<![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Tue, 26 May 2015 03:51:12 +0100 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[Corruptionomics in Italy]]> http://www.bruegel.org/nc/blog/detail/article/1634-corruptionomics-in-italy/ blog1634

In line with its National Reform Programme for the period 2015-16, Matteo Renzi’s government obtained parliament’s approval on a new anti-corruption law on May 21. We document the sheer size of corruption in Italy and argue that tackling it is not only a matter of fairness, but also crucial to boost the country’s potential output after three years of recession and almost two decades of stagnation. Experience from past success cases suggests that only forceful and comprehensive actions will succeed in bringing corruption under control.

The problem of corruption[1] in Italy is real and large. Transparency International’s Corruption Perception Index, the most widely used indicator of corruption, shows how Italy occupies the last place in Europe and 69th in the world, on par with Romania, Bulgaria, and Greece. This picture is confirmed by other organisations. The World Bank’s indicator for Control of Corruption ranks Italy 95th out of 215 countries, again neck and neck with Greece, Romania, and Bulgaria. The WEF ranks Italy 102nd out of 144 countries on indicators related to ethics and corruption.

The economic consequences of corruption can be dissected in two classes: static and dynamic. Statically, corruption leads to the creation of deadweight losses, as it drives prices above their marginal cost of production. This implies a loss for both the public (e.g. in the form of investment projects being more expensive) and the private sector (e.g. in a bureaucratic procedure costing more to execute). The Italian Court of Auditors estimates these direct costs of corruption to be in the order of magnitude of €60bn per year, equivalent to roughly 4% of the country’s GDP.

However, dynamically, corruption also distorts economic incentives and, in turn, weighs on potential output. The literature has identified several channels through which corruption affects a country’s medium- and long-term growth potential. The most relevant ones for an advanced economy like Italy are:

1. Domestic investment: Corruption not only reduces investment profitability, but also generates uncertainty in the returns to investment. This in turn will affect a country’s total factor productivity and potential output. Empirically, Mauro (1996), Dreher and Herzfeld (2005), Pellegrini and Gerlach (2004), only to mention a few, test this channel and all find a statistically significant negative effect of corruption (however measured) on investment.

2. Foreign Direct Investment: for the same reasons mentioned in point 1, corruption also directly reduces inward FDI, as argued by OECD (2013a). This is particularly problematic as the latter is associated with the international transfer of technology and management know-how, and hence the rate of technical progress – all crucial contributors to long-term growth.

3. Competition: Corruption can weaken antitrust enforcement, create barriers to new entry, or generate other barriers that preserve the privileges of established firms, as documented by OECD (2010). Weaker competition will affect productivity growth and innovation, as spelled out in Mariniello et al (2015).

4. Entrepreneurship: As rewards from entrepreneurial activity shrink, potential entrepreneurial talents might be diverted to alternative carriers in rent-seeking activities, as argued by Murphy et al (1999). The result will be less entrepreneurs, less start-ups, less innovation, and ultimately, lower growth. The validity of this channel in developed economies was recently tested and confirmed by Avnimelech et al (2011) by using a unique LinkedIn-based dataset.

5. Quality of government expenditure: Corruption will impact the level and composition of government expenditure. Firstly, it will increase the cost of goods and services purchased by the public sector, reducing the funds available for productive government use. Secondly, it will affect the composition of expenditure, as resources will be diverted to headings where corruption can be more easily concealed (see IMF, 1998).

Figure 1. Transmission channels of corruption on potential output


Source: Bruegel

And indeed the symptoms summarised in Figure 1 are all there. Although these might be individually due also to other factors, their joint reading seems to suggest that corruption might be weighing on long-term growth precisely through the channels identified by the literature.

Figure 2. Share of affirmative answers in a 2014 Eurobarometer Survey

Source: Special Eurobarometer 397

In terms of competition, 90% of Eurobarometer survey respondents agreed that corruption is part of the business culture in Italy: the highest value in the EU28 (see Figure 2 above[2]). Similarly, and perhaps more worryingly, 75% believe the only way to succeed in business is to have political connection: the second highest value in the EU28, after Cyprus. This is perhaps unsurprisingly paired with one of the lowest (and declining, even pre-crisis) shares of start-ups among OECD EU economies, as displayed in Figure 3 below.

Figure 3. Fraction of start-ups (less than 3 year old) among all firms


Source: C. Criscuolo, P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers no. 14

Gross fixed capital formation is close to a 20-year low[3]. The stock of FDI inflows was around 20% of GDP in 2013, the smallest figure in the OECD EU after Greece (11%)[4].

Regarding the quality and composition of Italy’s government expenditure, I will only report one striking number: for large public works alone, the Italian Court of Auditors estimates corruption (including indirect losses) to amount to as much as 40% of total public procurement value.

It must be acknowledged that a niche (largely model-based) literature suggests that corruption might be beneficial to growth in so far as it allows to bypass overburdening government regulation (e.g. Leff, 1964). However, this is not of great relevance to the Italian case as these studies were focused on developing and least developed countries, where institutional quality is extremely poor. Furthermore, the empirical literature is quite unanimous in acknowledging a strong and negative relationship between long-term growth and corruption (for a review of the empirical literature, see Campos and Dimova, 2010).

Over the past few years, a wave of corruption scandals has pushed successive Italian governments to take policy action. In November 2012, Mario Monti passed a large anticorruption law, aiming at preventing and prosecuting corruption in the public administration. Renzi’s government has largely been pushing for a toughening of those provisions. However, past success cases suggest that more forceful action will be needed if corruption is to be significantly curtailed.

Seeking to reduce corruption mainly by punishing corruptors and corrupted, without changing the institutional arrangements that made it possible for corruption to emerge, is unlikely to prove successful (OECD, 2013b). Past cases like Singapore[5] and Hong Kong show how the key words of an effective and radical anticorruption campaign should be: i) simplification, ii) transparency, and iii) clear accountability[6].

Extrapolating these principles to an Italian context could mean, for example, adopting a wide-ranging Freedom of Information Act, regulating lobbyism[7], restructuring public examinations with the aim of improving bureaucratic quality, furthering the use of job rotations within the public sector, abridging government formalities and paperwork[8], privatising public utility companies or, at least, reducing their monopoly power. To codify and ingrain these key principles in all levels of government activity, “persistent political will and vigilance, including at the highest level of government” will be needed (OECD, 2013a).

Tackling corruption in Italy is not only a matter of fairness, at a time when citizens are being asked to tighten their belt, but is likely to have major repercussions on the country’s private and public investment, FDI, competition, innovation, and ultimately, long-term growth. All of which, Italy is in dire need of.

[1] Throughout this contribution, corruption is defined in the broadest of senses as “the abuse of entrusted power for private gain”, in line with Transparency International.

[2] Spain is also depicted, as a country that is currently undergoing a wave of corruption scandals.

[3] See “Boost for Italian economy as investment climate starts to warm” – Financial Times, 8 April 2015.

[4] See “Recent trends in FDI activity in Europe” – Deutsche Bank, 21 August 2014.

[5] “The origins of the country’s persistently superior performance in corruption control can be traced to the radical reforms designed and implemented by the People’s Action Party (PAP) during the period 1959/60, which transformed the country from one plagued by corruption to one of the ‘cleanest’ in the world” (OECD, 2013a).

[6] Bianco (2012) shows how factors particularly associated with corruption are, inter alia, excessive bureaucratic burdens and low quality of the bureaucracy.

[7] Without a specific lobbying regulation, nor an established registrar of lobbyists, Italy ranks as one of the worst countries in Europe in terms of transparency of lobbying, and is hence at high risk of suffering from an undue influence of the private sector on public decision-making (see Transparency International, 2015).

[8] For example, the World Bank’s 2015 Doing Business survey shows how dealing with construction permits (for a warehouse) takes on average 233 days (against 150 days in the OECD), putting Italy on the 116th place in the world. 

Fri, 22 May 2015 09:29:09 +0100
<![CDATA[“Dura Lex, sed Lex”(?)]]> http://www.bruegel.org/nc/blog/detail/article/1633-dura-lex-sed-lex/ blog1633

On the 30th of April, the Italian Constitutional Court issued a decision on the pension reform introduced by the Monti government in 2011. The decision has potentially important implications for public finances, and sends also longer-reaching philosophical messages.

The Italian Constitutional Court said that one article in the pension reform law approved by the Monti government at the height of the crisis, is illegitimate. This article introduced a temporary block for 2012 and 2013 to pension indexation, for all entitlements above three times the minimum (i.e. all pensions about 1450 euro and above, in gross terms). The Court argued that this provision, however temporary, violates the principles of equality and proportionality.

the Government could potentially be bound to refund 4.5 million of pensioners

The ruling is retroactive to 2012, meaning that the Government could potentially be bound to refund 4.5 million of pensioners for the lost indexation in 2012-2013. Comments by PM Renzi and Finance Minister Padoan suggest that the total cost, if the reform were to be completely scrapped, would be in the order of 18bn. This would take Italy’s 2015 deficit from the 2.6% of GDP forecasted by the government to 3.6% of GDP.

But the effective impact of this decision is more complex, as it stretches out into the future. Once the reimbursement for 2012-2013 will be paid, the basis on which future indexation will be computed will also be higher than forecasted in recent government budget documents. There seems to be at the moment no publicly available details of how much this would cost, but put in the context of the very high pension expenditures that Italy already faces, it can hardly be good news.

Figure 1a and 1b


Of the 4.4 million of pensioners, only 3.7 million will be refunded

This being the background, the government announced two days ago the strategy for the reimbursements. Of the 4.4 million of pensioners interested by the Constitutional Court’s decision, only 3.7 million will be refunded, i.e. all those with pensions above the minimum but below 3,200 euro per month. A previous ruling by the Court had deemed  legitimate a temporary suspension of indexation imposed in 2008 for pension entitlements above 8 times the minimum (around 4000 euro), suggesting that, in this case too, it would be acceptable not to reimburse pensioners above above this threshold.

The Government’s strategy could still face challenges in court, but these will become clearer in the coming months. On the fiscal side, however, this decision already puts the government in a very delicate position. The reimbursements will in fact erode the “fiscal safety buffer” of around 2bn that the Government had succeeded in building up over the last months. This will be used to pay off indexation without running new deficit, thus winning a provisional support from the European Commission.

But the progress will no doubt be watched very closely, in Brussels. The IMF also warned in its concluding statement of 2015 Article IV mission to Italy, that “the re‐indexation of pensions in accordance with the Constitutional Court ruling should not modify the fiscal stance both this year and going forward. The safeguard clause should be fully offset by spending cuts—to avoid damaging tax hikes while building fiscal buffers.”

The Italian budget law foresees in fact a VAT hike of 2% as well as an increase in fuel taxes that can be triggered automatically to make sure the country achieves a structural budget balance by 2017 (the so-called “safety clause”). This tax hike would work against the Government’s recent limited expansions, at a time when the recovery in Italy is still fragile. In order to avoid it, the 2015 budget already foresaw 10 bn in expenditure cuts, which should reduce total expenditures from 51.1% of GDP in 2014 to 50.5% in 2015. The decision by the Constitutional Court, and the related deployment of the fiscal safety buffer, put an even higher pressure on the government to deliver on expenditure cuts.

the temporary de-indexation of pensions is against the principles of “equality” and “proportionality”

But beyond the budget, this decision send a more general, perhaps more important and controversial message. The Constitutional Court says in fact that the temporary de-indexation of pensions, even in time of dire economic crisis, is against the principles of “equality” and “proportionality”. Pensioners are certainly among those who were asked to bear a very significant part of the adjustments made during the crisis. This is true across countries in the “South” of the euro area, and it is far from who writes to deny this fact. But it may nevertheless be useful to put things into a broader perspective.

Italy is a country where the gap between young and elderly cohorts is wide and long-lived, but it has worsened during the crisis, with significant impact on the intergenerational redistribution. Pension expenditure in Italy is the second highest in Europe (figure 1b), standing at 16.5% of GDP even in 2012 (one of the years when this reform was in place). Perhaps more importantly, the replacement rate is top third, if we exclude Luxembourg that is clearly an outlier (figure 1a).

The percentage of elderly (65+) people at risk of poverty and social exclusion in Italy is around 22.6%. It is high, among the highest across the euro area over the same age range. For the younger cohorts the figure reaches 36.3% for the 18-24 years old, also among the highest in the euro area. The percentage at risk of poverty and social exclusion has increased by 5.4 percentage points among 18-24 years olds and by 5.3 percentage points among the 25-49 years old. It has decreased by 2.7 percentage points among the elderly.

This is by no means an special feature of Italy. Darvas et al. (2014) find that there has been during the crisis an increasing generational divide in Europe, as younger generations have suffered more than the elderly. The severe material deprivation rate has increased from 10.1 % in 2007 to 11.7 % in 2012 for children, while the same rate has declined from 8.6 % in 2007 to 7.5 % in 2012 for the elderly; 11.1 % of children lived in households in which their parents no longer work in 2012.

Source: EUROSTAT and own calculations

Youth (< 25 years) unemployment in Italy stood at 40% at the end of 2014

Figure 3 needs however to be put in the broader context of a country still suffering from a deep economic crisis that has had (and is still having) very serious consequences on the employment perspectives for young people. Youth (< 25 years) unemployment in Italy stood at 40% at the end of 2014, the third-highest in the euro area and the fourth-highest in the EU (figure 3a). Italy is one of the very few countries where youth unemployment has still increased (rather than declined) between 2013 and 2014, and the most recently available data from the National Institute of Statistics put the figure at yet a higher 43% in March 2015, signalling that the worrying trend is still far from stopping, not to mention reverting.

Figure 3a and b



What is even more worrying, as already discussed previously, is that this very high youth unemployment is also a predominantly long-term phenomenon. In 2014, 60% of young unemployed had been unemployed for more than a year, against less than 40% at the EU level. This hinges heavily on the probability of future re-employment of these young workers, whose skills keep deteriorating as time goes by, but it will also have longer-term effects. In a pension system that shifted from Defined Benefit to Defined Contribution in 1995, a 40% youth unemployment rate maintained for a prolonged period of time also implies that a significant share of Italians who are young today will be entitled to very low pensions tomorrow.

So now, let’s put things in perspective. The Italian Constitutional Court decided that - in a country with the second highest pension expenditure and the third highest replacement rate in Europe - a temporary de-indexation of pension entitlements above three times the minimum violates the principles of “equality and proportionality”. As a consequence, the government will now deploy 2 bn in reimbursements for 3.7 million of pensioners, inversely proportional to the level of pensions. For the single pensioners, annual reimbursements for 2015 will thus range between 280 euro and 750 euro, which translates into 23 to 62 euro per month. Someone will argue that this can stimulate more consumption on the side of the beneficiaries. Possibly, it will. At the same time, however, it certainly wipes away the fiscal buffer that had been accumulated and it increases the risk of a VAT hike this year, which would adversely hit consumption across the board (not only for the restricted group of beneficiaries) and perhaps jeopardise the still weak economic recovery.

All this, in the context of a country that at present records a 43% rate of youth unemployment - 60% of which is long term and risks becoming structural. The decision also sends the message that budget constraints may be rendered de facto irrelevant, which might raise interesting questions about the solidity of article 81, enshrining the European budget balance rule in the Italian Constitution. And it also seriously question the legitimacy for a government to act resolutely on its budget, even in case of dire national emergency as it was in 2011, when not only italy but also the survival of the euro was at risk. The Court’s argument may be bullet-proof from a legal point of view - as the Romans used to say: “the law is harsh, yet it is the law”. But to the eyes of a humble economist, this looks ill-timed, hardly “proportional”, and conveying a peculiar interpretation of the term “equality”.



Fri, 22 May 2015 09:07:26 +0100
<![CDATA[European leaders want the UK to stay, but are best friends forever?]]> http://www.bruegel.org/nc/blog/detail/article/1632-european-leaders-want-the-uk-to-stay-but-are-best-friends-forever/ blog1632

The Conservative Party’s election victory leaves little doubt as to the holding of a referendum on continued British EU membership in 2016 or 2017. While the official content of British demands remains vague at the moment, the reaction of Britain’s partners to the prospect of negotiations is made public every day.

German finance minister Wolfgang Schäuble has just declared that he is ready to open talks with the UK about demands to rewrite the rules of Britain’s EU membership. Although more cautious in other public appearances, German chancellor Angela Merkel had made similar comments last year. By contrast, soon after Cameron’s reelection French president François Hollande reacted curtly to the British plans. He stated “it is legitimate to take into account the aspirations of the British, but there are rules in Europe, and among these rules there is dialogue.”

This tableau is reminiscent of the previous Brexit attempt of 1974-1975. Back then, British prime minister Harold Wilson wanted to renegotiate the UK’s terms of entry to the then European Economic Community (EEC), which the UK had joined about a year before in January 1973. The British political landscape was virtually the opposite of what it is today – a Conservative party in favour of the Common Market and a Labour party split on the issue. However, the continental European picture is bears some resemblance to what happened then.

French president Valéry Giscard d’Estaing was strongly sceptical of British demands. In particular, he rejected the idea that the EEC budget should be reformed to suit the needs of the British government. By contrast, West German chancellor Helmut Schmidt was much more open to Wilson’s requests. Through culture and strategic thinking, Schmidt was closer to Britain. Often described as an ‘Atlanticist’, and famously voting against the Treaty of Rome in the Bundestag (partly in fear that it would isolate Britain!), the appointment of Schmidt at the German chancellery in May 1974 was excellent news for the prospects of the British renegotiations.

A little less than 40 years later, an interview with the former German chancellor in the press came as a relative surprise. “Fundamentally, I think de Gaulle was right [to veto British entry in the 1960s],” declared Helmut Schmidt in 2010. “I used to believe in British common sense and state rationale... I was brought up in a very Anglophile way. I was a great supporter of Edward Heath who brought Britain into the European community. But then we had Harold Wilson and Margaret Thatcher, who didn't always behave so sensibly.”

How can we make sense of such a change of mind? The turning point in Schmidt’s perception of Britain arguably occurred during the renegotiations of 1974-1975. Schmidt’s support for British membership contrasted with Wilson’s ambiguity in his public appearances. While the German chancellor would have liked a stronger British commitment to EEC membership, Wilson maintained an ambiguous line, chiefly for domestic political purposes. Schmidt did not understand why the technical details of the renegotiations were being transformed into proxy for the much deeper question of British membership of the European Community. In addition, even though Schmidt was critical of European integration before and during his time in office, he was always convinced of the need to organise the interdependence of European economies. He did believe in more, not less, integration – something that British officials failed to understand back then.

A negotiation that started off on a promising basis ended up in a much more difficult atmosphere. Most British demands in 1974-1975 were not met; those that were, only in a cosmetic way. What seemed to be an ideal situation at the beginning – having an ally in the German government, the most economically powerful member state and greatest contributor to the EEC budget – failed to lead to a successful deal for the British government. Worse, antagonising the German chancellor revived the Franco-German axis and contributed to British isolation in Europe. Schmidt refused to make concessions during the last stages of the renegotiations in early 1975, and the Franco-German duo took centre stage in European politics during the remaining years of the Labour government.

Schäuble’s comment should therefore sound a note of caution for British officials. A disproportionate disconnect between the high stakes of the discussions – yes or no to the EU – and the technicality of the negotiations’ process can easily turn someone who appears a best friend at the start into a staunch opponent at more crucial stages. Instead of finding comforting thoughts in Schäuble’s remark, the British government should be wary that in a few years the German finance minister could end up agreeing with what de Gaulle said in the 1960s: that there is a fundamental incompatibility between Britain and Europe.

This post is a snapshot of work in progress on the policy implications for today of the 1975 referendum.

Thu, 21 May 2015 17:09:34 +0100
<![CDATA[How can development banks best support growth in Central, Eastern and South Eastern Europe?]]> http://www.bruegel.org/nc/events/event-detail/event/532-how-can-development-banks-best-support-growth-in-central-eastern-and-south-eastern-europe/ even532

Bruegel is pleased to welcome the vice-presidents of the European Investment Bank, the European Bank for Reconstruction and Development and the World Bank, together with guests from the Vienna Institute for International Economic Studies for a discussion of the three development banks' recent Joint IFIs Action Plan (JIAP) in Central, Eastern and South Eastern Europe (CESEE).

As the financial crisis became a longer recession, it was soon clear that CESEE was especially vulnerable. More than a decade of convergence with the richer economies to the west was at risk, as sluggish export markets and frozen credit lines suppressed CESEE's potential for growth. To shore up the economy and lay the ground for a return to sustainable long-term growth, the three international development lenders renewed their efforts to provide loans across the region. They coordinated support for projects such as infrastructure investment, financial market stabilisation and credit guarantees for SMEs.

  • What was the impact of this intervention?
  • How successful was the cooperation between the three institutions?
  • How can the region get back to sustainable, inclusive growth and convergence?

After a presentation by Mark Allen, we will hear from the vice-presidents Philippe Le Houérou, EBRD, Wilhelm Molterer, EIB, and Laura Tuck, World Bank. There will follow comments by Rumen Dobrinsky and Michael Landesmann and finally a frank Q&A with the audience chaired by André Sapir.


  • Chair: André Sapir, senior research fellow, Bruegel
  • Mark Allen, adviser on CESEE matters, European Investment Bank
  • Rumen Dobrinsky, senior research associate, Vienna Institute for International Economic Studies
  • Michael Landesmann, director of research, Vienna Institute for International Economic Studies
  • Philippe Le Houérou, vice-president for policy and partnerships, European Bank for Reconstruction and Development
  • Wilhelm Molterer, vice-president for cohesion, European Investment Bank
  • Laura Tuck, vice-president for the Europe and Central Asia region, World Bank

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Bruxelles
  • Date: 2 June 2015
  • Time: 09.30 - 11.30 (coffee will be served from 09.15)
  • Contact: Bryn Watkins, events assistant, Bruegel

Thu, 21 May 2015 14:01:56 +0100
<![CDATA[Giving Greece a chance]]> http://www.bruegel.org/nc/blog/detail/article/1631-giving-greece-a-chance/ blog1631

Grexit would be a collective political failure

The Greek tragedy must not go on. Europe’s growing frustration with the new Greek government has triggered calls for stopping negotiations and even accepting “Grexit”, Greece’s exit from the euro. We believe that this would be a mistake. Grexit would be a collective political failure. Above all, it would cause a social and economic catastrophe for Greek citizens.

However, keeping Greece in the euro area at the cost of citizens of other countries, without a serious and credible commitment by the Greek government to reform its economy and its institutions, would be a collective political failure as well. It would not only erode further the credibility of Europe’s institutions and its architecture, but as well the roots of European integration, which was based from the beginning on the respect of common rules. The national sovereignty of each member state must be respected. But in a deeply integrated Europe, sovereignty is increasingly shared, rather than national.

Time is running out quickly for the Greek government. It needs to decide now whether to get serious about reforming the country. It continues to have one major advantage, namely a clear mandate for a fresh start for Greece, not relying on the old elites who ruined the country. But it has also one serious challenge: the fact that it won its political mandate based on contradictory promises that it could not fulfil under any circumstances.

Time is running out quickly for the Greek government.

The idea to call for a referendum in Greece should therefore not be regarded as a threat, but as an opportunity.  If Greek voters decide in a referendum to follow through with a serious programme of economic and institutional transformation, the new Greek government would obtain the necessary legitimacy to adjust its agenda. If Greek citizens decide otherwise, they will do so in the full knowledge of the implications, including the possibility of Greece’s exit from the euro.

However, a Greek referendum will not exonerate Europe from its responsibilities. We need to acknowledge that the two support programmes for Greece were a colossal bail-out of private creditors, not least those based in France and Germany, at the expense of European taxpayers. The optimism of the two programmes regarding Greece’s ability to reform and its debt sustainability was deeply flawed. Yet we should also honour our historic responsibility in stabilizing a continent in a peaceful common union. And we should accept that every European country in such a deep crisis, as Greece is in today, deserves solidarity and continued support.

The failure to solve the Greek crisis would have significant costs for Europe. Banking union, financial backstops such as the European Stability Mechanism (ESM), closer cooperation on fiscal policy and other firewalls have reduced the likelihood of contagion from Greece to other euro area countries. However, we should not underestimate the potential of spillovers from a switch in the mind-set of market participants which would no longer consider euro membership as an indefinite, irrevocable commitment.

The combined official exposure of Germany and France to Greece amounts to close to €160 bn

In addition, European taxpayers would pay a high price, as loans to the Greek government could no longer be repaid. The combined official exposure of Germany and France to Greece amounts to close to €160 billion, or around €4350 for a German or French family of four. This has to be weighed against the costs and risks of continued support and a third programme. Above all, Europe may have to bear the geopolitical cost of increased instability at its borders, not to mention their weakened global standing, which is highly dependent on its ability to act jointly, speak with one voice and on the strength and credibility of its common currency, the euro.

Solving the Greek question is ultimately a test of Europe’s ability and willingness to work towards a cooperative, functioning monetary union. It is a test of how robust the new institutions and its architecture are, and how much further we need to move to deepen institutional integration of the euro area. Sooner or later, the lessons of the European crisis must also be reflected through changes of the founding treaties.

As concrete actions, Greece first has to commit credibly to economic reforms in exchange for European solidarity in the form of grants for social emergencies and a possible third programme. These reforms must include the creation of an independent tax agency, a much more ambitious privatization plan, a pension reform to render the system sustainable in the long-run, a quick return to a reasonable fiscal primary surplus, and a reform of goods and services markets in order to introduce competition and ensure price adjustments.

Second, we should rebuild trust in the Greek economy in order to trigger domestic and foreign investment in the country. This should involve a clear signal of the Greek government to cooperate, service its debt, and accelerate the reform path of the country. And it should involve a clear signal by its partners to stand behind Greece, through continued financial and technical help, in support of reforms and a clear commitment by Europeans to do whatever is in their power to keep Greece in the euro. Third, the EU should support the creation of a pilot zone within which companies are subject to much less bureaucracy and clearer rules. Creating Greece’s Shenzhens is a way to experiment with new institutions and triggering further institutional change in a country plagued by weak institutions.

Solving the Greek crisis is the ultimate test how European integration can work

Solving the Greek crisis is the ultimate test how European integration can work and whether Europe will be able to reap the benefits from deeper integration. A referendum about the reform path and euro membership should be considered a last-resort option for Greece. But Greece urgently needs to choose its own destiny. Europe owes Greece solidarity and a perspective to thrive within the euro area. But it needs to be prepared for all possible outcomes, including an undesirable and for all costly Grexit.

Signed by the following members of the Eiffel Group and the Glienicke Group:

Agnes Benassy-Quere, Yves Bertoncini, Jean-Louis Bianco,  Armin von Bogdandy, Henrik Enderlein, Christian Callies, Marcel Fratzscher, Clemens Fuest, Sylvie Goulard, Andre Loesekrug-Pietri, Franz Mayer, Rostane Mehdi, Daniela Schwarzer, Denis Simonneau, Maximilian Steinbeis, Constanze Stelzenmüller, Carole Ulmer, Shahin Valee, Jakob von Weizsäcker, Guntram Wolff.

Wed, 20 May 2015 15:28:34 +0100
<![CDATA[Mind the gap (and its revision)!]]> http://www.bruegel.org/nc/blog/detail/article/1630-mind-the-gap-and-its-revision/ blog1630

In a 2013 post I described the uncertainties in estimating structural budget balances (which should reflect the underlying budget position of the government) and argued that a major source of uncertainty is related to the estimation of output gaps. The output gap shows the difference between actual output and potential output, where the latter should represent the output that could be produced if all resources were employed at their long-term sustainable rate.

In this post I present an analysis of the revisions made to output gap estimates between 2001 and 2015 by the European Commission and the IMF.

One can think of various ways to measure these revisions. Due to the importance of structural budget balances in real-time policymaking (e.g. the fiscal adjustment needed in 2015 is based on the structural balance estimate for 2014 and is assessed by considering the expected structural balance in 2015), I focus on the previous year and current year output gap estimates and their revisions a year later. 

The following example helps to illustrate the three revision indicators I consider:

Table 1: An example: European Commission May 2012 and May 2013 estimates for the German output gap in 2011-12 (% of potential GDP)

In May 2012, the Commission estimated that Germany was 0.02% above its potential output level in 2011. A year later in May 2013 the estimate for the 2011 output gap was revised to 0.69% of potential GDP. The difference between the May 2013 and the May 2012 estimates for 2011 is therefore 0.67% of potential GDP, and this is what I call “revision of previous year output gap a year later”. My indicator “revision of the current year output gap a year later” is the difference between the May 2013 and the May 2012 estimates for 2012, which is 0.82% of potential GDP. In the example above, both the previous year (2011) and the current year (2012) output gap was revised upwards in the 2013 estimate, so the revision in the change in the output gap from 2011 to 2012 is smaller, 0.15% of potential GDP.

Figure 1 shows the revisions of EC estimates. Since revisions can be both positive and negative, I calculate the absolute value of revisions for each country and then calculate country-averages for each year.

Clearly, the estimates made by the Commission in May 2008 for 2007 (Panel A) and 2008 (Panel B) were hugely revised by May 2009, and there were also major revisions in the forecast change in the output gap around this year (Panel C). However, leaving aside the extraordinary years around 2008, there were still major revisions in both earlier and later years, even for core EU countries. All three revision indicators are typically around 0.5-1.0% of potential output, which is quite large in my view.

Figure 1: Three measures of European Commission output gap estimate revisions (% of potential GDP, absolute value)

Source: author’s calculation using the 2001-2015 editions of the Spring economic forecast of the European Commission. Note: unweighted country averages of the absolute value of revisions (as % of potential GDP) are reported. Old EU15 Core: Austria, Belgium, Denmark, France, Finland, Germany, Luxembourg, Netherlands, Sweden and the United Kingdom; Old EU15 Periphery: Greece, Ireland, Italy, Portugal and Spain; New EU10: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Bulgaria, Romania and Croatia are not included, because EC data is not available for the full period we consider.

The magnitude of IMF output gap estimate revisions are broadly similar in the case of those twelve EU countries for which both IMF and EC estimates are available for each year in 2001-2015 (Figure 2). Moreover, the revisions in the IMF estimates for non-EU advanced countries (Australia, Canada, Japan, New Zealand, Norway and the United States) were also typically in the 0.5-1.0% range.

Figure 2: Comparison of European Commission and the IMF output gap estimate revisions for 12 EU countries (% of potential GDP, absolute value)

Source: author’s calculation using different the editions of the Spring economic forecast of the European Commission and the April World Economic Outlook of the IMF. Note: the April WEOs are typically published 3 or 4 weeks earlier than the May EC forecasts and therefore have a slight informational disadvantage. Unweighted country averages are shown for twelve countries: Austria, Belgium, France, Finland, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the United Kingdom (among the first 15 EU members, IMF data is not available for the full period for Denmark, Greece and Luxembourg).

Since I have a new potential output model in the making, which considers information from the current account balance (see the last paragraph of my 2013 post), I also checked if the size of EU/IMF output gap revisions is related to the variability of the current account balance. Figure 3 shows quite a strong association for EC estimates. For example, Austria (denoted by AT on the chart) had the smallest volatility of current account balance in 2004-2013 and the revision of EC output gap estimates was also the smallest in this period. The largest volatility of the current account balance and the largest revision of the EC output gap estimate were observed in Latvia (denoted by LV). The same association between the volatility of current account balance and revision of output gap estimate is also evident concerning IMF output gap estimate revisions.

This finding underlines that the methodologies of the EU and IMF are lacking information, which would be useful in estimating potential output at least for those countries that often have more variable current account balances. (As regards the publication of our model: we have progressed recently and hope to publish a working paper in a few weeks.)

Figure 3: Cross-country correlation between the variability of current account balance and the revisions of the previous year European Commission output gap estimates a year later, 2004-2013

Note: The correlation coefficient is 0.75 for the 25 EU countries considered, the same 0.75 for the sub-group of the 10 newer member states, while it is 0.52 for the EU15 countries (EU members before 2004). The correlation coefficients are similar in the cases of my two other indicators of output gap revision, as well as when considering IMF output gap revisions.

Let me note that these revision measures depend on:

· Methodology:  Various statistical methods are used, which essentially assume the smooth continuation of previous trends. When previous trends do not change much (e.g. in the case of Austria), revisions are small. But when previous trends change substantially, revisions became large, as in the case of Latvia. As I showed in my 2013 post, such methods can lead to quite implausible estimates for the NAWRU (non-accelerating wage rate of unemployment), which were revised very substantially when the trend in the unemployment rate changed. TFP (total factor productivity) is smoothed with another statistical method, which is also a source of uncertainty, especially if forecasts for the next few years turn out to be incorrect (see below).

· Forecasts. Forecasts obviously matter in the revision of current year estimates. For example, the estimate for 2015 made in May 2015 depends on the forecasts for 2015. Therefore, revisions of current year estimates may signal that the forecasts for that year were incorrect. This obvious dependence on forecasts is less important for the revision of previous year output gap estimates. For example, in May 2015 most of the 2014 data are available and therefore the forecast component in the 2014 actual GDP data is smaller. However, forecasts also matter due to the methodology. Potential output is calculated for a couple of future years too, and since the methodology uses various data smoothing techniques, longer term forecasts also matter even for the revision of previous year output gap estimates. The use of forecasts partly aims at reducing the end-point uncertainty of the estimates, but if forecasts actually turn out to be highly incorrect, this will have an impact on the estimates for the past too. For example, if the current May 2015 forecasts for 2015-16 and the additional projections for 2017-2024 prove to be wrong, the output gap estimates for 2014 (and to a lesser extent even for earlier years) will be revised too. Unfortunately, large forecast errors were more the rule than the exception in the case of EU countries in recent years.

· Data revisions. GDP data and certain other data, which are used in the EU’s production function methodology, like the stock of physical capital, various demographic variables (which are used to estimate the potential labour input), may be revised from time to time. Such data revisions certainly impact the estimated level of potential output, and may also impact (though likely to a lesser extent) the output gap estimate.

· Changes to the methodology. In this post we report the revisions of EC and IMF output gap estimates made in each consecutive years between 2001 and 2015. During this period, there were certain changes to the methodology. Therefore, the revisions in the output gap estimates reflect changes in the methodology too in those years when there was such a change (note that we compare the estimate made between two consecutive years, so only the changes implemented in between matter). However, these revisions, at least in the case of the EU methodology, impacted only certain technical features, like the 2010 change in the filter used to smooth TFP or the 2014 change in the NAWRU model. None of the methodology reviews changed the basic characteristics of the methodology and small technical changes will likely be implemented in the future too. Thereby, past revisions may be indicative for future revisions. (See the latest description of the EU methodology in Havik et al., 2014).

Certainly, revision of an estimate when new data becomes available is quite natural. Yet there are three reasons to worry about output gap estimate revisions:

1. My finding that size of EC and IMF output gap revisions are correlated with the variability of the current account balance suggests that important information is not utilised in the EC and IMF output gap estimates;

2. The revisions in the previous year and current year estimates one year later in ‘normal’ years are typically around 0.5-1.0% of GDP on average across countries, which is large in my view;

3. Output gap estimates are used for real-time policymaking in Europe, because fiscal adjustment requirements are expressed in terms of the structural budget balance estimate, which is in turn depend on the previous year and current year output gap estimates. Therefore, the imprecision in output gap estimates can translate into fiscal policy recommendations.

In a follow-up blog post I will analyse the revisions in structural balance estimates by the European Commission and the IMF.

Wed, 20 May 2015 09:17:59 +0100
<![CDATA[China pushing 'build now, pay later' model to emerging world]]> http://www.bruegel.org/nc/blog/detail/article/1629-china-pushing-build-now-pay-later-model-to-emerging-world/ blog1629

During the last couple of years, China has pushed a number of grandiose proposals that could make it the world's largest lender for development projects.

the AIIB aims to become the first global institution headquartered in China

The most recent is the Asian Infrastructure Investment Bank, which aims to become the first global institution headquartered in China. China will be the largest contributor to an AIIB that will be capitalized at no less than $100 billion. Two other initiatives are a $40 billion fund to revive economic relations along the old Silk Road and the BRICS Development Bank, which has another $100 billion in capital and is also headquartered in China.

In all, we are looking at a potential pool of capital comparable to that of the World Bank.

While much of the attention has centered on China's motives, as well as how the initiatives would challenge the status quo, more interesting questions are whether emerging economies will benefit and what kind of construction-led development model is to come with them.

Plenty of countries seem happy to sign up as recipients.

For example, China just unveiled $45 billion in lending to Pakistan, announced during President Xi Jinping's stop-over in Islamabad ahead of the Bandung Conference on Asia-Africa relations. The package, which constitutes China's largest single overseas investment deal, will go toward the development of the China-Pakistan Economic Corridor -- which aims to grant China direct access to the Indian Ocean and will involve the construction of large-scale infrastructure projects in the region. Details have not been fully disclosed, but the money is expected to be split between energy and transportation projects.

President Xi has also just agreed to lend billions of dollars to Russia and Belarus for infrastructure projects.

Openness to Chinese lending is understandable, given that developing economies have large infrastructure investment needs. The Asia Development Bank has estimated that Asia will need $8.3 trillion beyond existing financing capabilities between 2010 and 2020.

In this context, Chinese loans may be an important lifeline for countries that have not managed to secure access to financing from the ADB or World Bank.

China's terms of lending are believed to be broadly in line with market interest rates, and the government does care about getting a decent return on its loans. Under guidelines set down by the Organization for Economic Cooperation and Development, concessional lending means a five-year grace period on payments and near-zero interest rates. Chinese loans do not fall into this category.

China does offer more flexibility than other lenders

But China does offer more flexibility than other lenders. In some cases, it accepts commodities rather than cash as repayment. This may be more attractive to emerging economies. Geopolitical considerations may also lead China to accept more lenient conditions if circumstances warrant it.

But while Chinese terms may be more lenient, borrowers should also be aware of potential pitfalls.

There is often a lack of transparency surrounding the financial conditions of Chinese loans, which means recipient countries could find it difficult to judge whether they've been given a good deal.

Second, and more importantly, there are no guidelines setting quality standards of infrastructure projects financed by the AIIB or the other two initiatives.

We can look at the experiences of countries that have borrowed from China in the past to see how things may evolve.

Sri Lanka is perhaps the most paradigmatic example in Asia, as is Venezuela in Latin America and Angola in Africa. Over $5 billion in infrastructure projects were funded by China -- often built by Chinese corporations -- between 2009 and 2014. There is now plenty of basic infrastructure in place that has benefited Sri Lanka. But projects were often unsolicited, few were open to competitive bidding and some turned out to be wasteful vanity landmarks.

Bribes were paid. As a result, the new government in Sri Lanka is reassessing deals signed between former President Mahinda Rajapaksa and China.

It would be unfair to extrapolate Sri Lanka's case to the rest of emerging Asia, but it seems clear that the new development banks will need to establish adequate processes to justify projects and to make sure infrastructure is properly built.

It goes without saying that the world in which only Bretton Woods institutions governed emerging economy development was not perfect: There has been too much red-tape and loads of conditions that sometimes might have been used to keep projects in the hands of these institutions' major shareholders.

All in all, and notwithstanding the previous caveats, if China-led development banks manage to bring more competition to the world of development assistance, they may not be a bad thing at all.

Emerging countries will have more financing options

Emerging countries will have more financing options, but they should watch out for hidden costs and learn from China's own pragmatism: Put economics at the forefront when choosing whether to accept loans, rather than just sitting there and waiting to be handed a check.

Tue, 19 May 2015 15:43:18 +0100
<![CDATA[Are European yollies more hampered by financial barriers than their US counterparts?]]> http://www.bruegel.org/nc/blog/detail/article/1628-are-european-yollies-more-hampered-by-financial-barriers-than-their-us-counterparts/ blog1628

 Young innovative firms in particular are more sensitive to external finance barriers

The persistent deficiency in private R&D spending in Europe compared to the United States can be almost entirely accounted for by the EU having fewer young firms, in the mould of Google or Amazon among its leading innovators, as previous Bruegel research has shown (Veugelers and Cincera, 2010). Even more importantly, these yollies (young leading innovators) that Europe does have are less R&D intensive. Why do European yollies invest less in R&D than their US counterparts? An often-discussed barrier to innovation, especially in Europe, is the difficulty of accessing external funding. Young innovative firms in particular are more sensitive to external finance barriers because they more likely to lack sufficient internal funds for their investment projects (Hall, 2005). Furthermore, younger firms might find it more difficult to transact with external financiers, because they do not have established reputations and might be working on more risky innovative projects compared to established firms.

In Cincera, Ravet and Veugelers (2015), we further investigated this financial constraint hypothesis for our set of world-leading innovators to see if it could explain the lower inclination of EU yollies to invest in R&D compared to the US. We use a commonly used methodology in the empirical literature to assess financing constraints for investment decisions, which is to include in a standard model explaining investment decisions the availability of internal finance (usually cash flow) (Fazzari et al, 1988). The idea behind the methodology is to measure the importance of retained earnings in the R&D investment decision. This approach allows us to test the provision of additional cash to a company, and observe whether they use it for investment or not (Hall and Lerner, 2010). If they pass it to shareholders, it means either there is no good investment opportunity, or the cost of capital has not fallen. If however, they use the additional amount of cash for investment, this signals that the firm had access to unexploited investment opportunities for which external finance was too costly. A higher sensitivity of R&D investments to cash flow movements can thus be interpreted as evidence of tighter financial constraints. 

We applied this test to our set of world-leading R&D investors. We used the successive editions of the EU industrial R&D investment scoreboard (2004-08) assembled by the European Commission Joint Research Centre Institute for Prospective Technological Studies (JRC-IPTS), and matched this data to company account information. According to JRC-IPTS, these scoreboards are representative of more than 85 percent of all R&D carried out in the private sector worldwide.  Employing state of the art econometric techniques, which allow adjustments to be made for other influencing factors that might contaminate the interpretation of the results, we analyse how sensitive R&D investments are to cashflow movements, suggestive of financial constraints.

R&D investments made by EU leading innovators are more sensitive to cashflow movements

Our results confirm that the R&D investments made by EU leading innovators are more sensitive to cashflow movements than their US counterparts, particularly in high-tech sectors. Furthermore, when looking at the age structure of leading innovators, we find that R&D investments  by yollies[1] are significantly more sensitive to the availability of internal finance, compared to their longer-established counterparts, which suggests that yollies face greater financing constraints when investing in R&D. This higher sensitivity of young firms holds only for EU yollies. US yollies seem to face no significantly different cash sensitivity compared to longer-established US firms. The long-term coefficient associated with the cash-flow variables is about .099 for EU yollies against .03 for US yollies. Particularly in high-tech sectors, for which R&D projects are more likely to be critical, EU yollies are significantly more sensitive to cashflow movements for their R&D investments than US yollies.

This greater cashflow sensitivity of R&D investments, which suggests financial constraints, could thus go a long way to explain the lower presence and the lower R&D investment intensity of young world-leading innovators in Europe compared to the US, in particular in high-tech sectors, which could in turn explain the EU’s persistent R&D deficit.

This evidence, when corroborated by further analysis, has significant implications for the EU's innovation policy agenda. In order for Europe to improve its business R&D performance, this evidence suggests that policies need to address the financial constraints on risky R&D investments faced by leading innovators in Europe, especially by yollies and in high-tech sectors. To improve Europe’s innovative capacity,  European policymakers should look beyond reducing financial barriers for innovative start-ups, by providing small amounts of public funding to start-ups. They should also make it easier to access external finance for the larger risky R&D projects of those companies that are vying for global innovative leadership.


Veugelers, R. and M. Cincera, 2010, Europe’s Missing Yollies, Bruegel Policy Brief 2010/06, Bruegel Brussels

Veugelers, R. and M. Cincera, 2010, Young Leading Innovators and EU’s R&D intensity gap, Bruegel Policy Contribution 2010/09, Bruegel Brussels

Cincera, M, J. Ravet & R. Veugelers, 2015, R&D financing constraints of younger aged leading innovators in the EU and the US,   Economics of Innovation and New Technology,  forthcoming.

Fazzari S.M., R.G. Hubbard and B.C. Petersen (1988). Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity, 1, 141-195.

Hall B.H. and J.Lerner (2010). Financing R&D and Innovation, in B.H. Hall and N. Rosenberg (eds.), the Economics of Innovation, Elsevier Handbook of the Economics of Innovation.

Hall, B.H., (2005) “The Financing of Innovation,” in Shane, S. (ed.), Blackwell Handbook of Technology and Innovation Management, Oxford: Blackwell Publishers, Ltd., 2005.

[1] In line with Veugelers and Cincera (2010), we define young as those leading innovators established after 1975. But the results are consistent when using later cut-off dates.

Tue, 19 May 2015 13:32:27 +0100
<![CDATA[Is the economy stationary?]]> http://www.bruegel.org/nc/blog/detail/article/1627-is-the-economy-stationary/ blog1627

What’s at stake: The question of whether capitalist economies are self-correcting and will eventually revert to mean growth has received renewed interest given the underperformance of most economies six years after the onset of the Great Recessions. While the idea of persistent high unemployment was central to Keynes’ General Theory, it was quickly abandoned by the neoclassical synthesis.

we made the mistake of letting the last recession linger too long

Tyler Cowen writes that the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation, unveiled in bits and pieces. One relatively optimistic view is that observed deficiencies — like slow growth in real wages and the overall economy, persistently low interest rates and low levels of labor participation — are merely temporary.  Another commonly heard view is that we made the mistake of letting the last recession linger too long, allowing some of its features to become entrenched.

Unit roots, random walks and stationary series

John Cochrane provides a simple illustration of the different concepts. Suppose there is an unexpected movement in a series. How does this "shock" affect our best estimate of where this variable will be in the future? The graph shows three possibilities. First, green or "stationary."  There may be some short-lived dynamics. But, given enough time, the variable will return to where we thought it was going all along. Second, blue or "pure random walk." If the price goes up unexpectedly, your expectation of where the (log) price will be in the future goes up one-for-one, for all time. Third, black, "unit root." This option recognizes the possibility that a shock may give rise to transitory dynamics, and may come back towards, but not all the way towards your previous estimate. As you can see the "unit root" is the same as a combination of a stationary component and a bit of a random walk.

Source: John Cochrane

John Cochrane writes that the pure question whether the series will come back in an infinite time period is not really knowable. It could be that the series will come back eventually, but take a very long time. It could be stationary plus a second very slow moving stationary component. This is a statistical problem but not really an economic problem. The appearance of unit roots are economically interesting as they show a lot of "low frequency" movement, series that are coming back slowly - even if they do come back eventually.

History of an idea: high unemployment as a persistent equilibrium

the Keynesian high unemployment equilibrium is only temporary

Roger Farmer writes that classical economists from David Hume, through to Adam Smith, David Ricardo and John Maynard Keynes’ contemporary, Arthur Pigou, viewed the economy as a self-regulating mechanism. In the third edition of his undergraduate textbook, Samuelson replaced Keynes’ notion, of high unemployment as an equilibrium, with a new idea: the neoclassical synthesis. According to that idea, the Keynesian high unemployment equilibrium is only temporary. It applies in the short run, when prices and wages are sticky, but in the long run, when all wages and prices have had time to adjust, the economy reverts to a classical equilibrium with full employment.

Roger Farmer writes that Keynesians and monetarists adopted the Phillips curve as the missing equation that explains the transition from the short run to the long run. If the neoclassical synthesis is correct then the economy will always return to full employment as wages and prices adjust to clear markets. Unemployment cannot differ permanently from its natural rate and Keynes’ original vision of high unemployment, as a persistent steady state, must be fatally flawed.

The data: stationary or not?

Arnold Kling writes that if you think of the economy as ultimately self-correcting, then what it corrects to is potential GDP. If the economy is not self-correcting, then the concept of potential GDP can have no objective basis.

there is no evidence the economy is self-correcting

Roger Farmer writes that there is no evidence the economy is self-correcting. If, as Robert Gordon believes, it is caused by random technology shifts then there is not much that monetary policy or macro prudential policies can do about it. If, however, it is caused by random movements from one inefficient equilibrium to another, we should be thinking very hard about how to design a monetary/macro-prudential policy that keeps the economic train on the tracks.

John Cochrane writes that the "unit root" is most plausible and verified in the data for log GDP. Recessions and expansions have a lot of transitory component that will come back. But there are permanent movements too. Unemployment, being a ratio, strikes me as one that eventually must come back. But it can take a longer time than we usually think, which is interesting.

Paul Krugman writes that clearly, models with rational expectations, markets continuously in equilibrium, and unique equilibria don’t cut it. But which pieces of such models would you want to modify or replace? Farmer wants to preserve rational expectations and continuous equilibrium, while introducing multiple equilibria. That strikes me as a bizarre choice. Why not appeal to behavioral economics, behavioral finance in particular, to make sense of bubbles? Why not appeal to the clear evidence of price and wage stickiness — perhaps grounded in bounded rationality — to make sense of market disequilibrium?

Mon, 18 May 2015 09:16:09 +0100
<![CDATA[Greece’s hot summer]]> http://www.bruegel.org/nc/blog/detail/article/1626-greeces-hot-summer/ blog1626

After a Eurogroup meeting that appears to have not achieved much progress, and after Greece met its most recent payment due to the IMF drawing on its SDR accounts, the Greek Ministry of Finance published today the preliminary figures for budget execution over the period January - April 2015. There are positive signs, also on the revenue side, but the cash situation remains precarious ahead of forthcoming deadlines.

Figures confirm the pattern already observed last month (which I discussed here), with a marked improvement in the primary balance achieved mostly via expenditure cuts and a more limited improvement in revenues.

The State budget balance records a deficit of EUR 508 mn over January- April 2015, against the target of deficit of EUR 2.9 bn set in the 2015 budget, and significantly lower than for the same period of 2014 (when the deficit was EUR 1.15 bn). The State budget primary balance records instead a surplus of EUR 2.16 bn over the first four months of the year, against the target primary deficit of EUR 287 mn. This implies that in cumulative terms the State primary balance has over-performed the target by as much as EUR 2.45 bn

Source: Ministry of Economy and Finance, Greece

State Budget net revenues amounted to EUR 15.8 bn for the period January-April 2015, over performing the target by EUR 372 mn. Last month, the over-performance had been of EUR 94 mn (see here for details). For the month April alone, State Budget net revenues amounted to EUR 3.79 bn, over performing the monthly target by about EUR 278 mn.

As for last month, the public investment budget’s net revenues played a key role in the improvement on the revenue side, over-performing the target by EUR 465 mn. However, the improvement in the ordinary revenues component observed last month is confirmed. Ordinary net revenues beat their target by EUR 494 mn this month, which may suggest that the revenues situation is slowly normalising. While on a cumulative basis ordinary budget net revenues are still short of target, the gap is now only EUR 92 mn compared to the EUR 584 mn undershooting recorded last month.

Source: Ministry of Economy and Finance, Greece

Again, expenditure control was the main driver behind the improved primary surplus. For the individual month of April, State Budget expenditures amounted to EUR 3.8 bn, i.e. 521 mn lower than the target, with Ordinary Budget expenditures under performing by 290 million. Over the period January-April 2015, cumulated State budget expenditures amounted to EUR 16.3 bn, i.e. 2 billion lower than the target. Ordinary Budget expenditures amounted to EUR 15.5 bn and were decreased by 1.6 bn against the target, mainly due to the reduction of primary expenditure by EUR 1.45 bn and the reduction of military procurement.

This data confirm the pattern clearly observed last month. The primary surplus is improving, mostly due to expenditure cuts (a significant part of which was delayed payments, according to the news). The limited improvement in ordinary revenues is important, as it may signal a slow normalisation on the revenue side, but the overall situation remains very shaky in light of approaching payment deadlines.

Greece yesterday met its EUR 745 mn payment due to the IMF by drawing on its own Special Drawing Rights (SDR) account. Reportedly, Greece’s SDR holdings were standing at EUR 700 mn at the end of March, and EUR 650 mn have been used to make this payment.

What Greece did is effectively akin to taking a loan from the Fund to repay the Fund itself. While clever in the short-term, it has consequences. Whenever a member's SDR holdings are below its allocation, the member incurs a net interest obligation. This interest rate has to be paid quarterly and it is determined weekly based on a weighted average of representative interest rates on 3-month debt in the money markets of the four SDR basket currencies (i.e., the U.S. dollar, Japanese yen, euro, and pound sterling). The timeline for replacing the used SDR holdings is unclear, but Kathimerini reported that the holdings would need to be reconstructed “in a short period of time”.

While buying time in the immediate short term, the move could therefore put pressure on Greece in the next month, when it already faces repayments of about EUR 1.5 bn to the IMF. On top of that, Greece  needs to pay about 2.5bn in public sector salaries, pensions insurance, health and social protection every month, and reports in the Wall Street Journal suggests there could be a shortfall of about EUR 500 mn in May already, let alone June.

The government plan to draw on local governments’ reserves seems to be failing, as reports suggest that so far, only 2 out of 325 mayors across Greece have accepted to hand over their spare cash. In the meantime, the capital flight is reportedly worsening (with Greek savers withdrawing their money and buying fixed assets such as cars) and the ECB is considering raising haircuts from around 23% currently to between 44% and 80%, which bank officials say would effectively deprive the local system of access to Eurosystem liquidity. All things considered, it really looks like we are in for a very hot summer.

Thu, 14 May 2015 12:11:07 +0100
<![CDATA[An export-led recovery: what lessons from Central and Eastern Europe?]]> http://www.bruegel.org/nc/events/event-detail/event/531-an-export-led-recovery-what-lessons-from-central-and-eastern-europe/ even531

With Germany emerging most resiliently from the economic crisis and worries about long-term stagnation elsewhere in Europe, it has been easy to miss the transformation quietly underway in the EU’s newer member states. Seeking the path to an “export-led” recovery, several countries in Central and Eastern Europe have been able to position themselves competitively within the global upturn in trade. As a result, Central and Eastern EU countries (EU-CEE) have achieved an average 30% increase in export volumes since 2010 and several states have significantly increased their share of global trade.

This shift is the topic of the special focus note in the World Bank’s new EU Regular Economic Report (EU RER). We are delighted to welcome the report’s author Theo Thomas for a discussion about how and why EU-CEE trade patterns are changing.

  • What is driving this evolution in export behavior?
  • Is this export-led growth sustainable, or are policy changes necessary to anchor the recovery?
  • Does this story offer lessons for other EU member states, especially in the fragile periphery?


  • Introductory remarks: Mamta Murthi, regional director for Central Europe and the Baltics, World Bank
  • Speaker:Theo Thomas, lead economist, World Bank
  • Discussant: Zsolt Darvas, Senior Fellow, Bruegel
  • Chair: Grégory Claeys, research fellow, Bruegel

Relevant Reading

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Date: 28 May 2015
  • Time: 12.15-14.30 (lunch will be served at 12.15 after which the event begins at 12:30)
  • Contact: Matilda Sevón, events manager

Wed, 13 May 2015 11:18:16 +0100
<![CDATA[Speech by Pier Carlo Padoan, Ministry of Economy and Finance, Italy]]> http://www.bruegel.org/nc/blog/detail/article/1624-speech-by-pier-carlo-padoan-ministry-of-economy-and-finance-italy/ blog1624

Let me share with you a few thoughts about this event and the 10th Anniversary of Bruegel. I recall that Bruegel was a topic of discussion with Jean Pisani Ferry earlier than that; I remember that he visited the International Monetary Fund when I was serving there, and he said “I have an idea in mind, and that is an idea to establish in Europe something which under different acronyms is already acting in the US, and in Washington especially.” That is to say to develop a think tank that is at the same time looking at domestic issues, as is the case of the US, and also at global issues because, as Jean continued, “I feel that there is no such thing in Europe yet so we need one”. Certainly, he was absolutely right, and so conversation between Jean Pisany Ferry, Nicolas Veron and myself began, with the idea that such an instrument would be useful for policy making in Europe and would deserve support.

Italy from the start decided that supporting this endeavour was a good idea, and this is one of the reasons why we are here in Rome today celebrating 10 years of Bruegel. So, my first point is that I’m very proud, although this is not my merit. Italy and the Italian government contributed to Bruegel’s foundation and enjoyed Bruegel’s activity throughout this decade. Indeed I have some official date here, on 9 March 2004, Italy was one of the 11 EU member states to support and sign an initial agreement to support Bruegel, conditional on successful fundraising from the private sector, which was secured later in 2004. So this is a private-public partnership in intellectual policy making.

So here comes the next point. Everyone knows who Peter Bruegel was, the 16th century painter whose paintings you can admire in Brussels where Bruegel is located. But I later learned that Mario Monti, who was certainly one of the most influential people behind this initiative, suggested another interpretation of Bruegel. And again I have it here in my notes. “Bruegel stands for Brussels European and Global Economic Laboratory”, which is brilliant. Usually the way you come out with these things is that you start with the acronym and then you decide what it means; which reminds me of how economists are used to working. They have an idea in mind and then they think until they find a model that explains why they’re right. Being an economist myself, I know how it works.

Bruegel has very rapidly established itself as a leading intellectual player and intellectual leader in the European policy debate

But this is a good intellectual exercise.  So Italy’s contribution started then and it has been strengthening over time, both in terms of support through resources but also, let me say, I’m particularly proud that it has gone through and still is going through an active participation of Italian scholars and workers, hardworking workers, in Bruegel from Italy. And this is again a very welcome sign. Since then Bruegel has very rapidly established itself as a leading intellectual player and intellectual leader in the European policy debate, because it understood the appropriate cocktail of ingredients of looking at the evolving monetary union and the place it was playing in the global economy.

In 2005, we all know that there was no financial crisis and hardly anybody thought there could be such a big one, certainly I wasn’t thinking about it. Let me share with you a thought about this - when I was asked “where do you think the next financial crisis will come from?” my answer was “China”. And what I had in mind is a problem that seems to be emerging now, with the fragility of the Chinese financial system but in this way – so I was really misunderstanding the situation. Although of course the growing US trade deficit was also a source of concern. The traditional answer at that time was “don’t worry, markets will take care of the deficit financing” and that was what we got with the US deficit floating around 6% of GDP, which is a huge number in terms of raw figures.

So this was the environment and in that environment Bruegel initially established itself very quickly in a time where there were many policy challenges but none as challenging as the one we would be beginning to see only 2 years later in 2007, when the subprime crisis sparked off the global financial crisis.

Bruegel provides timely evidence based on policy recommendations, answering key policy questions

How is it that Bruegel has managed to establish itself as a key element? Well, it’s easy to describe it because - again my interpretation - it was able and it is able to provide timely evidence based on policy recommendations, answering key policy questions and linking Government, communities, research communities, business and civil society.  So it’s very easy to describe this once you know it works. In practice it’s much more difficult to implement it because after all, if you look around the spectrum of think tanks and policy centres that debate on policy issues, not all of them are as successful.  So there must be something different that explains Bruegel success.  

One possible explanation is exactly the novelty or the formula: the fact that Bruegel was and is a European institution, which is also deeply global. The interaction between these two complexities to me, and of course the ability to master and manage them, is a key recipe and it’s not easy to replicate.

So with the benefit of hindsight, but again economists are very good at that, this is the formula to be useful, not only to the policy debate but useful to policy makers. And I can testify that in my current job, which is being a policy maker, Bruegel’s contribution to the work that the ECOFIN has been doing has been simply exceptional. Exceptional exactly because it did the magic of attracting the interest of Finance Ministers, who usually are people who think that nothing is really interesting but the budget. I think there’s something else that is also different but of course the budget is a problem. And Bruegel was able to spark the attention of the EU and EU area finance ministers on a wide range of topics.

Let me recall that Bruegel managed to organise and prepare for the Italian semester dealing with an unemployment mechanism in Europe. I call it an unemployment mechanism because it’s still floating in the air but certainly it is something, and again this is my personal thought, that should definitely be in the next policy agenda.  Hopefully we are getting out of the mess of the financial crisis and so for Europe the time has come to think of the long-term agenda and look at practical ways to produce more integration, and more mutualisation.  I think that a must will be how to deal with unemployment, which is at the same time extremely high and extremely different for its explanations, or mix of explanations, be they are cyclical, be they are structural in so many different ways.

So this is a big challenge: how do you build a truly European institution, not because you name it European, but because it works on a European basis, drawing on such a different set of national experiences.  This is a challenge for you, I’m sure you will come up with very useful responses.

So let me come today very quickly to the issue that you will be discussing in the panel. I see that it’s Europe and the Emerging Markets but then, in my notes I had it written that it’s specifically on low interest rates. This is again an example of a very timely topic. I’ve just returned this morning from Azerbaijan where the Asian Development Bank was convening in its annual meetings. And guess what? One of the topics that was in the mind of the governors of the bank was exactly both low interest rates and energy prices and where you can easily expect the audience being split between consumers and producers, one smiling, the other crying for opposite reasons.

But having said that, I think this is a very timely topic also for Europe. Let me put it in perspective. I see today a policy mix in Europe, which you may summarise in the following list of components: Quantitative Easing (QE), with implications for exchange rates and interest rates. Structural reforms or I would say incentives, more incentives for structural reforms than before because also of the new communication around flexibility that the Commission put out recently.  Investment, of course the Juncker plan and what comes with it. And an old fashioned yet very valuable instrument named the Single Market.

Now, the question which I leave to you, if you wish to take it up, is: is this policy mix enough? Not simply to float to the upswing of this weak cycle, or do we need something more to transform this weak cycle into a more robust growth? And to that effect, is the policy mix, is the monetary policy stance appropriate, do we need to do more? And in particular one question which has been very much, and you know that very well, in the policy debates both public and less public in Europe. Is there a contradiction between QE and policy rates that are so low and the need for many, if not all, European countries to start and develop structural reforms? So is there a contradiction or as I like to say, there is a complementarity? My favourite answer to that argument is the Italian evidence which shows declining interest rates and increasing structural reform records, so it goes the other way, maybe. But that’s a purist relationship, possibly.

The second aspect which is correlated is: to what extent a given structural reform agenda, once it is implemented, is facilitated by monetary policy? Another common wisdom statement is that monetary policy at best can improve the cycle but it cannot raise permanently growth rates. If you took it in isolation, yes, but it depends how you mix it with other policy instruments. And maybe there is a policy mix which in a common monetary policy is part of, that ultimately raises long term growth, potential output and not just a cycle.

So, sorry for this long list of questions, I have the luxury of asking questions and not being able – not in this place -  to provide answers.  But again, let me welcome Guntram Wolff and Bruegel here in Rome, and of course we will have many other opportunities to interact and many more questions would be offered to you, and you will provide us with many more brilliant topics.

The recent Policy Brief produced for the Latvian presidency is a very important, very practical and very insightful report on capital markets.

Just to conclude with an advertisement to your work, the recent Policy Brief produced for the Latvian presidency is a very important, very practical and very insightful report on capital markets. Let’s hope that we have the tranquillity and the time to look at it seriously, and that we are not overcome by negative shocks coming from outside.

Thank you very much.

Wed, 13 May 2015 11:18:08 +0100
<![CDATA[Europe’s integration overdrive]]> http://www.bruegel.org/nc/blog/detail/article/1623-europes-integration-overdrive/ blog1623

Sixty-five years ago on May 9, French Foreign Minister Robert Schuman read a 
Declaration, triggering the birth of the European Union. Still in the shadow of 
World War II, Europeans began to create, historian Tony Judt writes, “a new
and stable system of inter-state relations.” Put simply, Europeans learned
once again to work with and talk to each other. It was a magnificent

Europeans have lost the ability to talk to each other.

May 10 is the fifth anniversary of the bailout of Greece.  Set almost exactly 60
years apart from the Schuman Declaration, the events triggered by the Greek
bailout have unleashed a daunting challenge to European cooperation and
harmony. Above all, Europeans have lost the ability to talk to each other.
For some, this is not a European problem—it is a Greek problem. Greece, so
this view goes, is sui generis, and once it is brought back into the fold, the 
systems of cooperation will return to normal functioning.

That is a mistaken view. The Greek problem will not go away. But the bigger 
problem is that the euro placed European integration into an unmanageable 

The policy package proposed by Greece’s creditors, requires further austerity 
and reduction of wages and social benefits. Those measures will help down 
the road, but the deflationary contraction will work faster. Debt will become 
harder to repay.  A debt-deflation spiral could overwhelm Greece quickly.  
German Chancellor Angela Merkel has blamed her predecessor Gerhard 
Schroeder for allowing Greece to enter the Eurozone.  Indeed, Greece should 
never have been in the Eurozone. But the real problem lay in the construction 
of the Eurozone itself.

Greece should never have been in the Eurozone.

Schuman had said: “Europe will not be made all at once, or according to a 
single plan. It will be built through concrete achievements which first create a 
de facto solidarity.” That philosophy was admirably embodied in the Treaty of 
Rome in 1957, when European nations opened their borders to each other. 
Numerous commercial relationships sprouted among the European 
businesses and citizens.  Empathy for the trading partners generated a sense 
of European identity. Citizens’ trust in European institutions followed the 
share of intra-European trade. The Treaty of Rome succeeded because it 
aligned national interests—nations and their citizens all gained through 
enhanced commerce.

With the euro, national interests collided. A common monetary policy is more 
favorable for some than for others. And crucially, the euro created the ever-
present risk that one nation would have to pay the bills for another. The 
Treaty of Rome created a “level playing field,” in which nations participated as 
equals. In the euro area, some nations are inevitably “more equal than others.” 
Greece must play by the rules of its creditors—even when these are evidently 
dysfunctional. Proponents insist that this will discourage others from 
deviating, and fidelity to the rules will ensure a stable Eurozone. But that 
equilibrium will, at best, be fragile. The problems will worsen in Greece and, 
will inevitably, arise elsewhere.

The economic and political costs of breaking the Eurozone are so horrendous 
that the imperfect monetary union will be held together. Instead, the cost of 
the ill-judged rush to the euro and mismanagement of Greece will eventually 
be a substantial forgiveness of Greek debt. 

This is a good moment to step back and loosen European ties.

But this is a good moment to step back and loosen European ties. As Schuman 
said, “Europe will not be built according to one plan.” The task is to create a de 
facto solidarity—not to force a fragile embrace.  A new architecture should 
scale back the corrosive power relationships of centralized economic 
surveillance. Let nations manage their affairs according to their priorities. And 
put on notice private creditors that they will bear losses for reckless lending.
The European fabric—held together by commercial ties—is fraying as 
European businesses seek faster growing markets elsewhere. That fabric 
could tear if political discord and economic woes persist. History and 
Schuman will be watching.

Wed, 13 May 2015 09:29:03 +0100
<![CDATA[Macroeconomic performance and election outcomes]]> http://www.bruegel.org/nc/blog/detail/article/1622-macroeconomic-performance-and-election-outcomes/ blog1622

What’s at stake: The results of last week’s election in the UK have generated a debate on the role of macroeconomic performance in electoral success and, in particular, on whether elections hinge on an incumbent’s overall record or on whether things are improving in the election year.

The macro performance of the coalition


David Spencer writes that he problem is that the country’s economic performance can be spun in different ways. 

Niall Ferguson writes that few governments since 1945 have achieved comparable economic results from such a difficult starting point. The UK had the best performing of the G7 economies last year, with a real gross domestic product growth rate of 2.6 per cent. Far from being in depression, the UK economy has generated more than 1.9m jobs since May 2010. UK unemployment is now 5.6 per cent, roughly half the rates in Italy and France. Weekly earnings are up by more than 8 per cent; in the private sector, the figure is above 10 per cent.

Simon Wren-Lewis writes that he has not come across a single non-City, non-partisan economist who does not concur with the view that the performance of the coalition has been pretty poor (or simply terrible), yet polls repeatedly show that people believe managing the economy is the Conservatives’ strength. This trick has been accomplished by equating the government’s budget with the household, and elevating reducing the deficit as the be all and end all of economic policy. This allowed Cameron to pass off the impact of bad macro management in delaying the recovery as inevitable pain because they had to ‘clear up the mess’ left by their predecessor. For that story to work well, the economy had to improve towards the end of the coalition’s term in office. The coalition understood this, which was why austerity was put on hold. In the end the recovery was pretty minimal (no more than average growth), and far from secure (as the 2015Q1 growth figures showed), but it was enough for media to pretend that earlier austerity had been vindicated.

David Andolfatto writes that austerity evidently killed GDP, but not the labour market. Frances Coppola explains that the rising participation rate, among single mums and the sick & disabled are due to cuts in welfare entitlements, while older people staying on in employment (or returning to it) is due to rising pension age, particularly for women, and low interest rates. 

Elections, overall record and improvement in election year


Paul Krugman writes that Britain’s election results are consistent with the general proposition that elections hinge not on an incumbent’s overall record but on whether things are improving in the six months or so before the vote. The Liberal-Conservative coalition imposed austerity for a couple of years, then paused, and the economy picked up enough during the lull to give them a chance to make the same mistakes all over again. 


Larry Bartels writes that the figure above is derived from the following very simple regression analysis:

Incumbent Party Margin = 9.93 + 5.48 × Income Growth – 1.76 × Years in Office.

Incumbent Party Margin represents the incumbent party’s national popular vote margin in percentage points. Income Growth is measured by the change in real disposable personal income per capita in the second and third quarters of the election year (Q14 and Q15 of the president’s term in the US), also in percentage points. Years in Office is a counter indicating how long the incumbent party has held the White House. The regression parameters are estimates based on data from the 17 US presidential elections since the end of World War II and “explains” more than three-quarters of the observed variation in election outcomes.

Front loaded austerity and election prospects

Paul Krugman writes that depressing the economy for the first half of your term in office can be a very smart move. If some positive growth, eventually, means that your policies have been successful, then a policy of simply shutting down half the economy for a year or two, then letting it start up again, is a smashing success. 

Cyclically adjusted primary balance, percent of GDP


Simon Wren-Lewis writes that in a demand led recession, austerity leads to some years where growth is less than it would have been otherwise, followed by later years where growth is more than it would have been otherwise. Austerity reduces the level of output from what it otherwise might have been. In the simplest case, once we come out of recession output goes back to the level it would have been without austerity.

Paul Krugman writes that if this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.

Tue, 12 May 2015 09:01:24 +0100
<![CDATA[The impact of the oil price on the EU economy]]> http://www.bruegel.org/nc/events/event-detail/event/530-the-impact-of-the-oil-price-on-the-eu-economy/ even530

The price of crude oil has dropped by about 40% compared to last year, which has raised hopes of an economic dividend for the EU. This could be supported by the apparent relationship between oil prices and GDP in many oil-importing economies over the past 60 years.

This lunchtime event will explore the potential impact of oil price changes on the EU economy. We are happy to welcome Lutz Kilian, University of Michigan, who has published extensively on oil prices, oil shocks and the links between oil and the wider economy. He will present his research, and then Georg Zachmann, Bruegel fellow, will chair a discussion with contributors from policy and business.


  • Lutz Kilian, professor of economics, University of Michigan
  • Cristiana Belu Manescu, economic analyst, European Commission DG ECFIN
  • Chair: Georg Zachmann, research fellow, Bruegel

Relevant Reading

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Date: 2 June 2015
  • Time: 12.30-1400 (lunch will be served after the event)
  • Contact: Matilda Sevón, events manager

Thu, 07 May 2015 10:39:19 +0100
<![CDATA[Why we should not blame the ECB for low returns on German savings]]> http://www.bruegel.org/nc/blog/detail/article/1621-why-we-should-not-blame-the-ecb-for-low-returns-on-german-savings/ blog1621

the ECB is not the main driver of the decline in interest rates

The ECB has lowered its official interest rate several times in recent years and the rate is now at zero. In March this year, it started in addition a large sovereign bond purchase programme. German commentators have been focusing on the negative effect of ECB policy on returns on German savings. Contrary to popular belief, however, the ECB is not the main driver of the decline in interest rates. The debate also ignores the appropriate policy response to the decline in interest rates.

Nominal interest rates have been falling for 30 years now. While in 1980, the US governments’ borrowing costs on a 10 year horizon amounted to around 13%, they declined to 8% in 1990, 5% in 2000 and to only 1.9% in April 2015. A similar picture emerges for Germany, where yields for the same type of bond falling from around 9% in 1980, to 5% in 2000 and now to 0.1%.

So what is behind this dramatic fall in interest rates, observed over the past 3 decades? Two factors are central: firstly the fall in inflation, and secondly the fall in real returns. Turning to the former, inflation rates in the 1980s were at about 3% in Germany; for the 2000s at 1.6% and currently the inflation forecast for the next 10 years is at 1.4% for the euro area. A similar picture emerges for the US.

A large part of the fall in interest rates is due to the falling inflation rates

A large part of the fall in interest rates is thus due to falling inflation rates. This is a success of better monetary policy management. Falling inflation rates do not reduce the return to savers. In fact, what matters for savers is the so-called real interest rate. Put differently, as a saver, I am interested in how many goods I can buy from the interest I receive from my savings, and this is measured by the real interest rate.

How have real interest rates developed? In both the US and Germany, real interest rates have fallen from levels of about 4%  to levels closer to 1% (see graph). With the recent economic upturn, real rates seem to have increased again.

Graph: ex-post real rates (US and DE).

Source: ThomsonReuters Datastream

So what drives this decline in real interest rates?  Real rates are determined by a whole set of economic factors, including growth prospects. Ultimately, it is economic performance that drives the return in investments. In a fast growing economy that is still building up its capital stock, real rates should be high as economic growth prospects are high. The opposite is true for an economy in a recessionary environment or an economy with already high capital stocks.

Long-term falling growth prospects are one of the main drivers of low real interest rates

Long-term falling growth prospects are therefore one of the main drivers of low real interest rates. This so-called secular stagnation is explained by demographic developments, increasing capital stocks and an absence of reforms. Moreover, the still rather weak economic outlook in the eurozone is also to be blamed for low returns on savings. Savers will not be awarded a higher interest rate simply because savings are plentiful and investment is low in a recession.

As the reasons behind low real rates are linked to secular stagnation, I would argue that an appropriate set of structural reforms is urgently needed to allow for proper business opportunities and innovation in the industrialized world. This is also particularly important in Germany. German corporations tend to invest abroad rather than in Germany, a development that is shown by the huge current account surplus, and is actually a concern which reflects the weakness of investment opportunities and the lack of demand in Germany. In addition to reform, the demand shortage needs to be addressed with public investment and reduced taxes on low-income households.

The ECB has only reacted to the weak economic situation and has reduced its interest rate to adapt to the weakening economy. The role of the ECB is to achieve the appropriate increase of inflation to its mandate of close but below 2%. Any premature move on increasing the interest rate would hamper the weak economic recovery. The resulting recession would keep investment depressed and returns low.

we have to ask what the right policies should be to address secular stagnation

The discussion therefore has to go beyond blaming the ECB for doing its job. Instead, we have to ask why real interest rates have been falling for so long, and what the right policies should be to address “secular stagnation”. Germany should implement substantial structural policies that increase domestic investment opportunities, thereby redirecting some of the savings to the German economy. It should also increase public investment in order to boost its long-term growth potential. Finally, Germany needs policies that ensure that low income households see their incomes raise and increase their consumption. Only with these changes in place can German savers expect to see their returns rising again. 

Thu, 07 May 2015 10:32:59 +0100
<![CDATA[Digital Single Market: setting the stage]]> http://www.bruegel.org/nc/blog/detail/article/1620-digital-single-market-setting-the-stage/ blog1620

The paper does not spell out how the proposals will be implemented

The European Commission's just-released Digital Single Market strategy paper is good news. The paper discusses key areas for action: e-commerce, geo-blocking and copyright, the VAT framework, telecoms infrastructure, online platforms, privacy, cyber security, data ownership and flow, ICT standards, e-government. It also provides a timeline for concrete follow-up proposals through to the end of 2016, by when the Commission intends to make proposals for all these areas. The paper lists principles that are hard to disagree with: moving towards less fragmentation in the EU regulatory framework; favouring investment and innovation; ensuring a “level playing field” for competition. However, the paper does not spell out how the proposals will be implemented, and thus is of little help in forecasting what will happen next.

More than in other sectors, the performance of digital markets is enhanced when market players can more easily anticipate how the underlying regulatory framework will be shaped in the future. Digital markets require significant investment in infrastructure and in innovation but they change fast, as do companies’ business models and customers’ preferences. A long-term regulatory strategy helps to address uncertainty by giving confidence to investors, who might be more concerned about their inability to assess the risk of their investment than about the size of the risk in itself. The Commission's strategy does not yet provide a basis to perform that assessment.

It's not clear which goals will be prioritised when trade-offs have to be considered

A successful strategy would dispel any ambiguity about goals. At this stage it is not clear which goals will be prioritised when trade-offs have to be considered: for example when different policy options will entail different distributions of rents between buyers and suppliers. There is ample economic evidence that pursuing the interests of users is normally the best way to improve economic performance. This is often translated into the maxim that Europe should protect competition not competitors. But on this the Commission has proved ambiguous in the past. In 2014, a merger between two mobile network operators in Germany – Telefonica and E-Plus – was cleared despite the Commission identifying a risk of potentially significant price increases post-merger. Clearance was granted on the basis of remedies that were arguably too weak to counteract the negative effects of the merger: the parties were required to divest up-front less than half of the market network capacity that was previously used by E-Plus to compete against Telefonica. The Financial Times spoke about a rare revolt by national regulators against a Commission decision.

Providing benefits for users should be the principal goal of the digital single market strategy

The Commission should unequivocally affirm that providing benefits for users is the principal goal of the digital single market strategy, and that competition is the main tool to achieve this. Competition allocates rewards efficiently, promotes investment and ensures that users receive a significant share of the created value. The Commission says it will propose new rules for telecoms markets, including potential measures affecting new businesses such as over-the-top operators (WhatsApp and the like), which are eroding operators profits’ downstream to ensure “a level playing field for all market players”. The Commission will also launch a “comprehensive assessment of the role of platforms” (such as Google, Apple, Booking.com, etc) and the “sharing economy” (Uber, Airbnb, etc) to identify potential regulatory issues in terms of transparency or data usage, for example. The Commission should reassure investors that any new regulation will be just about fixing market failures and not about introducing disguised protectionist measures. The reduction of profits in the EU industry is not an issue in itself, if it means cheaper products and a wider choice for European consumers.

The Commission needs to sticks to its strategy at least for the next 5 years

Once established, it is important that the Commission sticks to its strategy at least for the next five years. A major criticism of the Commission’s digital markets policy is that it has been inconsistent. For example, the Telecom Single Market ‘package’ adopted in September 2013 significantly undermined structural measures that were introduced by the Commission in 2012 to address high international mobile roaming fees. The 2012 measures required the unbundling of wholesale network access and retail services by mobile operators in order to foster competition in the roaming market. But with the 2013 package, the Commission made the unbundling provision softer, and ultimately no competition in the roaming market was created at all. Time consistency is crucial for investors and the Commission's past record has undermined confidence.

Finally, the Commission will have to come up with a workable mechanism to ensure take-up by relevant stakeholders. This might require some thinking outside the box. On issues such spectrum, copyright and geo-blocking, the difficulty is not so much in identifying a need to move towards more EU and less fragmentation, but how to get there with the backing of the Council. Taking mobile spectrum as example: the Commission should be ambitious about moving from national towards centralised auctions that would facilitate the emergence of pan-European operators. That is feasible, to the extent that appropriate mechanisms for the re-allocation of the lost revenues amongst member states are envisaged.

The Commission’s Single Digital Market paper can make an impact if the Commission sends the right signals about the goals it is actually pursuing, and its determination to stick to a workable strategy to go after them. 



Wed, 06 May 2015 14:40:57 +0100
<![CDATA[Europe’s radical banking union]]> http://www.bruegel.org/publications/publication-detail/publication/880-europes-radical-banking-union/ publ880

Banking Union, even in its current incomplete form, is the single biggest structural policy success of the EU since the start of the financial crisis. This essay presents the sequence of events that led to its inception in late June 2012 and takes stock on its current status of implementation and prospects.

The essay argues forcefully that the political decision to initiate banking union was the decisive factor behind the ECB’s OMT programme, which put an end to the most acute phase of the euro area crisis, and that it also enabled the shift in the European approach to banking crisis resolution from bail-out to bail-in, which was prevented by the earlier policy framework of national banking supervision. In this sense, the banking union decision of mid-2012 was the crucial and largely unrecognized turning point of the entire euro area crisis.

The transfer of supervisory authority over all euro-area banks to the ECB, effective since last November, marks a profound change and is already resulting in more rigorous and consistent supervision.

After a few years of transition, the banking union framework can be expected to lead to a better integrated, more diverse and more resilient European financial system. It will also enhance European influence in shaping global banking regulatory standards and policies.

Europe’s radical banking union (English)
Wed, 06 May 2015 10:03:20 +0100
<![CDATA[The American poverty traps]]> http://www.bruegel.org/nc/blog/detail/article/1619-the-american-poverty-traps/ blog1619

What’s at stake: Recent research by the Equality of Opportunity Project, a venture led by Raj Chetty, Nathaniel Hendren, Patrick Kline and Emmanuel Saez, is already having an impact on shaping the core issues of the next US presidential election where candidates need to address the question of American poverty traps.

The economics and politics of sprawl

Emily Badger writes that talking about the difference between high-mobility and low-mobility regions such as Seattle and Atlanta — as Hillary Clinton did recently — is powerful both because it tugs at the American sense of fairness, and because it turns abstract fears about inequality into something terribly real. By definition, the American Dream sounds like something equally accessible to hard workers wherever they live. But, in fact, an accumulating body of research suggests that children growing up in some parts of the country have much better odds than children elsewhere of climbing up the economic ladder. The American dream, it turns out, is more real for children in Seattle than Atlanta, for poor kids growing up around Salt Lake City than Charlotte.

Matthew O’Brien writes that the research by Raj Chetty, Nathanial Hendren, Patrick Kline and Emmanuel Saez show that factors such as the progressivity of local taxes, the cost of college, local inequality, are only slightly correlated with a region's social mobility. What seems to matter more is the amount of sprawl, the number of two-parent households, the quality of elementary and high schools, and how involved people are in things like religious and community groups.

David Leonhardt writes whatever the differences are between high-mobility and low-mobility regions, they seem to apply to residents of every race. Many of the areas where climbing the economic ladder is most difficult are also the areas with the largest concentration of African-Americans. The metropolitan areas with the highest percentage of African-Americans are clustered in the southeast and the industrial Midwest. So are the metropolitan areas where low-income children have the longest odds of making it into the middle class. Yet the economists who did the study do not list race as one of the main factors that explains the variation in upward-mobility rates across regions. The simplest way to explain their conclusion may be to point out that upward mobility tends to be rare for both blacks and whites, as well as for Latinos, in low-mobility areas. In Charlotte, Atlanta and Indianapolis, low-income white children have also tended to grow up to be low-income adults.

Matthew O’Brien writes that density changes things. Well-off whites who work in the city and live close by have an interest in paying for the kind of public goods, like mass transit, that benefit everybody. Well-off whites who live far away don't. This neglect of infrastructure keeps low-income people from living near or commuting to better jobs –  and that's not a a race issue. Indeed, the researchers also found that whites and blacks in Atlanta both have a hard time moving up. In other words, racial polarization might spur sprawl, which makes cities less likely to invest in their infrastructure – and underfunded infrastructure hurts low-income people of all races.

Paul Krugman writes that the new research on social mobility suggests that sprawl – not just the movement of jobs out of the city (as William Julius Wilson first argued) but their movement out of reach of many less-affluent residents of the suburbs, too — is also playing a role. The apparent inverse relationship between sprawl and social mobility obviously reinforces the case for “smart growth” urban strategies, which try to promote compact centers with access to public transit. 

The causal effects of good neighborhoods

David Leonhardt, Amanda Cox and Claire Cain Miller reports that the feelings heard across Baltimore’s recent protests — of being trapped in poverty — seem to be backed up by the new data. Justin Wolfers writes that hundreds of studies have demonstrated that the odds of economic success vary across neighborhoods. The far more difficult question is whether that’s because neighborhoods nurture success (or failure), or whether they just attract those who would succeed (or fail) anyway.

Raj Chetty and Nathaniel Hendren write that this geographic variation could be driven by two very different sources. One possibility is that neighborhoods have causal effects on upward mobility: that is, moving a given child to a different neighborhood would change her life outcomes. Another possibility is that the observed geographic variation is due to systematic differences in the types of people living in each area, such as differences in race or wealth. The key assumption underlying the author’s analysis on non-experimental data is that families who move from one city to another when their children are young are comparable to those who move when their children are older. This assumption would not hold if, for instance, families who move to better areas when their children are young are more educated or have higher wealth than families who move later.  To assess the validity of this assumption, the authors compare siblings within the same family, and show that the difference in siblings’ outcomes is proportional to the difference in their exposure to better environments. They also show that one obtains effects when analyzing families displaced by events outside their control, such as natural disasters or local plant closures.

Raj Chetty, Nathaniel Hendren, and Lawrence F. Katz write that the Moving to Opportunity (MTO) experiment of the U.S. Department of Housing and Urban Development offered a randomly selected subset of families living in high-poverty housing projects subsidized housing vouchers to move to lower-poverty neighborhoods in the mid-1990s. The MTO experiment generated large differences in neighborhood environments for comparable families, providing an opportunity to evaluate the causal effects of improving neighborhood environments for low-income families. Previous research evaluating the MTO experiment have consistently found that the MTO treatments had no significant impacts on the earnings and employment rates of adults and older youth, suggesting that neighborhood environments might be less important for economic success. But, in light of the previous paper’s findings, the authors revisit the MTO experiment taking into account the possibility that the effect differs depending on the age of the children when the family moved to a better neighborhood.

Source: Raj Chetty, Nathaniel Hendren, and Lawrence F. Katz

Raj Chetty, Nathaniel Hendren, and Lawrence F. Katz find that assignment to the experimental voucher group led to significant improvements on a broad spectrum of outcomes in adulthood for children who were less than age 13 at RA. The MTO treatments had very different effects on older children – those between 13-18 at RA. The point estimates suggest that moving to a lower-poverty neighborhood had slightly negative effects on older children’s outcomes. Although we have no direct evidence on the mechanisms underlying these effects, one plausible explanation for negative impacts at older ages is a disruption effect: moving to a very different environment, especially as an adolescent, could disrupt social networks and have other adverse effects on child development.

Wed, 06 May 2015 09:36:49 +0100
<![CDATA[Global Governance of Public Goods: Asian and European Perspectives]]> http://www.bruegel.org/nc/events/event-detail/event/529-global-governance-of-public-goods-asian-and-european-perspectives/ even529

The Asia Europe Economic Forum (AEEF), established in 2006, is a high-level forum which brings together Asian and European policymakers and experts for research-led discussions of global issues.

We are pleased to announce the next AEEF conference entitled 'Global Governance of Public Goods: Asian and European Perspectives', which will take place on 1-2 October 2015 in Paris, France. The event will bring together some fifty high-ranking Asian and European participants, including active and former senior policymakers, notable academic experts and private sector specialists.


The programme is still being developed, but confirmed speakers include:

  • Laurence Boone, special adviser to the president of France
  • Sandrine Duchêne, deputy director-general, French Treasury
  • He Fan, deputy director, Institute of World Economics and Politics at CASS
  • Kyung-wook Hur, visiting professor, KDI School of Public Policy and Management
  • Sébastien Jean, director, CEPII
  • Guntram Wolff, director, Bruegel
  • Naoyuki Yoshino, dean, Asian Development Bank Institute

Practical Details

Tue, 05 May 2015 15:52:29 +0100
<![CDATA[Additional monetary easing for China?]]> http://www.bruegel.org/nc/blog/detail/article/1618-additional-monetary-easing-for-china/ blog1618

any additional easing would push the RMB to a more depreciated level, bringing thereby an additional push to external demand

As many other central banks in the Asian region, the People Bank of China (PBoC) has been on an easing mode for a few months now and more seems to be in the store.  The once relatively polarized debate on what the PBoC monetary policy stance should be has increasingly leaned towards additional easing. Some analysts are even proposing full-fledged quantitative easing (QE), in the form of US Treasury sales to raise funds for assets locally, such as local government bonds and other hardly–performing assets. There is no doubt that the PBoC could, thereby, bring another big stimulus into the already heavily massaged Chinese economy as it would help debt-saddled local governments to clean their balance sheets and, at the same time, allow banks’ to lend further. As if this were not enough, any additional easing – capital controls permitting- would also push the RMB to a more depreciated level, bringing thereby an additional push to external demand.

Given China’s increasingly weak economic situation and growing deflationary pressures, the above could sound like music to Chinese ears. An obvious proof of how much euphoria this music can bring is the recent dramatic revival of Chinese and Hong Kong stocks. Some optimistic commentators have even related it to a strong economic recovery in the near future, notwithstanding the poor incoming data. Whether they are proven right or not, at least temporarily, very much depends on the PBoC and how much it ends up easing, especially if it goes all the way to some sort of QE.

Ironically enough, such monetary binge from a heavy-loaded easing by the PBoC can only harm the Chinese economy. The key reason is that it will continue to feed leverage by Chinese agents, by artificially lowering the cost of funding, at the worst of all times, namely that of a renewed reform push. The low shadow of the FED’ recent history, namely the complacent idea of a Great Moderation right before what has ended up being the US worst financial crisis in decades  should constitute an important warning signal for the PBoC in its current deliberations.

China has already pushed reforms during other periods of financial fragility.  The most recent of all occurred during the early 2000s, when the banking system was saddled with bad debts. However, there were a number of key factors that helped the Chinese authorities manage that situation without major consequences. First and foremost, China’s debt level was very moderate (Graph 1). Second, potential growth was much higher since China was enjoying an earlier stage of development and urbanization. Third, the economy was smaller and closer so the rippling effects on the rest of the world remained much more limited.

 China’s overall debt level has more than tripled from its 2007 level 

Today’s situation is not only more worrisome but also much harder to cushion. First of all, China’s overall debt level has more than tripled from its 2007 level and it is also very large when compared with other emerging markets in terms of its percentage to GDP (Graph 2).  

Graph 1 - China's gross government debt

Source: IMF World Economic Outlook April 2015.

Graph 2 - Public and private debt (cross-country comparison)

Note: Includes debt of households, non-financial corporations, and government. Q2 2014 data for advanced economies and China; 2013 data for other developing economies. Source: McKinsey Global Institute, 'Debt and (not much) Deleveraging'.

Second, the global financial crisis and the related stimulus package is only part of the reason why debt has accumulated so quickly. In order words, there is not only a stock problem but a flow one as debt keeps piling up.  Starting with public debt, over and above the massive increase after introducing the 2008-09 stimulus package, local government have continued to amass large deficits, which would make China’s consolidated fiscal accounts - if they existed officially - look awfully similar to those of the buttressed Southern Europe. 

there is not only a stock problem but a flow one as debt keeps piling up

Third, the private sector, driven by corporations, has been levering up at an even faster speed. In fact, private debt is six times larger than in 2007, having reached 150% of GDP in 2014 (Graph 3).  More worryingly, from virtually no exposure abroad, Chinese corporations and banks have borrowed massive amounts in USD, when the currency was cheap and rates were low, accumulating as much as 20% of GDP according to my estimates. Finally, and most importantly, China’s nominal growth has nearly halved from its peak levels. Therefore, the wonderful vanishing effect on high nominal growth on debt is no longer as effective. 

Graph 3 - China's private debt


Sources: Bank for International Settlements, National Bureau of Statistics of China.

the Chinese economy has long been spoilt with a relatively low cost for capital

Notwithstanding the well-known cushions that the Chinese economy has (both in terms of international reserves but also of public assets which can be privatized), the speed and extent at which China’s has been leveraging have clearly had a toll on the economy. The clearest case is the real cost of funding, which has increased substantially lately at the same time in which China’s potential growth has been coming down. In fact, the safest asset, government bonds are already hovering 2% in real rates from negative territory in 2011. While this may still sound pretty low, we cannot forget that the Chinese economy has long been spoilt with a relatively low cost for capital, which is partly behind the excessive role of investment in China’s growth story. Furthermore, both local governments and corporations are facing a much higher funding cost than the central government.  In fact, the floor for their funding cost, the benchmark lending rate, is already up to 4% in real terms (Graph 4). Furthermore, many local governments and corporations, particularly real estate developers, need to borrow in the shadow banking sector where the cost of money is much higher. 

Graph 4 - China's real interest rate


Note: Calculated as Benchmark one-year lending rate minus CPI inflation rate. Sources: National Bureau of Statistics, People's Bank of China

I would argue that the high cost of funding– more than the still relatively moderate slow-down in the Chinese economy – is behind China’s push for a laxer monetary policy. The problem is that the cost of funding not only hinges on the monetary policy stance but also on the higher credit risk from a much more leveraged economy. Such higher credit risk cannot be eliminated by laxer monetary policy only, at least not structurally. It would also require the commitment from the Chinese government that no local governments and, possibly, corporations will be allowed to fail, at least not those large enough to be systemic. While the Chinese government has already been playing hide–and-seek as concerns its bail-out policy, it seems clear that a more bail-out prone attitude would clearly go against its market-friendly reform agenda. In addition, China’s fiscal room is no longer as ample so as to make an open-ended bailout policy credible, nor would it be advisable anyway.

Coming back to the role of monetary policy in reducing the cost of funding, there is no doubt that the PBoC has enough instruments at hand to bring it down; the question is at what cost

Coming back to the role of monetary policy in reducing the cost of funding, there is no doubt that the PBoC has enough instruments at hand to bring it down; the question is at what cost. Given China’s much deteriorated fiscal finances and the corporations’ massive leverage, the PBoC’s additional easing would only add more fuel to the fire at a crucial time of reform. The importance of hard budget constraints during a reform process can hardly be overstated based on the experience of the Ex-Soviet Bloc as well as that of China at an earlier stage of its reform process in the 1990s.  Given that China has been growing its market and, thereby, is corporations, many of which are now among the largest in the world, hard budget constraints are not only about fiscal policy but also about letting the market price corporations’ credit risk without excessive interference. In other words, while the PBoC should of course support the Chinese economy and avoid a hard landing, it should stop short from full artificially lowering the cost of funding beyond what would be required for a correct evaluation of credit risk.  More specifically, the PBoC should ease monetary policy to the point that even unsound institutions can continue to operate without changing their behavior, especially as concerns leverage. This is the very fine line that the PBoC needs to draw. In addition, we cannot forget that the monetary policy stance also needs to take into account the fiscal stance, which has so far been extremely lax pushing the natural interest rate upwards. The very large local government deficits go against the notation of a hard budget constraint to reform the fiscal administration. 

Therefore, not matter how attractive the music sounds to the PBoC’s ears, it should refrain from making it too easy for local governments and leveraged corporations to avoid being confronted with the need to restructure and, therefore, with the need to reform. Flooded with liquidity, neither SOEs nor local governments will feel the pinch, eliminating market forces. If this concern is generally true, it is even more so for doubtful projects– which is what a potential QE in China would end up supporting. All in all, too much easing from the PBoC– let alone full-fledged quantitative easing - can only foster financial fragilities. By that token, if financial stability become the key concern, China’s much needed reform process will need to be postponed once again to manage financial fragilities first.




Tue, 05 May 2015 09:18:20 +0100
<![CDATA[A compelling case for Chinese monetary easing]]> http://www.bruegel.org/publications/publication-detail/publication/879-a-compelling-case-for-chinese-monetary-easing/ publ879

• Chinese monetary policy was excessively tight in 2014 but started loosening in late 2014, in an attempt to cushion growth, facilitate rebalancing, support reform and mitigate financial risk.

• There are three main reasons for this policy shift. First, there is evidence that the Chinese economy has been operating below its potential capacity. Second, among the big five economies, China’s monetary policy stance and broader financial condition both tightened the most in the wake of the global financial crisis, likely weighing on domestic growth. Third, a mix of easy monetary policy and neutral fiscal policy would serve China best at the current juncture, because it would support domestic demand and help with the restructuring of China's local government debts, while facilitating a move away from the soft dollar peg.

• Such a warranted shift in monetary policy stance faces the challenges of uncertain potential growth, a more liberalised financial system, an evolving monetary policy framework, the legacy of excess leverage and a politicised policy debate.

A compelling case for Chinese monetary easing (English)
Tue, 28 Apr 2015 09:16:45 +0100
<![CDATA[The Trans-Pacific Partnership]]> http://www.bruegel.org/nc/blog/detail/article/1617-the-trans-pacific-partnership/ blog1617

What’s at stake: U.S. Congressional leaders have recently introduced a bipartisan bill to renew the power of the president to negotiate trade agreements. If the Senate passes the bill, this is expected to inject momentum in regional trade negotiations with both Europe (TTIP) and Asia (TPP).

Fast track to TPP

Danielle Kurtzleben writes that the Trans-Pacific Partnership has become one of the hottest topics in Washington, as it appears to be one of the few topics on which President Barack Obama and Republicans might be able to reach any sort of agreement in this session of Congress. Roger Altman and Richard Haass write that after five years, American-led negotiations over the Trans-Pacific Partnership are nearly complete. The next step is for Congress to allow for the same legislative process — an up-or-down vote on the deal — that it applied to recent trade pacts, including the North American Free Trade Agreement of 1993 and the United States-South Korea free trade agreement of 2011.

Timothy Lee writes that Obama's predecessors have enjoyed Trade Promotion Authority, also known as "fast track", which allowed them to negotiate a number of trade deals. But the authority expired in 2007, and Obama has struggled to get it renewed by Congress (Naked Capitalism notes that Obama failed in the last Congress to get fast-tracked due mainly to considerable opposition in the Democratic party). Danielle Kurtzleben writes that the idea of fast track is that a president needs to be able to negotiate a treaty without the fear that Congress will amend it after he and a whole bunch of other countries come to agreement on a deal. When the president has TPA, he consults with Congress, but once a deal is reached, Congress can only vote it up or down — no amendments. Without that authority, it's not really feasible to reach a credible deal with foreign leaders. Greg Mankiw writes that with influential lawmakers like Senator Elizabeth Warren opposed to the measure, final congressional approval is far from certain.

The Council of Economic Advisers writes that the TPP is a proposed regional FTA that the United States is negotiating with 11 other countries: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Based on the most recent data, TPP partners account for 37 percent of world GDP, 11 percent of the world’s popula­tion, and 23 percent of world exports of goods and services.

Source: Federation of American Scientists via Vox.com

The enforceability of trade provisions

Timothy B. Lee writes that, in the past, debates about trade deals have mostly been about trade. In contrast, debates over the TPP mostly haven't focused on its trade provisions. As the opportunities for trade liberalization have dwindled, the nature of trade agreements has shifted. They're no longer just about removing barriers to trade. They've become a mechanism for setting global economic rules more generally.

Timothy B. Lee writes that the robust enforceability of trade agreements is unusual and is the reason why TPP would cover such a wide range of topics. If a country fails to live up to its commitments under the TPP, it can be hauled before a TPP dispute-settlement panel and — if it loses — face trade sanctions. Which means countries are likely to actually comply with their commitments — something that isn't necessarily true of other types of international agreements.

Ezra Klein writes that people at the White House note that Obama ran for office promising to renegotiate NAFTA, and while that didn't happen, this deal fully reflects his thinking about what went wrong with NAFTA — particularly in the weak enforceability of its labor and environmental standards. People will be surprised by how different from its predecessors this trade deal really is when the text is finalized and released publicly.  

The Council of Economic Advisers writes that failing to secure a TPP agreement would place U.S. workers and businesses at a distinct disadvantage, by allowing other countries to set the rules of the global trading system—rules that would likely be adverse to U.S. interests. Comprehensive trade agreements like TPP offer the United States a way to shape globalization’s rules in the best interest of American workers and firms and to ensure that global standards include important issues like worker and environmental protections.

Companies, workers and total gains

Lawrence Summers writes that some matters that are pushed by elements of the business community have little or nothing to do with the interests of the vast majority of American workers. These include pressuring other countries to change health and safety regulation, to extend and strengthen patent protection and to deregulate financial services. Conversely, it is appropriate in TPP, and our international economic diplomacy more generally, that we use the substantial leverage we possess in areas that do bear directly on middle-class living standards. These include the prevention of inappropriate producer subsidies — including through manipulated exchange rates or distorted state enterprise accounting.

Paul Krugman writes that, as with many “trade” deals in recent years, the intellectual property aspects are more important than the trade aspects. Leaked documents suggest that the US is trying to get radically enhanced protection for patents and copyrights; this is largely about Hollywood and pharma rather than conventional exporters. Do we really think that inadequate incentive to create new drugs or new movies is a major problem right now?

Source: Council of Economic Advisers

Brad DeLong writes that although estimates of the potential gains from freer trade are small number relative to the wealth of the world both now and discounted into the future, this is a rather large number compared to other things the U.S. government might do this year. Paul Krugman says that the potential net gains from freer trade in services and (secondarily) agriculture as estimated by Petri, Plummer and Zhai of 0.5% of GDP "seem high to him". Suppose that they are half that. In a Pacific region whose GDP is now approaching $30 trillion/year, that is $75 billion/year. Capitalize that at 4%/year and we get a net addition to world wealth of $3 trillion. 

Mon, 27 Apr 2015 09:02:04 +0100
<![CDATA[Turkey and the EU after the election]]> http://www.bruegel.org/nc/events/event-detail/event/528-turkey-and-the-eu-after-the-election/ even528

On 7 June 2015 Turkey will be voting in its 24th general election. Bruegel is pleased to announce a conference on 10 June in cooperation with the Istanbul Policy Center to discuss the result, the economic and political prospects and Turkish-EU relations.

Programme -

12.30: Registration and sandwich lunch

12.45 - 13.30: The outcome of the election

  • Chair: Kemal Derviş, member of the Executive Board, Istanbul Policy Center, and director of the Global Economy and Development Program, Brookings Institution
  • Fuat Keyman, director, Istanbul Policy Center, and professor of international relations, Sabancı University
  • Senem Aydın-Düzgit, senior scholar, Istanbul Policy Center, and assistant professor, Istanbul Bilgi University

13.30-15.15: Economic and political prospects

  • Chair: Fuat Keyman, director, Istanbul Policy Center, professor of international relations, Sabancı University
  • Işık Özel, associate professor of political science, Sabancı University
  • İzak Atiyas, senior scholar, Istanbul Policy Center, and professor, Sabancı University
  • Christian Danielsson, director-general, European Commission DG NEAR
  • Daniel Gros, director, Centre for European Policy Studies

15.15-15.30: Coffee Break

15.30-17.00 - Turkey and Europe in the global context

  • Chair: Guntram Wolff, director, Bruegel
  • Stefano Manservisi, head of cabinet of the high representative of the union for foreign affairs and security policy, EEAS
  • Kemal Derviş, member of the Executive Board, Istanbul Policy Center, and director of the Global Economy and Development Program, Brookings Institution
  • Laurence Dumont, member of the Assemblée Nationale, France
  • Münevver Cebeci, associate professor, European Union Institute of Marmara University

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: 10 June 2015, 12.30-15.30
  • Contact: Matilda Sevón

Fri, 24 Apr 2015 16:25:53 +0100
<![CDATA[Capital Markets Union: a vision for the long term ]]> http://www.bruegel.org/publications/publication-detail/publication/878-capital-markets-union-a-vision-for-the-long-term/ publ878

• Capital Markets Union (CMU) is a welcome initiative. It could augment economic risk sharing, set the right conditions for more dynamic development of risk capital for high-growth firms and improve choices and returns for savers. This offers major potential for benefits in terms of jobs, growth and financial resilience.

• CMU cannot be a short-term cyclical instrument to replace subdued bank lending, because financial ecosystems change slowly. Shifting financial intermediation towards capital markets and increasing cross-border integration will require action on multiple fronts, including increasing the transparency, reliability and comparability of information and addressing financial stability concerns. Some quick wins might be available but CMU’s real potential can only be achieved with a long-term structural policy agenda.

• To sustain the current momentum, the EU should first commit to a limited number of key reforms, including more integrated accounting enforcement and supervision of audit firms. Second, it should set up autonomous taskforces to prepare proposals on the more complex issues: corporate credit information, financial infrastructure, insolvency, financial investment taxation and the retrospective review of recent capital markets regulation. The aim should be substantial legislative implementation by the end of the current EU parliamentary term.

Capital Markets Union: a vision for the long term (English)
Fri, 24 Apr 2015 11:43:27 +0100
<![CDATA[The Gazprom case: good timing or bad timing?]]> http://www.bruegel.org/nc/blog/detail/article/1616-the-gazprom-case-good-timing-or-bad-timing/ blog1616

Just a week after having sent a Statement of Objections (SO) in the frame of the antitrust case against Google, EU Competition Commissioner Margrethe Vestager sent yesterday an SO in the frame of the case against Gazprom. The decision to send a charge sheet against the Russian gas company came after almost three years of investigations, which have also seen EU antitrust officials raiding Gazprom offices in central and eastern European countries.

But what is this antitrust case all about? And, considering the current EU gas market environment, has it arrived at a good time or  bad time for Gazprom? Furthermore, what might be its potential impact on  overall EU-Russia relations? This blog post aims to shed some light on these issues, also by trying to consider the perspective that Gazprom might have on the issue.

The case in a nutshell

In the Statement of Objections sent yesterday, the European Commission alleges that in the Baltic countries, Bulgaria and Poland Gazprom is:

i) Hindering cross-border gas sales, through certain clauses in the contracts with its customers allowing Gazprom to charge higher prices in countries that are more dependent on Russian gas (see map).

Average price for Russian gas in 2013 in EU member states, USD/thousand cubic meters

Source: Bruegel based on Henderson and Pirani (2014).

ii) Charging unfair prices through Gazprom's pricing formulae.

iii) Making gas supplies conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure. Specifically, the Commission's preliminary view is that Gazprom made wholesale gas supplies in Bulgaria conditional on the country's participation in the South Stream pipeline project, and in Poland conditional on the company's control over investment decisions concerning the Yamal pipeline.

Gazprom has 12 weeks to respond to the Statement of Objections and also has the opportunity tocall an oral hearing to make its defence. As there is no legal deadline for the Commission to complete antitrust inquires into anticompetitive conduct, the duration of the investigation is uncertain.  If it  keeps to legally binding commitments that address the Commission's concerns, it will still be able to settle the charges. Otherwise, the Commission might decide to issue an infringement decision and ultimately fine Gazprom up to 10 percent of its global annual turnover.

The EU antitrust case against Gazprom

Source: European Commission.

The case in the context of the current EU gas market environment: good timing

But does this case arrive at a good time or  a bad time for Gazprom? Paradoxically, looking at the current EU gas market environment it might well be argued that the case arrives at a rather favourable moment for the Russian company, at least for two reasons: demand outlook and pricing evolution.

The 10 percent reduction in EU gas demand between 2013 and 2014 illustrates the massive size of the issue.

When discussing the current status of EU gas demand, energy analysts often use expressions like "nightmare", "disaster" and "disruption". These words provide a good sense of the sharp downward trend that has characterized EU gas demand since 2008, not only due to the recession but also to the increasing share of renewables in power generation, increasing energy efficiency and the comparative advantage of the United States in terms of gas prices. As a pivotal supplier, Gazprom is also partly responsible for this ‘demand destruction’ in Europe, as its pricing policy was not flexible enough to ensure the inter-fuel (vis-à-vis coal) and international (vis-à-vis the US) competitiveness of its clients. The 10 percent reduction in EU gas demand between 2013 and 2014 illustrates the massive size of the issue.

Evolution of European gas demand (EU+CH) from 1990 to 2014

Source: Bruegel elaboration on British Petroleum and Eurogas.

With the unanticipated fall in demand, market power in the EU has rapidly shifted from producers to consumers. Gazprom might seize the opportunity presented by the antitrust case to revise its business model in the EU, with the aim of enhancing its competitiveness in the market and thus securing both the integrity of EU gas demand and its share in that.

The shift in market power from producers to consumers is connected to the pricing issue. As an overall trend, European gas pricing is evolving towards a hub-based system for commercial and regulatory reasons. This process is still in the making, considering that long-term contracts have not been terminated yet, but it is certainly advancing rapidly. Some companies, such as Statoil, have already adjusted their business model to the new reality of the EU market. Gazprom should have already followed this example, by adjusting its pricing formulae according to new market conditions, always with the ultimate aim of securing its segment of the EU gas demand. Such a move would have been particularly reasonable in recent months, considering the unprecedented fall in oil prices, which has already started to cut into Gazprom's oil-indexed contracts and which will consistently lower these gas prices during - and probably even beyond - 2015.

Evolution of Brent oil price from January 2000 to March 2015

Source: Bruegel elaboration on Energy Information Administration.

In this context, it might well be argued that the EU antitrust case arrives at a rather good moment for Gazprom, as it might seize this opportunity to enhance its business model in the EU and thus secure its long-term sustainability.

Russia perceives the EU antitrust case as mere political action. 

However, Russia perceives the EU antitrust case as mere political action. It will thus most likely use it as a rallying point and adopt a position that serves neither security of supply nor security of demand in the EU. This risk is reinforced by the fact that the EU antitrust case arrives at a very bad time for  overall EU-Russia relations.

The case in the context of current EU-Russia relations: bad timing

Commissioner Vestager declared last February that "If you see [the EU antitrust case against Gazprom] as a political case then any timing will be bad". This affirmation does certainly make a lot of sense, but of all the possible timings, the current one seems to be particularly bad for EU-Russia relations.

In fact, current political relations between the two players are extremely difficult, due to the convergence of a variety of factors such as EU sanctions against Russia over the Ukraine crisis, diplomatic efforts of Russia to unhinge the precarious EU "single voice" in foreign policy by attracting vulnerable EU Member States into its economic orbit, the persistency of tensions in Eastern Ukraine even after the Minsk II agreement, and the difficulties of the ongoing trilateral EU-Ukraine-Russia gas talks and related security concerns.

In this extremely complex geopolitical situation the EU antitrust case against Gazprom will most likely - in this case literally - add fuel to the fire.


In commercial terms Gazprom might benefit from the EU antitrust case

In commercial terms Gazprom might benefit from the EU antitrust case, in the sense that it might provide the necessary outside impetus for Gazprom restructure its business model in the EU accordingly to new market realities, in line with actions already taken by other EU gas suppliers such as Statoil. Such a process will enable Gazprom to sustain its role in the European market in the long-term, and also contribute to de-politicize the role - and the perception - of the company in Europe. Moreover, such a process might also help Gazprom to become de-politicized within Russia, making it less likely in the future that sensible business decisions are overruled by political concerns.

However, political arguments will most likely prevail over commercial ones, and this dynamic will further worsen the already deteriorating EU-Russia gas partnership. If Gazprom does not collaborate with the European Commission during the case, it will provide the EU with another argument in favour of diversification of gas supplies, ultimately contributing to the further deterioration not only of the EU-Russia gas partnership but also of the position of Gazprom itself in the EU. At this moment, as Belyi and Goldthau also point out, Gazprom should decide on whether to follow a risky political path or a sustainable commercial trajectory. In the latter case, its actions might ultimately contribute to the (re)construction of a relationship of mutual trust between the EU and Russia, which could expand far beyond the realm of the gas market.

Thu, 23 Apr 2015 11:20:10 +0100
<![CDATA[The IMF's big Greek mistake]]> http://www.bruegel.org/nc/blog/detail/article/1615-the-imfs-big-greek-mistake/ blog1615

the IMF should recognize its responsibility for the country's predicament and forgive much of the debt

The Greek government's mounting financial woes are leading it to contemplate the previously unthinkable: defaulting on a loan from the International Monetary Fund. Instead of demanding repayment and further austerity, the IMF should recognize its responsibility for the country's predicament and forgive much of the debt.

Greece's onerous obligations to the IMF, the European Central Bank and European governments can be traced back to April 2010, when they made a fateful mistake. Instead of allowing Greece to default on its insurmountable debts to private creditors, they chose to lend it the money to pay in full.

At the time, many called for immediately “restructuring” of privately-held debt, thus imposing losses on the banks and investors who had lent money to Greece. Among them were several members of the IMF’s Board and Karl Otto Pohl, a former president of the Bundesbank and a key architect of the euro. The IMF and European authorities responded that restructuring would cause global financial mayhem. As Pohl candidly noted, that was merely a cover for bailing out German and French banks, which had been among the largest enablers of Greek profligacy.

Ultimately, the authorities' approach merely replaced one problem with another: IMF and official European loans were used to repay private creditors. Thus, despite a belated restructuring in 2012, Greece's obligations remain unbearable -- only now they are owed almost entirely to official creditors.

Five years after the crisis started, government debt has jumped from 130 percent of gross domestic product to nearly 180 percent. Meanwhile, a deep economic slump and deflation have severely impaired the government's ability to repay.

Virtually everyone now agrees that pushing Greece to pay its private creditors was a bad idea.

Virtually everyone now agrees that pushing Greece to pay its private creditors was a bad idea. The required fiscal austerity was simply too great, causing the economy to collapse. The IMF acknowledged the error in a 2013 report on Greece. In a recent staff paper, the fund said that when a crisis threatens to spread, it should seek a collective global solution rather than forcing the distressed economy to bear the entire burden. The IMF’s chief economist, Olivier Blanchard, has warned that more austerity will crush growth.

Oddly, the IMF’s proposed way forward for Greece remains unchanged: Borrow more money (this time from the European authorities) to repay one group of creditors (the IMF) and stay focused on austerity. The fund's latest projections assume that the government's budget surplus (other than interest payments) will reach 4.5 percent of GDP, a level of belt-tightening that few governments have ever sustained for any significant period of time.

The priority must be to prevent Greece from sinking deeper into a debt-deflation spiral.

Following Germany's lead, IMF officials have placed their faith in “structural reforms” -- changes in labor and other markets that are supposed to improve the Greek economy's longer-term growth potential. They should know better. The fund's latest World Economic Outlook throws cold water on the notion that such reforms will address the Greek debt problem in a reliable and timely manner. The most valuable measures encourage research and development and help spur high-technology sectors. All this is to the good, but such gains are irrelevant for the next five years. The priority must be to prevent Greece from sinking deeper into a debt-deflation spiral. Unfortunately, some reforms will actually accelerate the spiral by weakening demand.

On April 9, Greece repaid 450 million euros to the IMF, and must pay another 2 billion in May and June. The IMF’s Managing Director, Christine Lagarde, has made clear that delays in repayments will not be tolerated. “I would, certainly for myself, not support it,” she told Bloomberg Television.

Five years on, the question will be why was more debt not forgiven sooner.

Inevitably, debt relief will be provided -- but in driblets and together with unrelenting pain. The Greek government will need to withhold payments to suppliers and workers, and will raid pension funds. Five years from now, the country's economic and social stress could well be even more acute. The question will be: Why was more debt not forgiven earlier? No one is willing to confront that unpleasant arithmetic, and wishful thinking prevails.

Having failed its first Greek test, the IMF risks doing so again. It remains trapped by the priorities of shareholders, including in recent years the U.K. and Germany. To reassert its independence and redeem its lost credibility, it should write off a big chunk of Greece's debt and force its wealthy shareholders to bear the losses.

Tue, 21 Apr 2015 16:15:10 +0100
<![CDATA[The many births of Bruegel]]> http://www.bruegel.org/nc/blog/detail/article/1614-the-many-births-of-bruegel/ blog1614

Ten years ago, on 20 April 2005, Bruegel’s fledgling team moved into what would become its permanent address, on the third floor of 33 rue de la charité / liefdadigheidstraat 33 in Brussels. The works to adapt our premises to their use as a think-tank venue was still far from finished. A few days later, Bruegel’s Board held its second meeting in what was still a makeshift boardroom in a vast open space. Most internal walls came only later.

At that time, Jean Pisani-Ferry, who had been appointed Bruegel’s first Director in January, Yvonne Hilario, Jozefien Van Damme and I were still entirely focused on the early operational and organizational build-up, also relying on Soizick Bévan as the project’s generously pro bono consultant. The research team would take initial shape only later in the spring, with the arrival of André Sapir as Bruegel’s first Senior Fellow, followed by three Research Fellows who have since moved on to expanded horizons: Alan Ahearne as a senior Irish financial and monetary policymaker, Juan Delgado as chief economist of the Spanish Competition Authority, and Jakob von Weizsäcker as Member of the European Parliament from the German SPD party.

That year 2005 was effectively when Bruegel started. There were many milestones, all of them important. On 17 January, the Board had its first meeting, at Brussels’s timeworn University Foundation near the Royal Palace. Under Chairman Mario Monti’s leadership, it adopted the name Bruegel – which Monti had himself suggested, playing on the idea of a “Brussels European and global economic laboratory” – and marked the start of Bruegel actual operations. The day after, Monti and Pisani-Ferry held a press briefing in which the new child was announced to the world, and received promising initial coverage.

Die Zeit emphasized the project’s Gemütlichkeit, calling it “Bruegels Denkstube”; Libération noted approvingly that it might help Europe find a voice to match les influents think tanks américains; the Italian press understandably focused on what the Bruegel chairmanship suggested about Monti’s future moves; and the Financial Times wrote “Monti recalled that Bruegel (the Elder, of course) was also known for his depiction of the Tower of Babel, which the think-tank would not resemble in the slightest.” A few days later, columnist Brian Groom noted in the same newspaper that “Initial fears at the European Commission that [Bruegel] would be another French-German manoeuvre to seize back the political initiative has turned out wide of the mark.”

After the move to the new offices, Bruegel held its first workshop there, on 13 May, on “Europe’s productivity drift and how to reverse it”. On 27-28 June it held its first high-level conference on the challenge to trade multilateralism from regional deals, a theme that also resonates these days, in the historic Erasmus House in Anderlecht. On 9 September, Bruegel’s first paper, written by André Sapir, was distributed and discussed at an informal ECOFIN meeting in Manchester. That same paper, “Globalization and the Reform of European Social Models”, was published as Bruegel’s first Policy Brief on 24 October, on a visual charter designed by Jean-Yves Verdu, who had also created the Bruegel logo. It firmly established Bruegel as a source of influential policy ideas from the very outset.

Even though the events of 2005 felt like a series of beginnings, they were also the culmination of a process of gestation that had started three years earlier. Both Jean Pisani-Ferry and I had been thinking about the possibility of a new European think tank, first on separate tracks and then jointly after a lunchtime conversation in Paris on 18 October 2002. The project was launched on 22 January 2003, by Jacques Chirac and Gerhard Schröder as part of the joint French-German declaration on the 40th anniversary of the de Gaulle-Adenauer Elysée Treaty. After some delays, it was then further elaborated by a French-German working group that brought it to discussion within the European Economic and Financial Committee, initially introduced by Jean-Pierre Jouyet and Caio Koch-Weser on behalf of their respective finance ministries. On 9 March 2004, 11 EU member states (Belgium, Denmark, France, Germany, Hungary, Ireland, Italy, the Netherlands, Poland, Spain, and – last but never least – the UK) announced their initial agreement to support Bruegel’s launch, conditional to successful fundraising from the private sector that was secured later in 2004. Pisani-Ferry was appointed project manager on 1 April 2004, and the legal entity that is Bruegel was formally created on 10 August 2004. This paved the way for the formation of Bruegel’s first Board, which Monti accepted to chair shortly after leaving the European Commission in late October 2004.

All these dates were, each in its own way, birthdates of Bruegel. Since then, our think tank has rapidly gained recognition and reputation, indeed more quickly than its founders initially thought possible. As for real estate, we expanded further in 2008, and will do so again later this year with a larger room for workshops and conferences and new facilities for our visitors and staff.

Bruegel is typically focused on the present and future, more than on the past. Nevertheless, the tenth anniversary of its start provides an appropriate occasion to recall how it all started. As one who was present at the creation, I will tell that story in further blog posts in the course of this year of celebration – while at the same time wishing Bruegel many more decades of success, expansion, and hard work. 

Mon, 20 Apr 2015 14:20:05 +0100
<![CDATA[Bruegel's Annual Conference]]> http://www.bruegel.org/nc/events/event-detail/event/527-bruegels-annual-conference/ even527

Bruegel's Annual Meetings offer a mixture of public sessions and restricted workshops, where Bruegel's scholars, members and stakeholders can discuss the policy challenges facing the European economy. In 2015 these events are also part of Bruegel's 10th anniversary celebrations, for which we are organising a series of events in the capitals of our member states. These debates, talks and conferences will bring crucial European topics to audiences across the continent.

Bruegel's Annual Conference - Draft Programme

9.00 Arrival

9:15-11:00 Banks and capital markets in the EU: Back to stability and growth?

  • Joanne Kellerman, board member, Single Resolution Board
  • Luc Frieden, Vice Chairman Deutsche Bank
  • Other speakers to be confirmed

11:00-11:30 Coffee break

11:30-13:00 Which growth perspectives for Europe?

  • Alvaro Nadal, state secretary, head of the Economic Bureau of the prime minister, Spain
  • Jean Pisani-Ferry, commissioner-general of the French prime minister's policy planning staff
  • Other speakers to be confirmed

13:00-14:30 What future for Europe's social models? (PUBLIC LUNCH DEBATE)

See separate event page about this public session.

14:30-16:15 Monetary policy and central banking: a global outlook

  • Paul Sheard, chief global economist, Standard & Poor's
  • Otmar Issing, president, Center for Financial Studies
  • Other speakers to be confirmed

Mon, 20 Apr 2015 11:17:18 +0100
<![CDATA[What future for Europe's social models?]]> http://www.bruegel.org/nc/events/event-detail/event/526-what-future-for-europes-social-models/ even526

Bruegel's Annual Meetings offer a mixture of public sessions and restricted workshops, where Bruegel's scholars, members and stakeholders can discuss the policy challenges facing the European economy. In 2015 these events are also part of Bruegel's 10th anniversary celebrations, for which we are organising a series of events in the capitals of our member states. These debates, talks and conferences will bring crucial European topics to audiences across the continent.

What future for Europe's social models?

A distinctively European social model is central to the political identity of many European societies. In the early stages of the financial crisis European social protection was even held up as a way to shelter both citizens and the productive economy from sharp recessions. However, during recent years this European social model has come under unprecedented pressure from government austerity. Looking ahead, an aging population and the potential for long-term stagnation are raising questions about the viability of the welfare state in its current form.

Protests and strikes across the continent have shown that European publics are reluctant to accept major cuts in social spending, but what lies ahead for Europe's social models? Is it possible to meet the current challenges with sustainable reforms that still protect the political principals or the welfare state? Or does social spending require major reduction and restructuring that will leave the social models of Europe totally changed?

This public debate will feature high-level speakers including Tito Boeri, president of the Italian National Social Security Institute.

Practical Details

  • Location: Brussels, Belgium
  • Venue: Les Brigittines, Petite rue des Brigittines, 1000 Brussels
  • Date: 8 September 2015
  • Time: 13.00-14.30
  • Contact: Matilda Sevón

Mon, 20 Apr 2015 10:43:21 +0100