

Speakers

  • Jyrki Katainen, Vice President of the European Commission
  • Erik Nielsen, Global Chief Economist and Head of Economics & Fixed Income/ Fixed Currency (FI/FX) Research at Unicredit
  • Isabel Schnabel, Professor of Economics at University of Mainz and member of German Council of Economic Experts
  • Chair: Guntram Wolff, Director of Bruegel

Relevant reading

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Monday 12 January 2014, 12:30-14:30. Lunch will be served at 12:30 after which the event will begin at 13:00.
  • Contact: Matilda Sevón, Event Manager - registrations@bruegel.org

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Tue, 09 Dec 2014 12:03:35 +0000
<![CDATA[Central and eastern Europe: uncertain prospects of economic convergence]]> http://www.bruegel.org/nc/blog/detail/article/1502-central-and-eastern-europe-uncertain-prospects-of-economic-convergence/ blog1502

This year countries of Central and Eastern Europe celebrate two important anniversaries: 25 years since the beginning of post-communist transition (1989) and 10 years since the first wave of EU Eastern Enlargement (2004). Such anniversaries provide a good occasion to look both back and ahead and summarize both successes and failures.

Do these anniversaries allow us to claim successes and look optimistically into the future? Yes and no. One does not need sophisticated analysis to understand how radically this region has changed during the last quarter of century – in terms of its political and economic systems, geopolitical arrangements, living and civilization standards, infrastructure, etc. However, one can also ask some difficult questions such as, for example, have all opportunities of economic and political progress been grasped? Was the entire 25/10-year period (depending on which anniversary we are talking about) successful? Perhaps we could claim bigger successes 5 or 7 years ago (before the global and European financial crisis started) than now? And what about the future? Is further economic progress automatically guaranteed?

A simple convergence analysis

Economic convergence may be interpreted and measured in many ways. Here we use [1] a very simple approach – we compare GDP per capita in current international dollars, in PPP terms of each central and Eastern European (CEE) country with that of Germany based on the IMF World Economic Outlook October 2014 database statistics.

The choice of Germany as a benchmark is motivated by its role as the largest EU national economy and major economic and trade partner of most of CEE economies on the one hand, and its largely positive but rather modest rate of growth in 2000s and 2010s [2], on the other.

We analyse the period between 2001 and 2013, i.e. after the end of dramatic period of transition related restructuring and related prolonged output decline (in early and mid-1990s) and the series of emerging-market crises (in the second half of 1990s) which affected part of the region. Figures 1 and 2 present results of our analysis for two country subgroups, i.e., current EU members (including Croatia which joined the EU on July 1, 2013) and EU actual and potential candidates in the Western Balkans region (except Kosovo for which the respective data is not available).

Convergence followed by de-convergence

In both country groups we can clearly distinguish two sub-periods – until 2007/2008 with rapid catching up (convergence) and after 2008 with either de-convergence or no progress in further convergence.

It is quite easy to name factors behind the rapid convergence experienced in the first sub-period: (1) post-transition growth recovery (effects of transition related reallocation of factors of production); (2) joining the Single European Market (or partial access in case of EU candidates); (3) global economic boom which resulted in large-scale capital inflows to the region (see Figure 3). The first two factors had a one-off character and the third one – short-term effect, which was largely reversed during the following crisis.

Note: According to IMF WEO geographical grouping Emerging and Developing Europe includes (as of October 2014) the following CEE countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, and Turkey. 

When the global financial crisis hit the region in 2008-2009 (in Baltic countries it started earlier, in 2007, and Hungary stopped converging in 2005) the convergence trajectory changed for worse everywhere. However, we can distinguish substantial differences across both country sub-groups.

The four EU new member states with the highest income per-capita level in early 2000 have recorded a steady decline in their relative GDP per capita levels after 2008

The four EU new member states with the highest income per-capita level in early 2000s, i.e., Slovenia, Czech Republic, Hungary and Croatia, have recorded a continuous decline in their relative GDP per capita levels, as compared to Germany after 2008. Three Baltic countries experienced an even sharper decline in 2008-2010 but then returned to rapid re-convergence (however, only Lithuania managed to exceed its pre-crisis convergence level yet). The somewhat similar growth pattern, i.e., first decline and then recovery can be observed in Western Balkan candidate countries (except Albania), Romania and Bulgaria although with smaller amplitudes of changes in their convergence trajectories (especially in the case of Bulgaria). Finally, Poland, Slovakia and Albania managed to continue their convergence vis a vis Germany after 2008 although at a very slow pace.

Future growth challenges

Looking ahead, one must ask what kind of challenges will be faced by CEE countries in their future development, and whether they will have chance to return to their pre-2007/2008 convergence trajectory (which many people in the region continue to believe). Clearly the pre-crisis growth bonanza based on large-scale capital inflow (which, in turn, was the consequence of underestimation of the region’s risk premia – see Luengnaruemitchai & Schadler, 2007) and the above mentioned one-off factors is unlikely to come back anytime soon. We live in a different world now.

Let us look briefly at long-term growth factors as determined by neo-classical growth theory. The demographic trends will be increasingly unfavourable, resulting in declining cohorts of working-age populations. Although this is a common European problem (including Germany, which serves as the benchmark in our analysis) and we compare GDP per capita figures, the Eastern part of the continent will experience sharper decline in this respect than their higher-income Western European neighbours (it is also necessary to take account of East-West labour migration which will continue until the current income gap diminishes substantially).

Looking ahead dramatic challenges will be faced with respect to investment

However, even more dramatic challenges will be faced with respect to investment. The short-term investment boom (between 2003 and 2007) was based on imported savings (capital inflow – see Figure 3) causing large current account imbalances (see Figure 4). When capital inflow stopped in 2008 the investment rate had to come down, in some countries (Baltics, Bulgaria, part of Western Balkans) substantially. Historical experience demonstrates that sustainable catching-up growth requires higher investment rates, at least 25% of GDP, and such a level was approached only once, in 2008 (see Figure4).     

Low-saving trap and reform stagnation

The bottom line is that the gross saving rate in CEE economies is very low, in the range of 16-17% of GDP, the lowest among emerging-market regions and much lower as compared with the Eurozone (see Figure 5). It did not improve after the crisis as one could expect. Without an increase in the gross saving rate, CEE countries will have rely on large-scale import of saving, in the range of 8-10% of GDP annually, to reach the desired investment rate of 25% of GDP (see above). Such massive net capital inflow seems very unlikely in the post-crisis environment of financial deleveraging. As demonstrated by Figures 3 and 4, it reached the level of ca. 8% of GDP only once, in 2008, and most of it came in the form of short-term capital. The size of net foreign direct investment has been much smaller and declining in recent years. Needless to say, excessive reliance on short-term capital inflows may increase external macroeconomic vulnerability in the case of adverse shocks, as several countries learned in 2008-2009.

One can only speculate on the reasons for so low a gross saving rate. Several hypotheses come to mind: public sector dissaving, consequence of population aging (which is usually associated with private dissaving), excessive publically financed social welfare programs (which may discourage private saving) or the crowding out effect related to EU cohesion and regional funds transfers. However, all these factors except the last one are also present in the Eurozone where the gross saving rate is 5 percentage points of GDP higher, on average, than in non-Eurozone CEE countries (see Figure 5). This important question definitely needs further investigation.

Finally, the third growth factor, improvement in total factor productivity, played an enormous role in the first two decades of transition (see EBRD, 2013, p. 12, Chart 1.3) unlike in other emerging-market regions (even in Emerging Asia its role was much less prominent). This was the effect of two factors mentioned before, i.e., transition related reallocation of factors of production and integration with the Single European Market. However, these one-off sources of productivity growth are already gone. On the other hand, economic and institutional reforms which could enhance further productivity growth have been halted or even reversed in some countries. The title of the 2013 EBRD Transition Report (‘Stuck in Transition?’ – see EBRD, 2013) is very telling in this respect. In a slightly more nuanced and diplomatic way the same observation has recently been repeated in the IMF anniversary report on the region (Roaf et al., 2014).

The way ahead

Even if CEE economies manage to return on the convergence path its speed will be much slower than it used to be before 2008

The above analysis leads to some important conclusions. First, even if CEE economies manage to return to the convergence path, its speed will be much slower than it was before 2007/2008. That means the timetable of catching up with the richest Western European nations like Germany will be much longer than one would have thought ten years ago. Second and more importantly, in order to return to the convergence path (even more slowly than before the crisis) several important policy challenges must be addressed.

The low domestic saving rate is one of them. CEE economies can no longer expect that large-scale capital inflow will be able to close the saving-investment gap as seemed to be possible in the short period of the mid-2000s.

Another challenge will relate to the steadily decreasing cohorts of working-age population. However, gradual increases in the effective retirement age and the labour market participation rate, and the adoption of more flexible migration policies could ease at least partly the deficit in labor resources.

A well-designed reform agenda could boost productivity growth. Among the most urgent reform measures are the modernization of excessive welfare state provisions (to reduce labor costs), increasing the flexibility of the labour market, adjusting education to the needs of contemporary labour markets, fiscal consolidation, a return to privatization, improving the business and investment climate, governance and rule of law, fighting corruption and organized crime, etc.

In structural terms, most CEE economies tried to build their comparative advantages in manufacturing (mostly in the intermediate stages of global production chains) and service sectors. They competed with lower wages and salaries (as compared to Western Europe) of the relatively well-educated labour force. This was enough to encourage several trans-national corporations to base their production and service centres in the region. However, as labour costs (direct and indirect) in CEE gradually increase and the competition of lower-cost emerging-market producers (especially in Asia) becomes stronger, those comparative advantages may disappear. Moving up the value chain and towards more knowledge-intensive sectors (the natural market niche for higher-wage economies) requires improving innovativeness, and higher spending on research and better education.

Similar reforms in other non-CEE EU economies, especially in northern Mediterranean ones, can provide a much needed synergy and long-term demand boost. On the EU level, deepening the Single European Market, particularly in services and infrastructure sectors, completing the Banking Union and strengthening fiscal and macroeconomic discipline will help to improve growth prospects for the entire continent, including its CEE part. Finally, on the global and interregional level the pro-growth impulses should include progress in trade liberalization and financial sector reform, improved coordination of macroeconomic policies between the main players and well-balanced deal in respect to policies addressing climate changes.

This is an uneasy agenda in political terms. However, if not implemented soon, five years from now the 30th anniversary of transition and 15th anniversary of the first EU Eastern Enlargement will be celebrated in more pessimist moods.

I would like to thank Guntram Wolff and Zsolt Darvas for their critical comments to the earlier version of this article. Obviously I accept the sole responsibility for its content and presented opinions, conclusions and policy recommendations.

References:

EBRD (2013): Transition Report 2013. Stuck in Transition?, European Bank for Reconstruction and Development, London

Luengnaruemitchai, P. & Schadler, S. (2007): Do Economists’ and Financial Markets’ Perspectives on the New Members of the EU Differ?, IMF Working Papers, WP/07/65

Roaf J., Atoyan R., Joshi B., Krogulski K. et al. (2014): 25 Years of Transition: Post-Communist Europe and the IMF, Regional Economic Issues, Special Report, International Monetary Fund, Washington, D.C.


[1] This is a revised and reedited version of my presentation delivered at the Conference on ‘Building Market Economies in Europe: Lessons and Challenges after 25 Years of Transition’ organized by the National Bank of Poland and International Monetary Fund in Warsaw, October 24, 2014. The original presentation was titled ‘CEE and CIS Economies: Uncertain Prospects of Economic Convergence’. The main difference with the original presentation is leaving CIS economies out of this paper. They require a separate analysis as they followed a slightly different path of economic development.

[2] Germany recorded two years of GDP in this period: by 0.4% in 2003 and 5.1% in 2009, according to the IMF World Economic Outlook, October 2014 database.

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Mon, 08 Dec 2014 17:15:55 +0000
<![CDATA[A new energy policy for the new EU Commission]]> http://www.bruegel.org/nc/events/event-detail/event/484-a-new-energy-policy-for-the-new-eu-commission/ even484

The new EU leadership acknowledges the need to revamp European energy policy. While European Council President Tusk suggested the idea of an Energy Union, European Commission President Juncker has also called for a a "resilient Energy Union". The Commission Vice President for Energy Union Maroš Šefčovič has announced the unveiling of a political concept for the Energy Union in early 2015.

Prof. Jean-Michel Glachant‘s ""Manifesto" is a timely contribution to this discussion of the EU’s future energy policy. His long experience as an academic commentator on EU energy affairs allows him to propose feasible solutions to the most relevant issues by building on existing policies, while acknowledging political realities.

His presentation will be followed by comments from Matthias Dürr (RWE) and a representative of the institutions (TBC). The subsequent discussion will be chaired by Georg Zachmann, Research Fellow at Bruegel.

Speakers

  • Jean-Michel Glachant, Robert Schuman Chair, Director of the Florence School of Regulation and Director of Loyola de Palacio Energy Policy Programme
  • Matthias Dürr, RWE
  • Marie Donnelly, Director for Renewables, Research and Innovation, Energy Efficiency, European Commission, DG ENER
  • Georg Zachmann, Research Fellow at Bruegel

Event Materials

  • Presentation by Jean-Michel Glachant -
  • Presentation by Matthias Dürr -

Practical Information:

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: 17th December 2014,12.30- 14.15. Lunch will be served from 12.30-12.45
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

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Mon, 08 Dec 2014 16:43:59 +0000
<![CDATA[Some tools for lifting the patent data treasure]]> http://www.bruegel.org/nc/blog/detail/article/1501-some-tools-for-lifting-the-patent-data-treasure/ blog1501

Patent applications are a product of research and development, but they are also subject to research. Studying patents and the patenting behaviour of individuals and organizations is important to understand how innovation works. Indeed, the relevance of patent data has long been recognized:

Patent statistics loom up as a mirage of wonderful plentitude and objectivity. They are available; they are by definition related to inventiveness, and they are based on what appears to be an objective and only slowly changing standard.

Zvi Griliches, 1987 (Patent Statistics as Economic Indicators: A Survey)

However, data helps only if it includes the kind of information that is necessary to answer some research question. Indeed, researchers have been involved in the construction and enrichment of datasets related to patents for at least 30 years. The problems we faced in our work with patent data have roots that go back to the eighties.

First of all, not all patentees that appear in the records with the same name are the same patentee, and conversely, two different names may actually correspond to a single patentee. The parent-subsidiary structure is an additional complication for the researcher that is interested in assigning a patent to a single entity.

Because the patent office does not employ a consistent company code in its computer record, except for the “top patenting companies” where the list of subsidiaries is checked manually, the company patenting numbers produced by a simple aggregation of its computer records can be seriously incomplete.

Zvi Griliches, 1987 (Patent Statistics as Economic Indicators: A Survey)

The second problem is that patent data needs to be complemented by company data to be of most use, and efforts to obtain this kind of dataset have always required extensive manual input (see Bound et al, 1984 and Griliches, Pakes, Hall 1988)

The manual work that was cumbersome thirty years ago is even more difficult today, given that the available data is hundreds of times larger than what was in the hands of researchers in the past.  Take the PATSTAT database: it is a useful source of standardized information for millions of patents from all over the world, but its usefulness is limited by the type of information that is included. For example, PATSTAT does not assign patent applicants to different categories, making it difficult to distinguish companies from public institutions or even individuals. Also, it is affected by the same problems that we mentioned above, namely the appearance of duplicates, and the missing link to other sources of firm-level data.

For this reason, some efforts are devoted to the enrichment of PATSTAT and its integration with external information. For example the EEE-PPAT table assigns a category to every patentee, establishing whether it is an individual, a company, or another kind of organization.

 

As shown in the map, we can geolocate a lot of PATSTAT patents using only information inside the database (left), but we can do much better once we link the patentees to companies, for which we have more precise information (right).

      

We contribute to this stream of research on PATSTAT by providing two algorithms that tackle the two above mentioned problems and that try to minimize the amount of manual work that has to be performed. We also provide data obtained by the application of these methods. Our work can be summarized as follows:

 

  1. We provide an algorithm that allows researchers to find the duplicates inside Patstat in an efficient way
  2. We provide an algorithm to connect Patstat to other kinds of information (CITL, Amadeus)
  3. We publish the results of our work in the form of source code and data for Patstat Oct. 2011.

More technically, we used or developed probabilistic supervised machine-learning algorithms that minimize the need for manual checks on the data, while keeping performance at a reasonably high level.

The data and source code is accompanied by three working papers:

A flexible, scaleable approach to the international patent “name game”

by Mark Huberty, Amma Serwaah, and Georg Zachmann

In this paper, we address the problem of having duplicated patent applicants' names in the data. We use an algorithm that efficiently de-duplicates the data, needs minimal manual input and works well even on consumer-grade computers. Comparisons between entries are not limited to their names, and thus this algorithm is an improvement over earlier ones that required extensive manual work or overly cautious clean-up of the names.

Source code

Data

A scaleable approach to emissions-innovation record linkage

 

by Mark Huberty, Amma Serwaah, and Georg Zachmann

PATSTAT has patent applications as its focus. This means it lacks important information on the applicants and/or the inventors. In order to have more information on the applicants, we link PATSTAT to the CITL database. This way the patenting behaviour can be linked to climate policy. Because of the structure of the data, we can adapt the deduplication algorithm to use it as a matching tool, retaining all of its advantages.

Source code

Data

Remerge: regression-based record linkage with an application to PATSTAT

 

by Michele Peruzzi, Georg Zachmann, Reinhilde Veugelers

We further extend the information content in PATSTAT by linking it to Amadeus, a large database of companies that includes financial information. Patent microdata is now linked to financial performance data of companies. This algorithm compares records using multiple variables, learning their relative weights by asking the user to find the correct links in a small subset of the data. Since it is not limited to comparisons among names, it is an improvement over earlier efforts and is not overly dependent on the name-cleaning procedure in use. It is also relatively easy to adapt the algorithm to other databases, since it uses the familiar concept of regression analysis.

Source code

Data

 



 

 

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Mon, 08 Dec 2014 16:36:00 +0000
<![CDATA[The European Union is the global laggard on Basel III]]> http://www.bruegel.org/nc/blog/detail/article/1500-the-european-union-is-the-global-laggard-on-basel-iii/ blog1500

On Friday, December 5, the Basel Committee on Banking Supervision published its reports on the compliance of rules adopted last year in the European Union and in the United States with its global accord on banking regulation, adopted in 2010 and known as Basel III. As was to be expected, the Basel Committee found the EU “materially non-compliant” with Basel III, while the US was found “largely compliant” and all other jurisdictions reviewed so far were found “compliant.” The EU, which often claims leadership on championing global financial standards, thus finds itself the global laggard on this key plank of the financial regulatory agenda. But moving towards better compliance with the Basel framework remains in the EU long-term interest. This can be achieved both in the short term through appropriate action by the European Central Bank (ECB), and in the longer term through changes in the applicable EU legislation.

the Basel Committee found the EU materially non-compliant with Basel III, while all other jurisdictions reviewed so far were found compliant

The two Basel Committee reports, published simultaneously on the EU and the US, are part of a multi-year initiative which the Basel Committee calls its Regulatory Consistency Assessment Programme (RCAP). The corresponding publications started in October 2012 with preliminary assessments of the EU and US, on the basis of draft rules at the time in both jurisdictions, as well as an assessment of Japan which was found compliant. Since then, the Committee has published successive RCAP reports on Singapore (March 2013), Switzerland (June 2013), China (September 2013), Brazil (December 2013), Australia (March 2014), and Canada (June 2014), all of which were also found compliant with Basel III. Under the Committee’s current work schedule, this will be followed by assessments of Hong Kong, Mexico, India, South Africa, Saudi Arabia and Russia in 2015, and of Argentina, Turkey, Korea and Indonesia in 2016. It should be noted that the jurisdictions already assessed under the RCAP cover a dominant share of the global banking system, including all of the thirty groups currently classified by the Financial Stability Board as Global Systemically Important Banks (of which 14 are headquartered in the EU, 8 in the US, 3 in China, 3 in Japan, and 2 in Switzerland). Thus, even if some of the reports still to come find other jurisdictions to be materially non-compliant or even “non-compliant” (the worst grade), it won’t change the EU’s status as global laggard, followed by the “largely compliant” US, among the world’s most important banking jurisdictions.

having rules that comply with Basel III does not imply that all corresponding banks are safe and sound

Cynics will note, rightly, that having rules that comply with Basel III does not imply that all corresponding banks are safe and sound. The RCAP process does not look at how rigorously and reliably the rules are implemented and enforced, but only at their content in comparison with the global accord. For example, in some emerging markets and also in developed economies, gaps in capacity and governance may prevent proper implementation practices. The Basel Committee acknowledges this, and has initiated separate processes to assess corresponding outcomes, starting with risk-weighting calculations which are the target of many of the Basel framework’s most biting critiques. (The Basel Committee also monitors whether jurisdictions have adopted rules to adopt Basel III at all, irrespective of their compliance status.) It should be noted, however, that relying on compliant rules greatly facilitates a process of implementation and enforcement that itself conforms to the global accord.

The RCAP process appears rigorous, balanced, and thorough. An ad hoc assessment team is formed for each report, composed of delegates from the supervisory authorities of jurisdictions other than the one being assessed, supported by members of the Basel Committee’s permanent secretariat staff. The work is submitted to a separate Review Team and also to a RCAP Peer Review Board. The identities of the Assessment Team leader and members, supporting members, and Review Team members are disclosed in each report. For example, Mark Zelmer, Canada’s Deputy Superintendent of Financial Institutions, led the team that delivered the assessment for the EU, and Mark Branson, chief executive of the Swiss Financial Market Supervisory Authority (FINMA), did so for the US. Of seven other team members for the US report, five were from the European Commission or from individual authorities of EU member states, and the two other from China and Japan respectively. Additional checks and balances have been introduced over time: for example, the first reports in October 2012 did not include a separate Review Team. The assessment itself is very comprehensive, putting the rules in their local context, analysing their actual impact on a sample of selected banks (whose names are also disclosed in the report), mentioning any ongoing processes to amend them, and enclosing responses from the assessed jurisdictions’ public authorities in a transparent way. Specifically, the EU report includes a joint response from the European Commission, the European Banking Authority (EBA) and the ECB; and the US report includes a joint response from “the US agencies” which, based on the report’s preface, include the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. In both cases, the responses commend the work of the RCAP assessment team, while contesting some of their conclusions, as is habitual in contradictory procedures. To be sure, financial policy is not an exact science, and it is inevitable that RCAP reports include elements of individual judgment on the part of the assessment team members. Nevertheless, these features ensure that the outcome of the assessment can be considered authoritative.

The reports support each jurisdiction’s overall grade with a more detailed examination of 14 specific “components.” In the EU’s case, two points are particularly weak. First, the Capital Requirements Regulation (CRR) of 2013 allows more leeway than the Basel framework to apply a zero risk-weight to banks’ claims on sovereign and other public-sector debtors, as well as reduced risk-weights to claims on small- and medium-sized enterprises. As a result, the report grades the “Credit risk: Internal Ratings-Based Approach” component as materially non-compliant. Second, the CRR exempts certain derivatives transactions of banks with public-sector entities and non-financial corporate entities from a capital charge for counterparty risks known as Credit Value Adjustment (CVA), with material impact on actual capital ratio calculations. As a result, the report grades the “Counterparty credit risk framework” component as non-compliant. In both cases, the rules have been tweaked during the EU legislative process to favor the financing of governments, other public entities, and companies by banks, which may be seen as a form of mild financial repression with European characteristics. As for the US, the two components “Credit risk: securitisation framework” and “Market risk: Standardised Measurement Method” are graded materially non-compliant, both because of a section of the Dodd-Frank Act of 2010 that prevents banking regulations from making explicit reference to the ratings produced by credit ratings agencies. For both the EU and the US, four additional components are graded largely compliant. All remaining component are deemed compliant, except one that has not been implemented in the US and is thus assessed as not applicable.

The Basel Committee’s assessment is actually milder on the EU than could have been expected on an important component, titled “Definition of capital and calculation of minimum capital requirements,” which is graded largely compliant (as it is also for the US). The report notes a number of departures from Basel III under this chapter, including most notably the treatment of insurance subsidiaries (important for large French banking groups, in particular) as well as the capital of cooperative banks (important in several member states, including Germany) and temporary accounting quirks on the booking of losses on sovereign debt portfolios. These departures from Basel III were included early in the elaboration of the CRR as a package known in specialized circles as the “Danish compromise,” since it was negotiated during the Danish Presidency of the Council of the EU, which covered the first half of 2012. This had led the first RCAP report of October 2012 to grade the draft CRR as materially non-compliant on the definition of capital criterion. It appears that, in the meantime, EU negotiators have been successful at convincing the assessment team that the corresponding impact is less significant that was initially reckoned.

The EU has decided to depart from the Basel standard more than any other advanced economy for a number of reasons. The general policy stance in most of the EU, until at least the inception of banking union in mid-2012 and partly continued beyond that date, was to hide the banks’ problems from public view as long as the banks could still satisfy their short-term obligations, an approach politely referred to as supervisory forbearance. This preference has affected both the position of several EU member states in the Basel Committee during the negotiation of Basel III in 2008-2010, and the legislative process that led to the CRR and its complement the fourth Capital Requirements Directive (CRD4) being finally adopted in June 2013. The absence of a sustainable fiscal framework at the euro area level largely explains (and arguably justifies) the risk-weighting of euro-area sovereign exposures at zero. Political impulses to favor the direction of credit to struggling member states and companies led to the amendments on SME risk-weighting and CVA risk exemption in the later phases of the CRR/CRD4 legislative process. Furthermore, the EU could have reserved the contentious provisions to small- and mid-sized banks, in which case there would have been no problem of Basel III compliance since the Basel accords are only intended at large internationally active banks. But the EU is keen to apply the same prudential rules to all banks irrespective of size, a longstanding choice which may in turn be viewed as the result of the influence of the larger banks on EU policy.

Even so, the EU choices to depart from Basel III also have downsides:

 

  • First, they result in laxer supervisory standards, as banks’ regulatory capital ratios are higher than they would be if Basel III was consistently applied (the size of the difference depends on each bank’s specific risk profile). This in turn undermines trust in the European banking sector as a whole. Investors are left in the dark as to how much lower the ratios would be under “full” Basel III. For example, the recent Comprehensive Assessment of the euro area’s 130 largest banks resulted in the publication by the EBA of a measure of capital ratios that was widely referred to in the media and commentariat as “fully-loaded Basel III,” but was actually (as the EBA correctly described it) a CRR/CRD4 ratio based on the rules that will be applicable in 2016 after the expiration of transitional provisions. This disclosure marked significant progress from previous practice in the direction of supervisory transparency, but still fell short of informing investors about each bank’s capital strength according to the actual Basel III standards.

  • Second, the departure from the global framework undermines the EU’s influence in the Basel Committee and more generally in global financial standard-setting bodies. In such bodies, as a senior policymaker once put it (and all things equal, i.e. at a given level of demographic, economic and geopolitical heft), “compliance is influence” – i.e., the more a jurisdiction can credibly claim that it applies the agreed standards faithfully, the more impact it can have on future revisions or new standards. The EU had such moral authority following its swift adoption of the previous Basel II Accord of 2004, and has not refrained from blaming the US about its own delayed process of Basel II adoption. But this advantage was eroded when the crisis revealed major flaws in the Basel II framework, and is now impaired as the EU lags behind in adopting the more rigorous Basel III.

  • Third, the EU has long championed the emergence and strengthening of global financial standards as a general proposition. Its long-term interest remains aligned with successful global financial regulatory initiatives. By not complying with Basel III, it weakens not only its own authority within the Basel Committee, but also the global authority of the Basel Committee itself. Other jurisdictions may now be tempted to introduce their own deviations from the global standards, under debatable assertions of local or regional specificities, and invoke the EU precedent.

 

As a result of these three factors, it would be in the EU’s best interest to readjust its supervisory practice and prudential legislation, in order to become compliant with Basel III as it had been with Basel I and Basel II in the past. Annex 16 of the RCAP report helpfully lists 11 “issues that the EU should consider to evaluate progress in aligning the EU capital regulations with the Basel Framework.” The Basel Committee prefers this diplomatic phrase to simpler “recommendations,” because it does not want to be seen as setting heavy-handed conditions for the removal of the infamous “materially non-compliant” mark.

The European Commissions’ statement in response to the RCAP report’s publication suggests a more open and constructive stance than back in October 2012

Prospects for such convergence are mildly encouraging. The European Commissions’ statement in response to the RCAP report’s publication suggests a more open and constructive stance than back in October 2012, when the previous assessment has elicited a furious reaction from then-European Commissioner Michel Barnier. This time however, the shriller response has come from the European Parliament, as parliamentary leaders from the main political groups issued a scathing joint statement that lambasts the Basel Committee as “a body that is working without legitimacy and without any transparency” and righteously proclaims that it “cannot modify the decisions taken democratically by the European institutions” – a statement of fact that the Basel Committee presumably has no intention to contest. The irony, which was not missed by some observers, is that these arguments closely mirror those used in individual member states by Eurosceptics who paint the EU as unaccountable, opaque and illegitimate, and reserve the democratic label exclusively to national institutions. In fact, the Basel III accord received ringing endorsements from political principals of the world’s main economies, including the EU and its largest member states, in successive summits of the G20 since 2010. In spite of the posturing, however, it can be expected that future revisions of the EU CRR/CRD4 legislation, and of the Basel III accord itself, may facilitate a gradual elimination of at least some of the areas of most egregious non-compliance.

On a shorter time horizon, the ECB has an important role to play. Since November 4, 2014, it is the supervisor of all banks in the euro area, directly for the 120 largest ones and indirectly, but through a common policy framework, for all others. It can use its supervisory discretion (what the Basel jargon calls Pillar II measures) to impose stricter capital requirements than the minimum set by the CRR, and may align these with a more consistent application of the Basel III accord. Short of this, it may disclose how much a “fully-loaded” application of Basel III would reduce each bank’s capital ratio, something that it also has the authority to enforce under the EU’s Banking Union legislation. In October 2014, both the ECB and the Single Supervisory Mechanism that it hosts have become full members of the Basel Committee, in which the ECB only had observer status until then. The compliance-is-influence principle also applies to it. To maximize its impact in setting the future global standards on bank capital and prudential regulation, the ECB should use its new authority to quickly impose more practices that better comply with Basel III than the imperfect minimum set in the EU CRR/CRD4 legislation. 

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Mon, 08 Dec 2014 08:56:24 +0000
<![CDATA[The superiority of economists]]> http://www.bruegel.org/nc/blog/detail/article/1499-the-superiority-of-economists/ blog1499

What’s at stake: Marion Fourcade and her co-authors (Etienne Ollion and Yann Algan) have made a big splash this week in econ departments and in the blogosphere with a paper giving a sociological perspective on the economics profession and arguing that economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement.

Paul Krugman writes that Fourcade’s  basic point is that successful economists tend to be intellectually arrogant because they live in a social setup that is very hierarchical, with steep gradients of prestige, widespread agreement about what constitutes good work and who is doing it, and pretty big rewards by professorial standards for climbing to the top of the heap. 

Livio Di Matteo writes that this is a rather unflattering portrait of the profession as a self-centered, financially privileged, male dominated clique of academic imperialists. Crooked Timber writes that a lot of economists are reading the piece don’t really get Fourcade’s argument, which is a Bourdieuian one about how a field, and relations of authority and power within and around that field get constructed. 

How economists see themselves (and how others see them)

Marion Fourcade and al. write that economists see themselves at or near the top of the disciplinary hierarchy. In a survey conducted in the early 2000s, Colander (2005) found that 77 percent of economics graduate students in elite programs agree with the statement that “economics is the most scientific of the social sciences.” They see the field’s high technical costs of entry and its members’ endeavors to capture complex social processes through equations or clear-cut causality as evidence of its superior scientific commitment, vin­dicating the distance from and the lack of engagement with the more discursive social sciences.

Marion Fourcade and al. write that from the vantage point of sociologists, geographers, historians, political scientists or even psychologists, economists often resemble colonists settling on their land. Lured by the prospect of a productive crop, economists are swift to probe the new ground. They may ask for guidance upon arrival, even partner-up with the locals (with whom they share some of the same data). But they are unlikely to learn much from them, as they often prefer to deploy their own techniques.

Noah Smith writes that a lot of academic disciplines look down on other disciplines – that’s part of the fun of academia. But psychologists certainly don’t think economists reign supreme over them. Nor, I assure you, do finance professors. It’s mostly sociologists who seem to have an inferiority complex. Peter Dorman is surprised by the data that suggests that economists are not collaborating more across disciplinary boundaries than they used to. One possible source of omitted evidence is that their list of external disciplines does not include psychology or biology, two fields where it seems to me that collaboration has been most fruitful.

Tyler Cowen writes that economists are in fact the smartest of the social scientists (on average), but this also has led economics to degenerate somewhat into a game of signaling smarts, to the detriment of breadth and knowledge of facts about the world.

The clubby character of the economics field

Paul Krugman writes that academic economics is indeed very hierarchical; but it’s important to understand that it’s not a bureaucratic hierarchy, nor can status be conferred by crude patronage. The profession runs on reputation — basically the shared perception that you’re a smart guy. Reputation comes out of clever papers and snappy seminar presentations. While it may seem like a vague concept, within each subfield everyone knows who the top guns are, and there’s a very steep slope downward from the few people at the very pinnacle and the next level. In my original home field, international trade, we used to joke that senior hires were difficult because there were only four people in the top ten. Because everything runs on reputation, a lot of what you might imagine academic politics is like — what it may be like in other fields — doesn’t happen in econ.

Crooked Timber writes that the paper provides good evidence that economics hiring practices, rather than being market driven are more like an intensely hierarchical kinship structure, that the profession is ridden with irrational rituals, and that key economic journals are apparently rather clubbier than one might have expected in a free and competitive market. What appears to economists as an intense meritocracy is plausibly also, or alternately, a social construct built on self-perpetuating power relations.

Marion Fourcade and al. write that several leading economic journals edited at particular universities have a demonstrable preference for in-house authors, while the AER is much more balanced in its allocation of journal space. Look­ing at home bias figures since the 1950s, Coupé (2004) finds a consistent pattern of over-representation of in-house authors over time. Between 1990 and 2000, for in­stance, the Harvard-based QJE “assigned 13.4 percent of its space to its own people” and 10.7 percent to neighboring MIT (against 8.8 percent to the next most prominent department, Chicago). Conversely, 9.4 percent of the pages of the Chicago-based JPE went to Chicago-affiliated scholars. This was equivalent to the share of Harvard and MIT combined (4.5 and 5.1 percent, respectively). Wu (2007) shows that these biases actually increased between 2000 and 2003.8 Our data (2003–2012) confirm this domination of Cambridge, Massachusetts over the QJE and (to a lesser extent) Chicago over the JPE.

Peter Dorman writes that the treatment of organizational structure focuses entirely on the AEA in relation to the professional organizations for American political scientists and sociologists.  This material was quite interesting, but aren’t they leaving out something important?  I’m thinking of the National Bureau of Economic Research (NBER), which provides support and especially networking for “core” researchers in economics.  From where I stand, many rungs beneath, this looks like a nomenklatura for the profession.  Perhaps this is a misinterpretation.  But if not, we ought to document how members of NBER are recruited and what the career consequences are for inclusion versus exclusion.

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Mon, 08 Dec 2014 07:43:25 +0000
<![CDATA[The Achilles' heel of Juncker's investment plan]]> http://www.bruegel.org/nc/blog/detail/article/1498-the-achilles-heel-of-junckers-investment-plan/ blog1498

in order to get to a promised total of €315 billion, the plan critically hinges on mobilising and leveraging an additional €294 billion in private investment

European Commission President Jean-Claude Juncker's plan to boost investment in the EU has three pillars: (i) the creation of a European Fund for Strategic Investment (EFSI); (ii) the setting up of a pipeline of projects at EU level and strengthening technical assistance through an investment advisory 'Hub'; and (iii) improving the framework conditions for investment. Much comment so far has focused on the first part, and in particular the multiplier used. The ESFI will be given €21 billion of public funds: €8 billion from the EU budget, forming a 50 percent guarantee, and another €5 billion from the European Investment Bank, which will also bring in its expertise in project selection. Then, in order to get to a promised total of €315 billion, the plan critically hinges on mobilising and leveraging an additional €294 billion in private investment, meaning €15 in private money for each €1 of public money committed.

There is much scepticism if this 1:15 multiplier is realistic, particularly as private funding needs to be 'additional' – it should not crowd out already planned investments. Claeys, Sapir and Wolff in a Bruegel blogpost and Wolff in Science  have already highlighted this additionality problem: will the right projects be selected that would not have happened without the guarantee? They stress how critical the expertise and independence of the project selection committee will be to select the right 'additional' projects and to avoid the trap of political capture.

Which projects should be selected? Claeys, Sapir and Wolff show that the multiplier effect will be higher the more risky the projects: it is particularly the risky projects that are most likely to have been left on the shelf during the crisis and can be activated without risk of crowding out. Although the Juncker Plan specifies “there should be no thematic or geographic pre-allocations” it does mention infrastructure, notably broadband, energy networks and transport infrastructure, education, research and innovation, and renewable energy and energy efficiency. There should be enough scope in each of these areas – though not only these areas – to find risky projects.

Of the €21 billion, €5 billion will be allocated to small and medium sized companies. This SME part is assumed to have the same 1:15 multiplier, implying a similar risk requirement to the other parts of the ESFI. Rather than ringfencing SMEs in general, it would have been better to ringfence the subset of young firms with high growth potential , if at all there should be any ringfencing. It is precisely these firms that typically offer much riskier innovative projects. Lacking resources and reputation they are typically find it harder to access finance, especially in the current European financial market situation of a low appetite for risk funding.

what matters is not just how much private investment can be leveraged, but how much growth and employment can be created from these investments.

Project selection should also focus on projects that meet both the additionality criteria and which have the highest social rates of return. After all, what matters is not just how much private investment can be leveraged, but how much growth and employment can be created from these investments. All this underlines the need for high quality independent governance of the ESFI, and a monitoring and evaluation strategy specified from the start, if the plan has any serious chance of reaching the 1:15 multiplier and making a meaningful impact on growth and jobs for the EU economy.

This is especially the case because the EU public funds that will go into EFSI, ie the €8 billion, is not new money, but money shifted from other parts of the EU budget. And, although not clearly stipulated in Juncker’s plan, but probable, the same holds for the €5 billion from the EIB. This introduces an 'opportunity cost' component to the calcuations, ie what the social returns from the additional investment will be above what would have come from their original spending allocation. The case has to made that the shifted money is spent better in the new Juncker plan compared to the original allocation, but the Juncker plan is silent on this. How sizeable these opportunity costs are will depend on the specifics of where the money is coming from. According to the Juncker plan, the €8 billion will come from the Connecting Europe Facility (€3.3 billion), Horizon 2020 (€2.7 billion) and budget margin (€2 billion). It is particularly concerning that the money is being taken from the parts of the EU budget that probably have the greatest potential for multiplier effects similar to what ESFI aspires. For example, public investment in basic science projects like those funded through the European Research Council, have been shown to be able to generate substantial social rates of return . In fact, the text of Juncker's plan notes that the 1:15 multiplier “is a prudent average, based on historical experience from EU programmes and the EIB.” Where is this historical evidence from if not research spending and projects such as the Connecting Europe Facility?!

All this implies that the mission for the project selection committee will be to select projects with a 1:15 multiplier effect in excess of the multiplier effect from the Connecting Europe Facility and Horizon 2020. Their job would be much easier if the money came from other parts of the EU budget with lower opportunity costs.

The multifaceted problem of low investment in Europe goes beyond lack of finance.

Taking into account this Achilles’ heel, the third pillar of Juncker's plan – improving the framework conditions for investment – becomes all the more pivotal in order to mobilise the envisaged private investment. The multifaceted problem of low investment in Europe goes beyond lack of finance. Private investors are also shunning Europe because of lower rates of return . Juncker's plan therefore needs to provide a credible commitment to improve the investment climate, if the required 1:15 multiplier is to be secured.

Unfortunately, unlike the first and second parts of the plan, the third strand does not come with milestones and a time line, which make it less powerful to convince the private sector that the investment climate will be made sufficiently better in future.

Furthermore, does the third strand of the plan address the right conditions for increasing investment in Europe? It mentions as the most important areas banking union and capital market union, and better regulation and single market progress in energy, transport and digital sectors. It also mentions in particular addressing those barriers affecting SMEs. While these areas are not contested, what is remarkably low on the plan's radar are the framework conditions related to research and innovation. The plan only mentions that “to boost research and innovation, EU competitiveness would benefit from fewer barriers to knowledge transfer, open access to scientific research and greater mobility of researchers,” but offers no concrete new ideas on how to improve this and no milestones or timetable.

This is remarkable, because it is particularly these areas that will be the areas of strength of Europe in future. As an illustration, in Ernst & Young's latest European attractiveness survey (2014) , 45 percent out of 808 CEO respondents think that R&D will be the driving force for Europe’s attractiveness to foreign direct investment. They rate as Europe’s most attractive feature its stability and predictable business environment (44 percent), its capacity for innovation (38 percent), a large customer base (31 percent) and the quality of its labour force (31 percent).

The plan, by taking away money from H2020, jeopardises the stock of high quality public R&D infrastructure and researchers being trained on the frontier of research and supported in their intra-EU mobility. It is this stock that firms are looking for when deciding whether to locate their risky R&D-based investments to the EU rather than elsewhere.   The H2020 is a critical framework condition for the risky projects with high growth aspirations, the target with the highest potential for the 1:15-multiplier.

Taking away funds from the H2020 for the ESFI is therefore cutting in the 1:15 multiplier potential of the Plan.

To conclude, when asked to endorse the plan, the Council of the EU and the European Parliament should:

  • Ask for a clear evaluation strategy embedded in the plan from the start; this would evaluate ESFI and holding its management accountable for selecting the projects with the required additionality and (social) rates of return, taking into account the opportunity costs of the public funds used.
  • Ask for a re-focus within the dedicated SME window onto risky projects carried out by firms with high innovation-based growth potential.
  • Ask for a rethink of which parts of the EU budget the EU contribution should come from; criteria for this would be the multiplier effect/(social) rates of return of the current funding allocations;
  • At least, EFSI should not take linearly away from the Connecting Europe Facility and H2020, but should only remove money from the parts of these programmes with the lowest opportunity cost.
  • Ask for a clear proposal for the third part of the plan, addressing the critical framework conditions for investment with concrete policies, accompanied by deadlines and milestones. 

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Fri, 05 Dec 2014 14:35:33 +0000
<![CDATA[Central bank rates deep in shadow]]> http://www.bruegel.org/nc/blog/detail/article/1497-central-bank-rates-deep-in-shadow/ blog1497

Measuring the impact of monetary policy on the economy at the zero lower bound is difficult. After 2008, central banks cut policy rates close to zero and implemented various unconventional measures, such as large-scale asset purchases in the United States, United Kingdom and Japan, or long-maturity lending to banks in the euro area. More recently, the European Central Bank cut deposit rates below zero and started the purchase of asset backed securities and covered bank bonds. Such unconventional measures are not reflected in key policy rates, which are stuck near zero.

At the zero lower bound other monetary indicators are needed. As I argued in a recent working paper, a properly measured indicator of money (the so-called Divisia-money) is one such indicator. Another indicator is a so-called estimated shadow interest rate. Such rates are estimated for the US, UK and euro area by Jing Cynthia Wu and Fan Dora Xia, who utilised information from the term structure of interest rates in an unobserved components model. Their shadow rate estimates are virtually the same as the policy rates when policy rates were well above zero, but their shadow rate estimates turned negative for certain periods when the policy rates were very close to zero. Money and shadow rates are interlinked: in my working paper I found that a fall in the shadow rate increases Divisia-money growth and in turn an increase in Divisia-money growth increases GDP growth.

Fall in the shadow rate increases money growth which in turn increases GDP growth

In a post seven months ago, Ashoka Mody plotted shadow rate estimates for the US and the euro-area and argued that the ECB must and can act. Since the ECB has announced a number of monetary policy measures since then, let’s look at more recent shadow rate developments.

 

Policy rates and estimated shadow rates (%)

ECB achieved much less accommodative monetary stance than the Federal Reserve and the Bank of England

The figure suggests that the ECB achieved a much less accommodative monetary stance than the Federal Reserve and the Bank of England. The recent measures (negative deposit rate, new long term refinancing operations and some asset purchases) pushed the estimated shadow rate below zero, yet it is still much higher than the approximately minus 3 percent shadow rates estimated for the US and UK for 2013-14, even though quantitative easing has ended there.

Since both the current inflation (0.3% in November 2014) and expected inflation (see Silvia Merler’s post on this) in the euro area is well below the inflation in the US and UK and well below 2%, there is indeed a strong case for the ECB to act. Ashoka Mody is right that the ECB is again well behind the curve.

Quantitative Easing should start with the purchase of European debt, which has an eligible pool of around €490 billions

A sizeable quantitative easing programme can have an impact in the euro area too, as we argued in a policy contribution I wrote with Grégory Claeys, Silvia Merler and Guntram B. Wolff in May this year. A good starter would be the purchase of European debt, which currently has an eligible pool of around €490 billion of EFSF, ESM, EU and EIB bonds.

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Fri, 05 Dec 2014 10:49:32 +0000
<![CDATA[The ECB winter of discontent]]> http://www.bruegel.org/nc/blog/detail/article/1496-the-ecb-winter-of-discontent/ blog1496

It was the last meeting before Christmas at the ECB, as well as the first in the new premises and the last with a non-rotating voting system. It ended with no action, a controversial twist in the language and a sense of dissenting views on QE. The lack of action was largely to be expected. The ECB has in fact pledged a lot of reputational capital on the measures adopted so far, and moving a step forward before having had the chance to assess their effectiveness would be inconsistent with the narrative offered so far.

projections for GDP growth for 2015 and 2016 have been lowered to 1.0% and 1.5%, down from 1.6% and 1.9%

Yet, the revision to the ECB’s staff forecasts has been substantial. The median projections for GDP growth for 2015 and 2016 have been lowered to 1.0% and 1.5%, down from 1.6% and 1.9%. The median projections for HICP inflation also worsened, and inflation is now forecast at only 0.7% in 2015 and 1.3% in 2016. And since the cut off date for forecasts was 13 November, these numbers do not yet factor in the latest downward shock to oil prices. As of the 2nd of December 2014, oil price futures implied that the price of Brent crude oil would fall to USD 73.2 in 2015 and rise to USD 78.1 in 2016, i.e. to levels that would be14.5% and 11.7% lower than those entailed in the baseline projection. The ECB estimated that the impact of a lower than expected oil price path would cause euro area HICP inflation to reach about 0.4 percentage point below the baseline projection for 2015 and 0.1 percentage point below the baseline projection for 2016.

Therefore, the outlook is gloomy and the risk related to lower oil prices looks quite substantial, especially for 2015. The oil price could eventually be the ultimate shock needed to trigger further action. ECB president Draghi stated that the ECB will closely follow these developments and that the appropriateness of existing measures will be reassessed “early next year”, when further easing could be unavoidable. Whether “early” means “as early as the next meeting” (January 22nd) will most likely depend on the actual take up of the second TLTRO auction on which the ECB has repeatedly tried to sound positive (11th December) and on the numbers achieved under the CBPP3 but most importantly the ABSPP, which largely disappointed with less than one billion purchased in its first week of operations.

unanimous commitment exists within the Governing Council to using additional unconventional measures to stir the balance sheet

It was reiterated that unanimous commitment exists within the Governing Council to using additional unconventional measures to stir the balance sheet, but a number of signals in today’s meeting suggested that the controversy about the definition of “further measures” is still alive and binding. Draghi said clearly that sovereign QE would fall within the ECB’s mandate, leaving the options on the table quite open (to everything except gold and foreign-denominated assets). With respect to the size of the balance sheet increase – which had been the main focus of the meeting in November – there has been an interesting linguistic twist in the introductory statement, where the ECB balance sheet is no longer “expected” to increase up to the level it had “in early 2012”, but it is now “intended” to do so. This adds linguistic dovishness and is consistent with the overall message that the ECB is ready to ease more. But in the Q&A Draghi clarified that this definition should still be considered different (weaker) than an actual target and hat the change in the language could not be agreed unanimously. The sense of caution stemming from these words was further reinforced by a somewhat odd clarification, from Vice President Constancio, about the personal nature of his recent comments about QE. 

In sum, the takeaway from today’s meeting seems to be that the need to do more for the ECB is more pressing than ever, while at the same time internal constraints are still far from eased. Despite the ECB president explicitly saying that unanimity would not be needed in order to proceed with QE, the other signs discussed above seem to point to significant internal divergences still strongly standing on the way of a “comfortable majority”.

One way to make the process more palatable to the internal opposition – as advocated here some time ago – would be to start QE by buying those assets that are the closest to a euro area-wide government bond, i.e. bonds issued by European supranational institutions. The total of bonds available is around €490 billion, with slightly more than €200 billion for EFSF/ESM, €60 billion for EU and €200 billion for EIB. The potential pool of EIB bonds could increase, during 2015, as the recently announced Juncker plan foresees the issuance of 60 billion in new AAA rated EIB bonds, backed by the 21 billion put in the European Fund for Strategic Investment (EFSI). 

And in fact, new EIB bonds are not the only (and certainly not the most interesting) EIB product that the ECB could consider investing in. Juncker’s plan in fact includes a leg directly aimed at supporting risk finance for SMEs and mid-cap companies across Europe, relying on (and scaling up) the already existing European Investment Fund (EIF). This could be done – according to the plan – by providing higher amounts of direct equity or additional guarantees for high-quality securitisation of SME loans. And these securitized product could be of particular interest to the ECB for a number of reasons: (i) they would be representative of underlying new loans that would most likely be subject to accurate screening, as part of this EIB/Commission plan, and therefore potentially less risky than a random pre-existing ABS (ii) they would be ultimately be backed by a European guarantee (the 16 billion backstop buffer), which could allow the ECB to invest in slightly riskier tranches (something the ECB has been trying to achieve on normal ABS asking for national government guarantees, but still with no success). Defaults on ABS in Europe have been very low during the financial crisis – ranging between 0.6-1.5 percent on average, against 9.3-18.4 percent for US securiisations – but the two abovementioned arguments would make them even less risky.

One problem is timing, as the investment plan is still in its infancy whereas the ECB could need to act very early next year. But based on the experience of other central banks, programmes of asset buying stretch over a fairly long horizon. Any such ECB engagement would have the obvious effect of leveraging the credibility of the plan in the eyes of private investors and therefore increasing the chances that more private investment would effectively opt. This would increase the likelihood that the plan’s 315 billion target is reached, and that the monetary stimulus is complemented by other policies moving in a synergic, rather than conflicting, direction. 

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Fri, 05 Dec 2014 07:43:46 +0000
<![CDATA[The funding of bank resolution in Europe: will the new framework meet expectations?]]> http://www.bruegel.org/nc/events/event-detail/event/482-the-funding-of-bank-resolution-in-europe-will-the-new-framework-meet-expectations/ even482

WE ARE HAVING A PROBLEM WITH THE LIVE STREAM AND THE PRESENTATION IS NOT SHOWING CORRECTLY! Download slides -

The Bank Recovery and Resolution Directive (BRRD) and the associated Single Resolution Regulation (SRR) put emphasis on the financing of a resolution coming from the private sector and those that have knowingly taken on the risks rather than on the taxpayer through a bail out. However, as David G. Mayes argues, simply being able to resolve a bank without a taxpayer bail-out does not necessarily reduce the economic cost of the resolution, since a failure of a systemic bank can impact GDP, unemployment and hence tax revenues and welfare expenditures.

In his presentation, David G. Mayes will explore the problems of assessing the costs of resolving failing banks and explain the New Zealand scheme and the authorities’ assessment of the impact the various resolution and recovery measures is likely to have on the economy. He then assesses the proposals in the BRRD/SRR in this light and finally draws conclusions for the ways in which the BRRD/SRR might be implemented in order to keep the risks to society at large to a minimum. He argues that the strong preference for bailing-in rather than bailing-out will only work if the scheme can offer certainty that bailing-in will be applied. However, the complexities of cross-border resolution may make the EU’s bail-in scheme less credible and thereby banks may still expect a bail-out.

David G. Mayes’ presentation will be followed by comments from Robert Kendrick and Emiliano Tornese, and then a general discussion chaired by Zsolt Darvas.

Speakers

  • David G. Mayes, Director and Professor of the Europe Institute at the University of Auckland
  • Robert Kendrick, Credit Analyst at Schroders plc, Research Division.
  • Emiliano Tornese, Banking and Securities Lawyer at European Commission
  • Zsolt Darvas, Senior Fellow at Bruegel

Event materials

Presentation by David Mayes -

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: 16th December 2014,12.45- 14.30. Lunch will be served at 12.45 after which the event begins at 13.00.
  • Contact: Matilda Sevón, Events Manager -registrations@bruegel.org

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Thu, 04 Dec 2014 16:13:31 +0000
<![CDATA[Time for redefining gas relations in EU-Ukraine-Russia triangle]]> http://www.bruegel.org/nc/events/event-detail/event/481-time-for-redefining-gas-relations-in-eu-ukraine-russia-triangle/ even481

On Thursday, December 11, at 12.00, the press center of the Interfax-Ukraine news agency will host a press conference to launch the publication from the Brussels Think Thank Bruegel ”Time for redefining gas relations in EU-Ukraine-Russia triangle". The Policy Paper will be introduced by Georg Zachmann, Bruegel, and Agata Loskot-Strachota, OSW.

Despite the interim deal reached by Russia and Ukraine, the gas conflict remains to a large extend unresolved. The publication proposes the EU to actively engage in a redefinition of its gas relations with both Russia and Ukraine.

Speakers

  • Georg Zachmann, Bruegel
  • Agata Loskot-Strachota, OSW

Agenda

12.00-12.45 Press Conference

12.45-14.00 Panel debate

12.45-13.15 Presentation of paper by Georg Zachmann and Agata Loskot-Strachota

13.15-13.30 comments

13.30-14.00 open discussion

Practical details

  • Venue: Interfax-Ukraine News Agency, Kiev, 01030, Киев, ул Рейтарская 8/5а (Reitarska St, 8/5А), Kiev, Ukraine
  • Time: Thursday, 11 December 2014, 12:00-14:00
  • Contact: Matilda Sevón, Event Manager - registrations@bruegel.org

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Thu, 04 Dec 2014 15:32:32 +0000
<![CDATA[Emerging markets mock the pessimists]]> http://www.bruegel.org/nc/blog/detail/article/1495-emerging-markets-mock-the-pessimists/ blog1495

Remember this time last year, when it was fashionable to predict that 2014 would be a pretty bad year for emerging markets?  Didn't really happen, did it? Now I hear analysts saying the crisis they'd been counting on has only been postponed. It'll happen next year instead. It's possible, but I wouldn't bet on it.

 The so-called emerging markets are all quite different.

In this discussion, one crucial fact is both obvious and always forgotten: The so-called emerging markets are all quite different. They don't move in unison. Take the impact of cheaper oil. Just as in the advanced economies, it's good news for some (the equivalent, in effect, of a tax cut) and bad news for others (the equivalent of a cut in income). It's unhelpful to generalize. Many of the world's star performers in 2014 were emerging-market economies. The same will be true in 2015.

The fallacy of agglomeration is compounded by a failure to grasp relative scales. Taken together, the two errors give a completely distorted picture of global activity.

In terms of purchasing power parity, China is now about as big as the U.S. 

The slowing of China's expansion is a constant theme these days. Fine, but remember that China will be a $10 trillion economy by the end of 2014, and that during the course of this year's slowdown, it added roughly $1 trillion to world output. In terms of purchasing power parity, China is now about as big as the U.S. Therefore, growing at a "disappointing" 7.0-7.5 percent, it will add more than twice as much to global output next year as the U.S. added in 2014.

Yet the median financial commentator is excited about the U.S. and downbeat about China. What am I missing?

In current-dollar terms, China's economy is now more than twice the size of Japan's. Again, investors seem disproportionately energized about the lesser case. Japan would have to grow at a rate in excess of 10 percent to make a bigger contribution to global output than China. China is bigger than Germany, France and Italy combined: The biggest euro economies would need to grow by more than 7 percent to rival its addition to global activity.

Though lagging far behind China, India is becoming a globally significant economy as well -- about the same size as Italy, or three-quarters the size of the U.K. economy in current-dollar terms. Adjusted for purchasing power, its addition to global output will far exceed theirs in 2014.

In fact, despite the general mood of despondency, growth in global output will come in this year at about the average for the decade to date -- 3.3 percent. Granted, that's down from 3.9 percent between 2001 and 2010, but it's about the same as in each of the two decades before that. The main thing is, U.S. growth isn't the only thing driving the pattern.

Financial markets seem to give a better sense of the underlying dynamics than you'd get from gauging the mood of analysts. “Slowing” China has seen its Shanghai benchmark index rise by more than 25 percent so far this year. The Shenzhen index, which probably gives a better representation of the modern sector of China's economy, is up about 35 percent. That's roughly the same as the rise in India's main stock market index. Indonesia is up close to 20 percent, and Turkey 25 percent. A number of other stock markets have done a lot better than those in the advanced economies. Not so much a crisis, when you look at those numbers; more a pretty stellar year.

So is 2015 the year it all unravels? The now-traditional end-of-year prediction calls for a steep rise in U.S. bond yields. If that happened, then emerging-market economies with growing current-account deficits and a correspondingly heavy dependence on imported capital might struggle. But bear in mind two offsetting factors.

First, some of the economies seen as most at risk in this scenario -- including India and Indonesia -- are big energy importers and will benefit from cheaper oil.

Second, advanced-economy central banks have limited latitude -- and in some cases, none -- to tighten monetary policy and raise long-term yields.

In Japan and the euro area, further easing seems likelier than any tightening of monetary conditions.

In Japan and the euro area, further easing seems likelier than any tightening of monetary conditions. The U.S. has halted its quantitative easing program but will be in no hurry to advance its schedule for monetary tightening. There's little prospect yet that the Federal Reserve will put the bonds it has bought back into the market. And it won't see higher global bond yields as serving U.S. interests. U.S. exporters, after all, need customers.

It's enough to make you think the crisis may be postponed yet again.

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Thu, 04 Dec 2014 13:32:56 +0000
<![CDATA[Aging and the governance of the healthcare system in Japan]]> http://www.bruegel.org/publications/publication-detail/publication/860-aging-and-the-governance-of-the-healthcare-system-in-japan/ publ860

Japan is the most rapidly aging country in the world. This is evidence that the social security system, which consists of the pension system, healthcare system and other programmes, has been working well.

The population is shrinking because of a falling birth rate. It is expected that the population will fall from 128 million in 2010 to 87 million in 2060. During this period, the ratio of people aged 65 or over will rise from 23 percent to 39.9 percent. Japan’s age dependency ratio was 62 in 2013, the highest among advanced nations. It is expected to rise sharply to 94 in 2050 (see Figure 1 on page 4).

A total reform of the Japanese social security system, therefore, is inevitable. From the point of view of fiscal reconstruction, reform of the healthcare system is the most important issue. The biggest problem in the healthcare system is that both the funding system and the care-delivery system are extremely fragmented. The government is planning its reform of the healthcare system based on the principle of integration. Other advanced economies could learn from the Japanese experience.

Aging and the governance of the healthcare system in Japan (English)
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