<![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Wed, 01 Jul 2015 02:39:20 +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[Charts: (Lack of a) Reaction in Euro Area yields]]> http://www.bruegel.org/nc/blog/detail/article/1663-charts-lack-of-a-reaction-in-euro-area-yields/ blog1663

With the current situation in the ongoing Greek debt negotiations taking a turn for the worse this weekend, we take a look at other Euro area interest rates on long-term debt  to gauge how markets have reacted to the news of a Greek referendum on the Eurogroup's proposals,  and the imposition of capital controls.

So far, markets have reacted in a fairly benign way, especially when put in the context of developments between 2010 and 2012.

Figure 1: Intra-day Evolution of 10 Year Sovereign Yields (%, hourly data)


Source: Thomson Reuters Eikon, most recent data 17:00 CET (16:00 GMT)


Figure 2: Change since Market Closing on Friday, 26.06.15 (basis points)


Source: Thomson Reuters Eikon, most recent data 17:00 CET (16:00 GMT)

Spain, Italy and Portugal show the biggest market reactions to the weekend’s news, with yields temporarily increasing by 22, 23 and 28 basis points respectively, from the last data on Friday to the point at which markets opened today. The markets have dampened their reaction since then somewhat (as shown by the red bars) in Spain and Italy.

Figure 3: Historical perspective of 10 year sovereign yields (%)


Source: Thomson Reuters Datastream

Taking a broader look at volatility, the VIX and VSTOXX indicies do not show significant signs of major stress yet, although the VSTOXX, the European index, has diverged locally from the VIX recently, but this evolution has been ongoing since before the weekend's events.

Figure 4: VIX volatility index

Source: Thomson Reuters EIKON









Mon, 29 Jun 2015 18:06:11 +0100
<![CDATA[Greece: from default to Grexit?]]> http://www.bruegel.org/nc/blog/detail/article/1662-greece-from-default-to-grexit/ blog1662

The government of Greece has rejected the creditors’ conditions of the continuing bailout program and is heading to imminent default on its obligations vis à vis the International Monetary Fund (end-of-June) and European Central Bank (July).The chaotic manner in which negotiations were broken off, and Prime Minister Tsipras’ decision to call a referendum on July 5, 2015 on accepting or rejecting creditors’ conditions triggered an immediate banking panic: people in Greece started to queue at ATM machines to withdraw cash from their accounts. 


Greece’s banking sector has already been under huge pressure since Syriza’s parliamentary victory 

In fact, Greece’s banking sector has already been under huge pressure since Syriza’s parliamentary victory in January 2015. Only the systematically increasing liquidity support of the ECB, through the Emergency Liquidity Assistance (ELA) special lending facility has kept banks afloat. 

From default to Grexit – the hypothetical scenarios

Does Greece’s sovereign default and banking crisis mean its immediate and automatic exit from the Eurozone as many commentators have suggested? The short answer is not necessarily and, definitely, not immediately. Leaving aside quite complicated legal issues, such as the lack of a formal procedure for leaving the Eurozone, let us concentrate on different economic scenarios, which may or may not lead to Grexit. In any case, an exit is unlikely to happen during the next few days or weeks. 

Considering hypothetical scenarios of leaving the Eurozone (Dabrowski, 2012), the most likely variant could be involuntary exit caused by lack of another option acceptable to Greek authorities or loss of control on macroeconomic developments. Two other potential scenarios, such as a voluntary and deliberate decision by Greece to leave the Eurozone and reintroduce its national currency, an involuntary exit forced by other EU/Eurozone members do not look probable. Most of Greek society, including the ruling Syriza party, wants to keep the Euro. The remaining EU partners have neither the legal instruments, nor the interest to force Grexit.  

The first trigger - banking crisis

Greece’s involuntary exit from the Eurozone may be triggered by a banking crisis

In the current situation, Greece’s involuntary exit from the Eurozone could be triggered, in the first instance, by a banking crisis. Facing a run on bank deposits and having frozen the size of ECB liquidity support at the level of June 26, 2015, the authorities had to introduce limits on cash withdrawals and money transfers outside Greece and announced bank holidays for one week, most likely subject to further extension. In case of reduction or complete withdrawal of the ELA support, banks will have to be closed immediately because they will become both illiquid and insolvent. 

Although living with closed banks and frozen deposits is technically possible (as demonstrated, for example, by the US banking crisis in the early 1930s or, in a lighter form, in Cyprus in 2013), this cannot last for long. This is the case even in Greece, where the general population and small businesses are used to relying on cash operations, and large enterprises often operate via foreign banks. Sooner or later, the government may want to offer the owners of blocked Euro deposits the chance to voluntarily convert them into the new national currency, a move which would require reverting to a national monetary policy (to provide banks with liquidity in the new currency) and then printing new banknotes and coins to allow free deposit withdrawals. 

Another hypothetical sub-scenario involves taking political control over the Bank of Greece (in violation of the EU treaties) and forcing it to act against ECB instructions, i.e., providing commercial banks with liquidity support beyond ECB limits and lending conditions (related to eligible collateral and its quality). This kind of “rebellion” was observed both in the former USSR and in former Yugoslavia during their political disintegration between 1990 and 1992. The republican central banks (formally the branches of the State Bank of the USSR or the National Bank of Yugoslavia) started to issue credit money on their own, without authorization from their headquarters.

The most likely ECB reaction to such hypothetical scenario would be cutting Greek banks off from the Target-2 payment system. As a result, the Euro non-cash turnover in Greece would become separated from the remaining part of the Eurozone. Once owners of Euro deposits learn about this separation, they would likely start testing the ability of local banks to cash their deposits, leading to either bank closures or the necessity to print local cash currency. 

The second trigger – government cash shortage

Since 2013, Greece has enjoyed a primary fiscal surplus. That is, the government can pay salaries, pensions and other current bills out of current revenues, especially if it stops serving its debt. However, the increasing uncertainty associated with the economic policies of the Syriza government and negotiations with creditors have recently led to problems in revenue collection (Merler, 2015). The chaos caused by the failure of the bailout negotiations, sovereign default and banking crisis, could cause the situation to drastically deteriorate in the coming weeks.  

Facing a cash shortage, the government may postpone its payments and continue building up arrears (which already exist) as was done by several governments in the former USSR in the 1990s. However, this solution would work for a few weeks, perhaps months, not longer, and the consequences for payment discipline in the entire economy are obviously negative. At some point, the government may try issuing promissory notes or other kinds of monetary substitutes. Even if denominated in Euro (still the official legal tender), these substitutes would be traded on the private market at a discount. And the government would have to accept them as the means of payment, for example, of taxes or fees for government services. If it remains unable to redeem them at nominal value in some reasonable period of time, a parallel currency, a kind of “local” Euro will be de facto installed. This is another avenue, which may lead Greece to gradual departure from the Eurozone.

Doubtful benefits of leaving the Eurozone

Could leaving the Eurozone help Greece to solve its economic and fiscal problems as suggested by many commentators? According to them, reintroducing a weaker national currency would allow the country to regain its external competitiveness. However, today competitiveness is not such a dramatic problem as it was a few years ago, thanks to the progress in structural reforms achieved in recent years (Darvas 2015). Furthermore, Greece’s exports have not reacted much to decreases in wage costs due to other factors such as rigid product markets and limited innovation (Wolff 2015; Velasco 2015), the policy areas that require further deep reforms. The structure of Greece’s exports (the large share of international services) also plays a role (Gros, 2015). 

Exiting a highly integrated monetary union with a single legal tender in which all the contracts are denominated in a common currency, is a much more complex and hazardous operation than a simple devaluation of the national currency (like the devaluation of the British pound in 1992). Even such an “ordinary” devaluation is usually contractionary in the short-term, because it negatively affects domestic demand. In countries in which a substantial part of public and private debt is denominated in foreign currency, the consequences of a devaluation are much more severe (like the example of Argentina in early 2000s) as the size of external liabilities increases in the local currency and in relation to GDP. 

A departure from the Eurozone would mean an immediate default on all public and most private liabilities

A departure from the Eurozone would mean an immediate default on all public and most private liabilities, as old contracts would remain denominated in Euro. Any attempt to redenominate them involuntarily into the new weaker currency (as well as the discrimination of residents against non-residents or vice versa) would involve serious legal objections that are not easily overcome in an EU country with democratic rule-of-law. 

The economic chaos resulting from exiting the Eurozone, a collapse of the financial system and a rapidly deteriorating economy would further reduce tax revenues and, therefore, the capacity of the government to provide basic public goods and services. 

Technical and economic challenges of new currency 

Finally, reintroducing a national currency (unlike currency devaluation) is quite a complex technical operation, which requires time and the administrative capacity to be prepared in secrecy. The operation itself would most likely have to include a temporary bank holiday and the reintroduction of customs controls on a country’s borders to stop the outflow of euro cash. Given the inexperience of the current government, the weakness of the Greek public administration and potential opposition to leaving the Eurozone, it may pose a serious challenge. 

Despite its formal status as legal tender, a new currency might not be trusted and accepted by economic agents who would prefer to continue using the euro. If not supported by tough monetary and fiscal policies (a rather unlikely scenario for the government, which just rejected the much softer conditionality of the bailout package) a new currency would rapidly depreciate, which could lead to high inflation or even hyperinflation. This was the experience of many of the successor states of the former Austro-Hungarian Empire (after 1918), as well as the former Soviet Union and former Yugoslavia (both after 1991). 

It’s not too late to avoid havoc

Greece faces an uneasy period of serious financial, economic and (perhaps) political turbulence. Whether the rejection of the “Troika” bailout package and the resulting sovereign default will lead to exiting the Eurozone and reintroducing national currency is hard to tell. If it eventually happens, it will take several weeks or months. However, Grexit does not need to happen. There is still a window of opportunity (although rapidly decreasing over time) for the Greek government to come back to the negotiation table and relaunch economic reform. The result of the forthcoming referendum will play a decisive role. 


Dabrowski, M. (2012): The need for contingency planning: potential scenarios of Eurozone disintegration, CASE Network E-Briefs, No. 11/2012

Darvas, Z. (2015): Is Greece Destined to Grow?, Bruegel Blog, 16th June, www.bruegel.org/nc/blog/detail/article/1647-is-greece-destined-to-grow/&nbsp;

Gros, D. (2015): Why Greece is Different, Project Syndicate, May 13, https://www.project-syndicate.org/commentary/greece-export-problem-by-daniel-gros-2015-05

Merler, S. (2015): Greece budget update. The same story, with a twist for the worse, Bruegel Blog, 19th June, www.bruegel.org/nc/blog/detail/article/1650-greece-budget-update/&nbsp;

Velasco, A. (2015): Greece, Argentina, and the Middle-Income Trap, Project Syndicate, May 30, 


Wolff, G. (2015): Why Grexit would not help Greece - debunking the myth of exports, Bruegel Blog, 6th January, www.bruegel.org/nc/blog/detail/article/1530-why-grexit-would-not-help-greece/

Mon, 29 Jun 2015 15:55:09 +0100
<![CDATA[#Greferendum]]> http://www.bruegel.org/nc/blog/detail/article/1661-greferendum/ blog1661

Defying hopes that negotiations could lead to an agreement between Greece and its creditors by the end of the week and ahead of the programme expiring, PM Tsipras announced on Friday evening that he would call a referendum to allow the Greek people to express their view about the latest creditors´ proposal. Based on Tsipras’ speech, the decision to call for a referendum rests on the government’s conviction that accepting the proposal on the table would be beyond its mandate, because the proposal would be in conflict with the electoral platform the government was elected on. Finance minister Varoufakis also commented along these lines, saying that for such a major decision the Greek government felt it ought to consult the Greek people and receive the backing of more than 50% of the citizens.

On Saturday night, the Greek parliament authorized the referendum, with a total of 178 lawmakers backing the proposal and 120 voting against it (the threshold for authorization being 151 votes). Kathimerini reports that deputies from the far right Golden Dawn voted with the government, while opposition parties New Democracy, PASOK and To Potami and the KKE Communist Party voted against. The referendum will therefore be held in a week, on Sunday the 5th of July. According to the Greek government´s proposed question, Greek people will be asked to answer the following: 

"The Greek people are asked with their vote whether to accept the outline of the agreement submitted by the European Commission, the ECB and the IMF on the Eurogroup of 25th June 2015 and consisting of two documents, which form the basis upon the referendum question will be asked: the first document is titled "Reforms for the completion of the Current Program and Beyond" and the second document is titled "Preliminary debt sustainability analysis". 

Whichever citizen rejects the institutions' proposal votes NO.

Whichever citizen accepts the institutions' proposal votes YES" 

The government will be campaigning for NO, rejecting the creditors’ proposal.  

The Documents 

If views on the primary surplus targets are now aligned, views on how to fill the fiscal gap in the supplementary budget are definitely not. 

The referendum question will be based on the people's assessment of the creditors' proposal of June 25th. This is the proposal that was supposed to be sent to the Eurogroup for discussion - posted by the Financial Times - and it is identical to the document published yesterday by the European Commission “in the interest of transparency and for the information of the Greek people”. This proposal was considered unacceptable by the Greek government and incompatible with the mandate that it had received based on the electoral platform it had run on. Before talks broke down on Friday, however, the Greek government had advanced a counterproposal - which was also leaked and posted by the Financial Times. It may therefore be useful to recall here the main points of the creditors’ proposal, as opposed to this later Greek counterproposal, which presumably the Greek government would consider acceptable and compatible with its mandate.

On the primary surplus target, the creditor text foresees targets of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018. Both sides agree on these targets, and as already pointed out on this blog during the earlier phase of the negotiations, 1 percent of GDP in 2015 is below the target that finance minister Varoufakis unsuccessfully bargained for during the first Eurogroup he attended. This is a significant concession by the creditors from their initial demands, but the problem is that the deterioration of the Greek economy over recent months has been such that now even this “concession” translates into the need to adopt a supplementary 2015 budget (which would be effective as of July 1st). If views on the targets are now aligned, views on how to fill this fiscal gap in the supplementary budget are definitely not. 

One set of measures would be based on corporate taxes. Both sides agree to an increase in the corporate income tax rate from 26% to 28% in 2016 budget (although the Greek side initially proposed 29%, scaled down by creditors). But there is disagreement on what to do in the shorter term. The creditors’ document asked for the introduction of a 100 percent advance payments for corporate income as well as individual business income tax by end-2016, which the Greek side eliminated in their latest counterproposal. On the other hand, the Greek government wanted to reinsert a one-off corporate tax of 12% on corporate profits over EUR 0.5 million, to meet the fiscal target for 2015. This was in the initial greek offer, but creditors had opposed it

Another fiscal measure on which there is disagreement is military expenditure, which the creditors are asking to be reduced by 400 million whereas the Greek counterproposal offered 200 million, with the gap presumably  to be filled by “increased tonnage tax” and the implementation of an “effective taxation framework for commercial shipping”, two measures that were not discussed in the creditors´ offer. 

On VAT reform – a highly debated issue over the last month – creditors backed down from their initial demand to unify VAT rates under a single one or two at most, and agreed to keep the three rates system – including reducing the lowest rate from 6.5% to 6% as in the initial Greek proposal. The counterpart of this would be a reshuffling of the items across the rate bands, with the objective to achieve a net revenue gain of 1 percent of GDP on an annual basis from parametric changes. One important concession from creditors on VAT is the acceptance of the Greek demand that energy remains in the 13% rate band rather than being moved to the 23% one.  One irremovable demand from creditors is instead the removal of the reduced VAT rates on Greek island, which is a politically difficult concession for the Greek government to swallow. The latest Greek counterproposal in fact wanted to reintroduce that discount, leading to a lower objective (0.93% of GDP) for VAT revenues gain than what was required by creditors.  

On pensions, which was probably the most sensitive and politically charged subject of discussion during the whole negotiation phase, the 25th June offer shows that positions still remained divergent as of last week. Creditors asked for the retirement age to be increased to 67 by 2022, while the Greek side initially proposed 2036 and later offered 2025. The biggest point of contention is however the EKAS “solidarity grant”, which provides top-ups for poor pensioners, and is therefore an extremely sensitive issue. Creditors asked initially for the phase out of this grant by 2017, but the June 25th proposal appeared to agree to phasing out by 2019, one year earlier than the Greek side was ready to offer (2020). The institutions would however require that the phase out starts immediately for the top 20% of beneficiaries, something that Friday’s Greek counterproposal was rejecting, together with the request to freeze monthly guaranteed contributory pension limits in nominal terms until 2021. Concerning the increase in health contributions for pensioners - which was originally proposed by the Greek government - the creditors´ proposal includes an increase from 4% to 6% on average.  

The Question and polls 

The attempt of this summary is to be informative about the existing positions, as objectively as possible.

Surveys have consistently shown that a significant majority of the Greek people want to stay in the euro. 

As is often the case in referendum votes, objectivity is not the only variable, and the way the question is asked and presented by the different parties can have a significant impact on voters’ behavior. Based on Tsipras´ speech and the accounts of parliamentary discussions, it seems the government will frame the vote as a decision between preserving sovereignty and accept the imposition from creditors who – Tsipras said in previous occasions – would attempt to humiliate the Greek government and people. The opposition will instead frame the vote as a decision on Greece’s eurozone membership, which a NO vote could de facto undermine.  

Polls seem to reflect a similar polarization. Over the past months (and years) surveys have consistently shown that a significant majority of the Greek people want to stay in the euro. But polls specifically about the support for a deal with creditors have varied significantly. 

A survey by the Alco polling institute published in Sunday's edition of Proto Thema newspaper and reported by reuters, said 57% out of 1,000 respondents were in favour of reaching a deal, while 29% wanted a break with creditors. Another poll by Kapa Research, which asked  1,005 respondents how they would vote if a new "painful" agreement were put to the vote in a referendum, yielded a significantly lower 47.2% of respondents in favor of an accord and 33% against, with more than 18% of undecided. This means that there are a very high number of swing voters. The same poll showed a worryingly small 48.3% of respondents saying they would not support any move by the government which could place Greece outside the euro zone. These polls were all taken before the imposition of capital controls, therefore a crucial question will be how the latest developments have shifted the votes of the undecided. 

Timing and general conclusion 

The Greek programme expires tomorrow. The Eurogroup statement issued on Saturday 27 July plainly reiterates this fact, but does not include any indication that the deadline will be extended a few days after the referendum. Without extension, the referendum will be pointless. I agree with my colleague Zsolt Darvas that at this historical moment euro-area leaders should allow Greek people to make their voices heard, and that the Eurogroup should explicitly grant this exemption. If the outcome of the vote is a YES, than a deal will still be possible. Many aspects of the current proposals will likely need to be reconsidered, in light of the period of capital controls.

The time has really come to live up to promises, on both sides.

In particular, it is worth remembering that the summer months (especially July) are key months for  state revenue collection, as has been previously shown on this blog. Revenues were already significantly underperforming in May, and we don't know what the impact of the current situation will be. The recent statement by the Commission shows that a more pessimistic position from the creditor side could be possible, in the case of a YES vote. It says that "the understanding of all parties involved was that this Eurogroup meeting should achieve a comprehensive deal for Greece, one that would have included not just the measures to be jointly agreed, but would also have addressed future financing needs and the sustainability of the Greek debt". This is something creditors committed to in 2012.

On his part, PM Tsipras also made promises to his people, which certainly did not entail capital controls or euro exit. The commission statement also makes reference to  a " package for a new start for jobs and growth in Greece, boosting recovery of and investment in the real economy", which should be part of the deal and allow Tsipras to fulfill at least some of the commitments he made his people for a brighter future. My personal opinion is that the time has really come to live up to promises, on both sides. But this will only be possible if the Greek people take the leap of faith to vote for a YES. 

Mon, 29 Jun 2015 13:22:57 +0100
<![CDATA[China’s outward foreign direct investment]]> http://www.bruegel.org/nc/blog/detail/article/1660-chinas-outward-foreign-direct-investment/ blog1660

China’s outbound foreign direct investment (ODI) may have exceeded inbound foreign direct investment (FDI) for the first time in 2014, according to the Ministry of Commerce of the People’s Republic of China (MOFCOM). This result is remarkable because it implies that China may have already become a net exporter of FDI, something surprising given the country’s stage of development as well as its relatively low share of global ODI stocks (Figure 1).

The reality could actually be quite different.  ODI figures may be substantially distorted due to the presence of offshore intermediaries such as Hong Kong, and tax havens in the Caribbean, which accounted for circa 70% of China’s total ODI flows and stocks in 2013 (Figure 2). MOFCOM requires companies to register the first (not the final) destination of their cross-border transactions and  not to take into account reverse flows, making it hard to determine the final size and distribution of Chinese ODI. In a recent Working Paper with Carlos Casanova and Xia Le[i], we recalculate China's Outbound Foreign Direct Investments (ODI) in a way which accounts for these distortions.

Our estimates show that China's ODI flows and stocks may have been overestimated andcould actually be more diversified that previously thought (Figure 3). First of all, ODI flows and stocks in 2013 may have been much lower than reported by MOFCOM. The reason for this discrepancy is that approximately 40% of all flows to Hong Kong ending up being reinvested in China as inbound FDI , in order to benefit from preferential conditions (Xiao, 2004).

In addition, the geographical distribution of Chinese ODI stocks and flows may be more balanced than previously thought, with developed markets in North America and Europe accounting for a larger share of final flows and stocks.

While Asia remains the largest recipient of Chinese ODI, its share falls from 70% to 50% according to our estimates. The fact that Asia is the main recipient of Chinese ODI makes sense given the region’s geographical proximity and close trade links with China. However, Chinese official statistics define Asia in very broad terms – to include the Middle East and Central Asia – so this figure would decrease significantly based on narrower geographical classifications.   

Europe emerges as the second largest recipient according to our estimates. The continent goes from being a relatively modest recipient of ODI (8% of stocks and 6% of flows in 2013), to accounting for 19% of total stocks, and 17% of total flows in 2013. Take the European Union (EU) as an example: recent media reports have claimed that we are witnessing wave of Chinese investments into the EU; however official statistics place this figure at a modest USD 4.4 billion in 2013. Our estimates show that in reality Chinese ODI flows into the EU could have been closer to USD 10.4 billion, challenging previously held assumptions that China remains a minor investor in the EU.

North America also sees an increase in its share of ODI, with the United States accounting for over 75% of flows and stocks to North America. This comes as no surprise. MOFCOM’s statistics show that Chinese ODI flows into the US were USD 3.8bn in 2013, a figure which is lower than the value of the largest transaction that year (the purchase of Smithfield’s Food for USD4.7bn, which happened via the Cayman Islands). Our estimates put this figure at around USD 9.0 billion (stocks: USD 49.2 billion).

Latin America is the only region that experiences a drop in Chinese ODI, however if we exclude offshore centers from the equation, ODI stocks to the region actually increase after accounting for data limitations based on our estimates (USD 9.9 billion according to MOFCOM vs. USD 23.2 billion based on our estimates).


All in all, even if China did not really make it to surpass the landmark of becoming a net creditor in 2014, there is no doubt that it will in the future as China’s ODI stocks in the world are underrepresented relative to the country’s size. In particular, a number of issues will add to the existing momentum behind Chinese ODI.  First, the easing of application procedures for ODI is bound to continue as China moves forward with capital account liberalization. Second, there is a growing need to internationalize Chinese corporations to boost productivity  and reduce excessive capacity in several sector. Boosting ODI to overseas markets where demand is still on the rise, as is the case with most ASEAN countries, will enable China to outsource this excessive capacity. Labor-intensive sectors will also seek to expand overseas in order to benefit from relatively lower labor costs and maximize profit margins, favoring ODI flows to manufacturing activities in ASEAN and to a lesser extent Africa. Third, China’s huge amount of reserves will need to be diversified into higher yielding assets over time.  Fourth and most importantly, the Chinese government is the one pushing this process not only at the level of the individual company but also with grandiose initiatives such as the 21st Century Silk Road.

With the growing importance of Chinese ODI, we also hope that tracking where this huge amount of money is going becomes easier over time.

[i] https://www.bbvaresearch.com/en/publicaciones/chinas-odi-how-much-goes-where-after-round-tripping-and-offshoring/

Mon, 29 Jun 2015 10:36:39 +0100
<![CDATA[Economic and legal observations on capital controls]]> http://www.bruegel.org/nc/blog/detail/article/1659-economic-and-legal-observations-on-capital-controls/ blog1659

While the exact decision of the Greek government is not yet to my knowledge clearly communicated, it appears that besides a bank holiday, the government intends to impose capital controls. The Guardian reports that for capital control measures to take effect, the Greek cabinet must approve the recommendations of the Greek financial stability council  and a presidential decree is needed.

Legally, capital controls are relatively difficult to justify in EU law. However Article 65(1b) TFEU provides a loophole in the EU treaties. The free movement of capital in the European Union is a fundamental principle codified in the Treaty on the Functioning of the European Union (TFEU); see Article 63(1). While the TFEU allows countries outside the euro area to “take the necessary protective measures” when a sudden balance of payments crisis occurs (Article 144(1)), euro-area countries do not have such a right. Article 65(1b) acknowledges the right of all EU Member States to “take measures which are justified on grounds of public policy or public security”. In addition, Article 65(3) states that such measures “shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.”

Economically, as I have argued in the case of Cyprus, capital controls are a contradiction in terms to monetary union. A euro is a euro only if it can circulate freely in the entire monetary union. With capital controls, the Greek euro will be worth less than the French or German euro and therefore ceases to be a euro.

The statement by Greek PM Tsipras that Greek deposits are safe is therefore wrong. Their value is already now significantly lower than their face value.

The good news, however, is that capital controls can be reversed. For capital controls to be reversed and Greece to remain in the euro, a necessary condition is that the ECB is ready to provide abundant liquidity to all solvent banks. This is unlikely to happen without prior political agreement in euro group. Like it or not: The limits of monetary union are the limits of political union.

Mon, 29 Jun 2015 08:42:27 +0100
<![CDATA[A democratic Europe should allow Greek people to decide on their future]]> http://www.bruegel.org/nc/blog/detail/article/1658-a-democratic-europe-should-allow-greek-people-to-decide-on-their-future/ blog1658

Mr Tsipras’s call for the 5 July referendum about the Eurogroup proposal is an ideal outcome for official creditors. Thereby, Greek people will either give a mandate to their government for continuing the implementation of the financial assistance programme, or vote for uncertainty. I do think that a no vote would ultimately lead to financial, economic and political chaos and may culminate in Grexit. But with a yes vote, the so-far arguably cumbersome, ineffective and unfriendly negotiations would be largely over and the discussions should be focused on the details and the implementation, not on the main principles.

In a European Union founded on the principle of democracy the referendum should be welcomed. 

In a European Union founded on the principle of democracy the referendum should be welcomed. All other politically feasible solutions would have just prolonged the uncertainty. The Greek government perceives that its mandate received from January 2015 election does not allow to accept the creditors’ offer. Thereby, any forced agreement on a slightly modified version of the conditionality demanded by creditors would have likely led to implementation problems and future disputes. And a collapse of the Greek government may just lead to political paralysis and an even more uncontrolled situation.

The Eurogroup statement issued after the talks broke down on Saturday 27 July plainly reiterates that the current financial assistance programme will expire on 30 June 2015. It does not include any indication that the deadline will be extended a few days after the referendum. Thereby, the Eurogroup statement makes the referendum largely useless.

The Heads of State and Government of euro-area countries should make a decision to extend the current bail-out deal a few days after the referendum. 

The Heads of State and Government of euro-area countries should make a decision to extend the current bail-out deal a few days after the referendum. A democratic Europe should allow Greek people to have their say on such a historical question.

The extension of the current bail-out programme (or the lack of it) may influence the decision of the European Central Bank, which will be crucial for the next few days. The ECB should not reduce liquidity assistance to Greek banks. Either a bank holiday or severe limitations on cash withdraw/electronic payments seems inevitable before the referendum, but banks would not be able to survive a reduction in central bank liquidity support. A collapsing banking system would drag the economy down even further. The ECB may not increase liquidity support in the coming week, but at least it should wait for the result of the referendum before curtailing existing support, since with an extension, Greece will continue to be under a financial assistance programme.

creditors should lower the planned fiscal adjustment requirements. Greece has implemented by far the largest fiscal adjustment in the EU

In the meantime, creditors should lower the planned fiscal adjustment requirements. Greece has implemented by far the largest fiscal adjustment in the EU.  A somewhat lower primary surplus would not make a big difference to public debt trajectory in light of the miserable miscalculation of the 2010-12 programme assumptions. A new ESM loan (based on the conditionality which will be voted on the referendum) should be offered to repay maturing ECB-held Greek debt.

The IMF should restructure its Greek loans the same way as European lenders did.

According to opinion polls, the majority of Greek people wish to stay in the euro area. If the risk of Grexit is eliminated and reforms continue, the Greek economy is destined to grow to the benefit of Greek people and the country’s lenders. At this historical moment euro-area leaders should allow Greek people to make their voices heard and the ECB should wait for the referendum before curtailing Greek banks’ access to liquidity.

Sun, 28 Jun 2015 13:20:31 +0100
<![CDATA[Euro area governance: an assessment of the “five presidents” report]]> http://www.bruegel.org/nc/blog/detail/article/1656-euro-area-governance-an-assessment-of-the-five-presidents-report/ blog1656

European Commission President Juncker has published the long-awaited report prepared in collaboration with the presidents of the European Council, the Eurogroup, the European Central Bank and the European Parliament. The aim of the report is to prepare a roadmap for the completion of EMU, which is “not an end in itself” but a “means to create a better life for all citizens”. The aim of this blog is to discuss a few of its key elements.

The positives

(1)  The institutions are to be congratulated for pursuing this work. In my assessment, monetary union is not sustainable in its current set-up. Unemployment remains too high, growth too weak, political tensions too large, financial fragilities too substantial. Combined, these factors suggest that major frictions or fault lines will continue to characterise the euro area and could eventually lead to its disintegration.

(2) It is positive that all central elements remain on the table. Economic, financial, fiscal and political union will all continue to be the subject of discussions.

(3) The report shows realism on process. While one can criticise the timeline for not being ambitious enough from an economic and social point of view, the report is probably realistic in terms of the political willingness to move forward.  The idea to prepare a White Paper with concrete next steps is also a sign of realism. However, it would be preferable for a political group, not an expert committee, to prepare this work. Ultimately, the goal for the next two years should be to build a political, and not just technical, consensus.

(4)  The report is right to put significant emphasis on structural divergence within the euro area. By the beginning of the crisis unit-labour costs had diverged by 20-30 %. Since the beginning of the crisis there has been some correction in small periphery countries, but the big three (Germany, Italy and France) have only just started to rebalance. Such divergence has major implications for employment, for industrial activity and also for current accounts. Current account imbalances have largely corrected in deficit countries through a combination of demand compression and export increases. However, the current account surplus of Germany has, if anything, increased in the crisis years: a state of affairs that has been criticised by the Commission. Broadly speaking, a solution to this divergence is vital to put the euro area on a sustainable footing. A solution will require work in all three largest countries, and only a symmetrical adjustment of this divergence is politically viable [1]. Since this adjustment requires action by many actors at a national level, the presidents’ report proposes as André Sapir and myself have also suggested, to create national institutions, so called competitiveness councils, similar to the Belgian competitiveness councils. These national councils need to be coordinated to achieve symmetric adjustment.

(5) The report also rightly makes finalising banking union a priority. The main elements missing to date are a proper backstop to the single resolution fund and an adequate system of deposit insurance. The proposal to create a deposit re-insurance mechanism was made by my colleague Nicolas Véron and also features prominently in our analytical work on banking union. Arguably, an ESM credit line and a deposit re-insurance system can already be established within the current EU treaties.

(6) The institutions’ thinking on fiscal union has developed significantly. The earlier “van Rompuy report” emphasised the need to create a common budget. The problem with creating a central budget, however, was always that it could not provide an appropriate fiscal stance for the euro area as a whole. Instead, its main purpose was to create a risk-sharing mechanism to allow support for a more expansionary budget policy at the national level. The euro area needs both elements but arguably the former more urgently than the latter.


  • With monetary policy at the zero-lower-bound, it is imperative to define instruments that can complement monetary policy. Since 98% of all government spending is national, one has to find a way of ensuring national fiscal policies complement monetary policy. This ultimately requires more forceful coordination mechanisms – not the creation of a common budget. The report got this right
  • True fiscal risk sharing, for example through a European unemployment insurance system, is contemplated but arguably more difficult to achieve than better and more coordinated national fiscal policies.

A shift towards constraints on fiscal policymaking at the national level, which would uphold a proper area-wide fiscal stance, and the creation of a European Fiscal Advisory Board to confirm when exceptional times require binding decisions at European level is a good development (see our arguments here).

The missing and negative elements

(1) The report missed an opportunity to question the current system of fiscal rules. It is evident that these rules are economically questionable and practically impossible to implement, inter alia because they are based on unmeasurable concepts such as potential output. It has also become clear that fiscal policy is at the heart of political decision-making and therefore not suitable to be governed only by rules. Instead, the report should have shifted the emphasis onto the fact that the euro area needs a system in which political decisions on national fiscal policy become joint decisions (at least in exceptional times) with appropriate national and European legitimacy.

(2) As regards democratic legitimacy, the report contains many elements, but I think the central point could have been made even clearer. When we enter a system in which European decisions in exceptional times can constrain national policymaking, legitimacy has to come from elected parliamentarians. The key challenge will be to find the right way of involving the European and the national parliaments. The current debates around Greece remind us that we are still far from an optimal set-up, to put it euphemistically.

(3) The report fundamentally fails to reflect on the role of non-euro area countries, but instead sticks to the outdated fiction that all EU countries will eventually join the euro area. After the UK elections and with euro-critical parties gaining strength in several other EU countries, this is a big omission. Arguably, a two-speed Europe is becoming the baseline scenario and we should find ways of organising this.

(4) The report fails to openly accept and thereby push the debate on the necessity of treaty change. This may be a tactical move in the hope that the expert group preparing the White Paper makes such a recommendation. However, as argued above, it would have been better to start the political discussion now and for these discussions to also touch on the key elements of unavoidable treaty change.

(5) The report puts too little emphasis on crisis resolution. It is not the role of such a report to discuss current macroeconomic policies. However, the report could have emphasised one important issue that will facilitate crisis resolution: how to deal with public and private debt.


  • As regards public debt, the goal should be to reduce the exposure of banks to sovereign debt. This will make debt restructuring easier should it become necessary. As I have argued before, the introduction of single exposure rules should be high on the agenda now, as the ECB’s quantitative easing programme provides ideal conditions for such a step. It is a mistake in the report to leave this to the medium term (see last paragraph of section 3.1).
  • The private debt overhang is still substantial in many euro area countries. Better principles for insolvency legislation should be defined in order to facilitate a quicker and more orderly process of winding down this debt burden.


(6) Finally, while the report is right in pushing the agenda on deeper financial integration through a capital markets union, it is perhaps unrealistic as regards timing. The structure of Europe’s financial system will change only gradually and therefore it cannot meaningfully contribute to short-term recovery.


[1] Germany needs to unleash its sources of growth and create demand (more investment, lower taxes for low income households, gradual increase in wages, shift of economic structure towards services), while France and Italy will have to work on increasing productivity and working time to reduce their unit labour cost relative to Germany. See for example http://www.bruegel.org/nc/blog/detail/article/1476-france-and-germany-a-moment-of-truth.

Thu, 25 Jun 2015 11:23:59 +0100
<![CDATA[The effects of ultra-loose monetary policies on inequality]]> http://www.bruegel.org/publications/publication-detail/publication/885-the-effects-of-ultra-loose-monetary-policies-on-inequality/ publ885
  • Low interest rates, asset purchases and other accommodative monetary policy measures tend to increase asset prices and thereby benefit the wealthier segments of society, at least in the short-term, given that asset holdings are mainly concentrated among richest households.
  • Such policies also support employment, economic activity, incomes and inflation, which can benefit the poor and middle-class, which have incomes more dependent on employment and which tend to spend a large share of their income on debt service.
  • Monetary policy should focus on its mandate, while fiscal and social policies should address widening inequalities by revising the national social redistribution systems for improved efficiency, intergenerational equity and fair burden sharing between the wealthy and poor.

The effects of ultra-loose monetary policies on inequality (English)
Thu, 25 Jun 2015 09:44:22 +0100
<![CDATA[Will a UK welfare reform ease the UK's EU negotiation?]]> http://www.bruegel.org/nc/blog/detail/article/1655-will-a-uk-welfare-reform-ease-the-uks-eu-negotiation/ blog1655

In a speech on 22 June 2015, UK Prime Minister David Cameron pointed at a number of possible changes that could be made to the UK’s tax credit system. The UK’s tax credit system is an arrangement whereby some taxpayers (families and individuals on low income) can deduct a certain amount of money from the tax they owe to the state (although you do not have to actually pay any tax to receive the tax credit: the name is misleading). The Labour government introduced tax credits in the 1990s.

Why is the UK government suddenly thinking of reforming this system? The first immediate reason is the UK government’s official aim of cutting public spending. In an article in the Sunday Times on 21 June 2015, Chancellor of the Exchequer George Osborne and Secretary of State for Work and Pensions Iain Duncan Smith outlined a plan to reduce welfare spending by £12 billion a year. A quick look at UK welfare spending shows that tax credits (most importantly Child Tax Credit and Working Tax Credit) are an obvious area for attention, since cuts to state pensions have been ruled out. 

Source: Department for Work and Pensions (DWP)

Incidentally, tax credits are regularly the subject of criticism, especially from the Conservative Party since the system was introduced under a Labour government.

David Cameron purported in his speech that the current UK welfare system amounted to a ‘merry-go-round’: “People working on the minimum wage having that money taxed by the government and then the government giving them that money back – and more – in welfare.” He hinted at three measures in particular: 

  • Increasing the minimum wage: “The minimum wage is rising to £6.70 per hour from October 2015 – the largest real-terms increase since the financial crash and is forecasted to rise to £8 by 2020 on current projections.”
  • Increasing the tax-free amount of wages: “It is why we have increased the amount you can earn without paying tax, saving a typical taxpayer £825 a year, and it’s why we will take 1 million out of tax by increasing the tax free threshold to £12,500.”
  •  Free childcare: “Add the 30 hours of free childcare we will introduce for working families, and rewards from work, will be even stronger.”

What David Cameron does not say explicitly is what would happen to the tax credits in their present form. The media clearly expects an attack on the current system, but specifics are lacking: The Guardian reported an ‘assault’ on tax credits; the BBC pointed at Cameron’s ambition to “end welfare merry-go-round.” The UK prime minister is clearly signalling profound changes to the tax credit system, but it is unclear how far he is ready to go in reforming it or perhaps more radically removing it altogether.

But this reform could also have important implications for the UK’s EU renegotiation and impending referendum – and this could be the second motivation for reform.

The most contentious issue among the otherwise vague list of demands for EU reform formulated by the UK government is that concerning EU freedom of movement rules. Tellingly, this demand was included in the chapter “Controlled immigration that benefits Britain” in the Conservative Party’s 2015 Manifesto, but not in the chapter “Real change in our relationship with the European Union.” The Conservative Party’s demands read: “We will negotiate new rules with the EU, so that people will have to be earning here for a number of years before they can claim benefits, including the tax credits that top up low wages. Instead of something-for-nothing, we will build a system based on the principle of something-for-something.” 

The ability of non-UK citizens to access tax credits that top up low wages was therefore most clearly spelled out. In the event of a profound reform of the UK’s tax credit system – in particular if the UK government decides to completely dispose of the tax credit principle – this would de facto remove the most contentious demand on the EU negotiation table. In November 2014 and again in January this year, German chancellor Angela Merkel for instance most clearly voiced her opposition to any change to the current rules on the freedom of movement, even at the expense of an eventual Brexit. But if people living in the UK, regardless of their citizenship, were no longer in principle to claim tax credits, why would the UK government ask for a change in the EU freedom of movement’s rules? The list of the UK’s negotiations demands would be easier to deal with, if very vague.

In that sense, side-stepping the free movement issue via tax credit reform would bring today’s negotiation much closer to that in 1975, the year of the UK's previous EU membership referendum (analysed in a recent Bruegel Policy Contribution). In 1975, British Prime Minister Harold Wilson formulated a list of demands – including changes to the common agricultural policy, retention by UK Parliament of some powers and fairer methods of financing the EU budget – that avoided going into the specifics. The UK renegotiations of 1975 brought mostly cosmetic changes, but the vagueness of the original demands allowed these cosmetic changes to be presented as successes during the referendum campaign. The situation could take a similar path today: removing the UK’s original request for EU Treaty changes on the freedom of movement would leave only a few vague items on the UK’s list of demands (see 2015 Conservative Party Manifesto): ‘reform the workings of the EU’, ‘reclaim power from Brussels’ and ‘safeguard British interests in the Single Market’. David Cameron’s plans to reform the UK’s tax credit system will therefore be an unexpected critical domestic component of the UK government’s EU negotiation stance. 

[1]  I would like to thank Stephen Gardner for his help in conceiving this blog and Thomas Walsh for compiling the chart’s data.

Wed, 24 Jun 2015 14:00:49 +0100
<![CDATA[The productivity gap: why is innovation not increasing growth?]]> http://www.bruegel.org/nc/events/event-detail/event/544-the-productivity-gap-why-is-innovation-not-increasing-growth/ even544

We live in an age of huge technological and commercial innovation. Yet Europe is struggling to emerge from low productivity and weak growth. An inefficient allocation of scarce resources across firms, including the mismatch between skill levels and job requirements, is often cited as a reason for Europe’s failure to achieve long-term growth, but policymakers offer few clear solutions. Nevertheless, there is an emerging consensus that the slowdown of diffusion and adoption of innovations from the frontier to the rest of the economy could be part of the problem.

  • How can we measure the links between allocation of skills, innovation efforts and productivity growth?
  • Why are some firms, sectors and countries falling behind in the race for innovative productivity growth?
  • What mix of business, employment and education policies can foster sustained growth at the frontier, while encouraging the diffusion of productivity-enhancing innovations throughout the economy?

Bruegel is pleased to welcome Andrew Wyckoff, the OECD’s director for science, technology and innovation, for a discussion of the latest OECD research on this topic. Reinhilde Veugelers, Bruegel research fellow, will also present work on innovation and growth. Finally, comments from Román Arjona and the audience will offer space for in-depth reflection.


  • Andrew Wykoff, director for science, technology and innovation, OECD
  • Román Arjona, chief economist, European Commission Directorate-General for Research and Innovation
  • Isabel Grilo, Head of Unit, DG ECFIN
  • Chair: Reinhilde Veugelers, senior research fellow, Bruegel

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Date: Tuesday 30 June 2015
  • Time: 12:00 - 14:00 (Lunch: 12:00 - 12:30)
  • Contact: registrations@bruegel.com


<iframe src="http://bruegel.force.com/events/EventRegApplication?Id=a0qb000000Cw1Om" width="600px" height="1200px" frameborder="0"></iframe>


Tue, 23 Jun 2015 13:40:20 +0100
<![CDATA[Die Europäische Energieunion: Schlagwort oder wichtiger Integrationsschritt?]]> http://www.bruegel.org/nc/blog/detail/article/1653-die-europaische-energieunion-schlagwort-oder-wichtiger-integrationsschritt/ blog1653

Die Schaffung einer europäischen Energieunion ist ein zentrales Projekt der Juncker-Kommission. Die umfassende Definition der Energieunion – welche von Energieeffizienz und Klimaschutz über Versorgungssicherheit bis hin zu Wettbewerbsfähigkeit reicht – kann es der Europäischen Kommission ermöglichen, einen tiefgreifenden Kompromiss zwischen den Mitgliedsstaaten zu moderieren. In diesem Prozess sollte Deutschland eine aktive Rolle spielen, da sich die deutschen energie- und klimapolitischen Ziele nur im europäischen Verbund sinnvoll umsetzen lassen.

Die Energieunion ist ein politischer Begriff, der im April 2014 vom damaligen polnischen Ministerpräsidenten Donald Tusk geprägt wurde. Der Begriff bezieht sich auf Projekte zur verstärkten Vergemeinschaftung wie beispielsweise im Zusammenhang mit der Europäischen Bankenkrise (insb. Bankenunion und Kapitalmarktunion). Diesen Projekten ist gemein, dass sie ein Bündel verschiedener Maßnahmen beinhalten, um systemische Risiken auf europäischer Ebene besser zu kontrollieren. Anlass für Donald Tusks Vorschlag zur Schaffung einer Energieunion war die Sorge um die Sicherheit der Europäischen Energieversorgung im Zusammenhang mit der russisch-ukrainischen Krise. Allerdings wurde der polnische Vorschlag schnell von anderen Mitgliedsstaaten, der Europäischen Kommission, der Energiewirtschaft und der Zivilgesellschaft als Gelegenheit begriffen, eine umfassende Neuausrichtung der europäischen Energiepolitik zu diskutieren.


Für die große Wirkung des Konzepts der Energieunion gibt es mehrere Gründe: 2014 war ein wichtiges Jahr für die europäische Energiepolitik. Es wurden die europäischen Energie- und Klimaziele für 2030 beschlossen, die Amtszeit der Barrosso-Kommission endete und der Energiebinnenmarkt sollte vollendet werden. Diese energiepolitischen Wegmarken gingen mit einer Bestandsaufnahme der Energie- und Klimapolitik der letzten zehn Jahre einher. Dabei wurde deutlich, dass der europäische Energiebinnenmarkt an wichtigen Stellen auseinanderdriftet, die Versorgungssicherheit Europas nach wie vor nicht gesichert ist und die Energiepreise deutlich höher als beispielsweise in den USA sind. Auch musste man eingestehen, dass die europäische Vorreiterrolle im Klimaschutz noch nicht zu dem erhofften internationalen Abkommen geführt hat. Die Umsetzung der 2008 beschlossenen Energie- und Klimaziele (20 Prozent Erneuerbare, 20 Prozent Energieeffizienz und 20 Prozent Treibhausgasreduktion) sowie des dritten Binnenmarktpaketes haben also nicht ausgereicht, um Nachhaltigkeit, Versorgungssicherheit und Wettbewerbsfähigkeit der europäischen Energieversorgung zu stärken. Somit war es nur natürlich, dass 2014 über eine mögliche Neuorientierung der Mittel und Ziele der europäischen Energiepolitik diskutiert wurde. Des Weiteren trat die Juncker-Kommission am 1. November 2014 ihre erste Legislaturperiode an und versucht, neue Akzente zu setzen. Dass mit Donald Tusk der ‚Erfinder‘ der Energieunion Ratspräsident geworden ist, hat sicherlich dazu beigetragen, dass sich die Juncker-Kommission die Energieunion dezidiert auf die Fahnen geschrieben hat. So wurde der neue Posten eines Vizekommissionspräsidenten für die Energieunion geschaffen und mit dem Slowaken Maros Sefcovic besetzt. Dessen Aufgabe ist es, die Europä- ischen Kommissare für Transport, Binnenmarkt, Forschung, Landwirtschaft, Klima und Energie, Umwelt sowie Regionalpolitik bezüglich der Schaffung einer Energieunion zu koordinieren. Für den Erfolg des Konzepts einer Energieunion war es ebenfalls hilfreich, dass gerade Polen – welches sonst aufgrund seiner energiepolitischen Partikularinteressen (Subventionen für Kohleförderung und möglichst geringe Treibhausgasreduktionsverpflichtungen) eher als Bremser in europäischen Energiefragen wahrgenommen wurde – eine so weitreichende Diskussion eröffnet hat. Des Weiteren half bei der Einigung auf das Konzept, dass die Politikmaßnahmen, ja sogar die Problemfelder, relativ vage formuliert wurden. Entsprechend brachten mehrere Mitgliedsstaaten und viele externe Akteure Vorschläge zu sehr unterschiedlichen Energiepolitikbereichen in die Diskussion ein. Der ursprüngliche polnische Vorschlag beinhaltete vor allem Maßnahmen zur Erhöhung der Versorgungssicherheit. Insbesondere forderte Tusk die Schaffung einer länderübergreifenden Einkaufsgemeinschaft für Erdgas, um der russischen Marktmacht zu begegnen, sowie eine positivere Neubewertung einheimischer fossiler Brennstoffe wie Kohle und Schiefergas. Das Vereinigte Königreich und die Tschechische Republik griffen den Begriff einer Energieunion in einem Non-paper auf, welches eine Reduzierung des Einflusses Brüssels in der Energiepolitik fordert. Ein deutsches Non-paper hob dagegen die Notwendigkeit einer stärkeren Zusammenarbeit im Energieeffizienz- und Klimabereich hervor. Schließlich bedienten sich auch Industrievereinigungen, NGOs und Think Tanks des Begriffes der Energieunion, um ihre Vorstellungen einer europäischen Energie- und Klimapolitik zu verbreiten.


In der Debatte um die Energieunion wurden fünf grundsätzliche Herausforderungen für die europäische Energie- und Klimapolitik identifiziert. Ausgangspunkt der Debatte um die Energieunion war die Frage der Versorgungssicherheit, welche im Rahmen der russisch-ukrainischen Krise enorm an Brisanz gewonnen hatte. Im Mittelpunkt steht dabei die Sorge, dass der außenpolitische Spielraum der EU und seiner Mitgliedsstaaten durch die Abhängigkeit von russischem Erdgas eingeschränkt wird. Verschiedene Akteure präsentieren sehr unterschiedliche Antworten, wie die europäische Versorgungssicherheit gestärkt werden kann. Diese reichen von der Erschließung anderer außereuropäischer und einheimischer (Schiefergas) Erdgasquellen, über eine verstärkte Nutzung von Kohle und Atomenergie, bis hin zur Senkung der Energienachfrage oder der Umstellung auf erneuerbare Energien. Eine zweite Herausforderung ist die zunehmende Renationalisierung der Energie- und Klimapolitik in der EU. Europäische Instrumente wie der Emissionshandel oder der grenz- überschreitende Stromhandel haben in der letzten Dekade an Bedeutung verloren. Investitionsentscheidungen werden zunehmend auf Basis nationaler Mechanismen (Netzausbau, Erneuerbare Förderung) oder nationaler Märkte (Kapazitätsmärkte) getroffen. Neben den unvermeidlichen Reibungsverlusten bei nicht abgestimmten nationalen Maßnahmen hat die Renationalisierung auch zu einer Zurückhaltung privater Investoren geführt, denen verlässliche Rahmenbedingungen fehlen. Die größte langfristige Herausforderung ist der nachhaltige Umbau des Energiesystems. Allein im Strombereich bedeutet dies weit mehr, als fossile Kraftwerke durch emissionsfreie Kraftwerke zu ersetzen. Es wird immer deutlicher, dass ein CO2-freies Energiesystem das Zusammenspiel von Verbraucher_innen, Erzeugern, Infrastrukturanbietern und Informationsdienstleistern tiefgreifend verändern wird. Dabei ist heute noch nicht absehbar, wie das System letztendlich aussehen wird (z. B. dezentrale vs. zentrale Erzeugung) und wer die Koordinierung dieses Systems übernimmt (z. B. Netzbetreiber, Händler oder Informationsdienstleister). Europarechtliche Rahmensetzungen werden eine wichtige Rolle bei der Ausgestaltung des Transitionspfades spielen. Einen wichtigen Beitrag zur Erhöhung der Versorgungssicherheit und der Reduktion von Treibhausgasemissionen wird die Senkung der Energienachfrage spielen. Entsprechende Ziele wurden in der Vergangenheit nur unzureichend erreicht. Eine wichtige Rolle spielt dabei die Frage, welche Maßnahmen auf lokaler, regionaler, nationaler oder europäischer Ebene getroffen werden sollen. So scheint es beispielsweise weder sinnvoll, gleiche Dämmstandards für Gebäude in Süditalien und Nordschweden vorzuschreiben, noch wäre es wünschenswert, wenn Elektrogeräte in verschiedenen Mitgliedsstaaten unterschiedliche Energieeffizienzstandards erfüllen müssen. Eine weitere Herausforderung für die europäische Energiepolitik ist die Sicherung der Wettbewerbsfähigkeit der Industrie. Hierbei wird einerseits auf die hohen Energiepreisunterschiede zwischen den USA und Europa verwiesen, welche die Wettbewerbsfähigkeit Europas bei energieintensiven Industrien verringern. Dabei wird häufig übersehen, dass diese Preisunterschiede auch in der unterschiedlichen Ressourcenverfügbarkeit in Europa begründet liegen und nicht nur auf Unterschiede in der Energiepolitik zurückzuführen sind. Zum anderen wird der Hoffnung nicht Ausdruck verliehen, dass die Förderung neuer Energietechnologien (insb. Erneuerbarer Energien) die Wettbewerbsfähigkeit Europas in diesem globalen Zukunftsmarkt steigert. Die Herausforderung für die europäische Energie- und Klimapolitik besteht also darin, nicht übermäßig an Wettbewerbsfähigkeit in energieintensiven Sektoren zu verlieren und gleichzeitig die Zukunftschancen bei neuen Technologien zu maximieren.


Der Vizepräsident der EU-Kommission für die Energieunion war also gefordert, einen ambitionierten, aber nicht unrealistischen Vorschlag für die Schaffung einer Energieunion zu präsentieren, der die benannten Herausforderungen adressiert. Nur etwa 100 Tage nach Beginn der Legislaturperiode wurde ein entsprechender 18-seitiger Vorschlag am 25. Februar vorgestellt. Am 19. März beschloss der Europäische Rat, der vorgestellten Rahmenstrategie der Kommission zu folgen. Zur Schaffung einer Energieunion schlägt die EU-Kommission fünf Dimensionen vor: 1. Energieversorgungssicherheit, Solidarität und Vertrauen; 2. Ein vollständig integrierter europäischer Energiemarkt; 3. Energieeffizienz als Beitrag zur Senkung der Nachfrage; 4. Verringerung der CO2-Emissionen der Wirtschaft; 5. Forschung, Innovation und Wettbewerbsfähigkeit. Diese Dimensionen werden in 26 Politikinitiativen konkretisiert, welche 2015 und 2016 von der Kommission angestoßen werden sollen. Der Kommissionvorschlag und der Ratsbeschluss sind so formuliert, dass sie sowohl eine grundlegende Neugestaltung der europäischen Energie- und Klimapolitik als auch eine vollständige Kontinuität der bisherigen Politik erlauben würden. Es bleibt also abzuwarten, inwieweit sich die Kommission und die Mitgliedsstaaten (und formal das Europaparlament) darauf einigen können, tiefgreifende Reformen der europäischen Energie- und Klimapolitik in Angriff zu nehmen, welche den Namen Energieunion verdienen. Das optimistische Szenario wäre hierbei, dass es der Kommission mit den fünf Dimensionen gelungen ist, die Fragestellung so weit zu formulieren, dass alle Mitgliedsstaaten durch die Aufgabe sekundärer Forderungen Erfolge in den für sie zentralen Bereichen erzielen können. So wäre es beispielsweise denkbar, dass Deutschland der Schaffung eines gemeinsamen europäischen Mechanismus für die Förderung erneuerbarer Energien oder verbindlicheren Regeln für Gaslieferungen im Krisenfall zustimmt, wenn im Gegenzug ein starkes Regelwerk („Governance“) für die Erreichung der langfristigen Erneuerbaren und Klimaziele festgeschrieben wird. In einem mittleren Szenario würden die jeweiligen Akteure in jedem Teilbereich voneinander unabhängige Kompromisse suchen. Das impliziert, dass eine qualifizierte Mehrheit mit jeder Maßnahme einverstanden sein muss. Entsprechend würden die Kompromisse wenig ambitioniert ausfallen, viele Ausnahmen für einzelne Länder gemacht werden und keine Konsistenz des Gesamtmaßnahmenpaketes zu erwarten wäre. Eine auch von der Europäischen Kommission vieldiskutierte Lösung wäre eine verstärkte Regionalisierung (im Sinne von Länderblöcken) der Energiepolitik. Der offensichtliche Vorteil ist, dass Länder mit ähnlichen Voraussetzungen eher in der Lage sind, eine gemeinsame Energie- und Klimapolitik zu betreiben. Das Problem regionaler Ansätze ist allerdings, dass sich damit wichtige Probleme nicht lösen lassen: Ein mittelosteuropäischer Gasverbund wird nicht das Problem der Abhängigkeit von Russland lösen. Ein nordwesteuropäischer Stromverbund wäre nach wie vor mit dem Problem einer Windflaute an der Nordsee konfrontiert. Und ein iberischer Erneuerbaren-Verbund würde nicht die notwendige Investitionssicherheit garantieren können. Außerdem besteht die Gefahr, dass regionale Ansätze in verschiedenen Regionen divergierende Pfadabhängigkeiten festschreiben, welche einer Europäisierung der Energiepolitik langfristig zuwiderlaufen. Im pessimistischen Szenario würde die Europäische Kommission nicht genügend politisches Kapital besitzen (oder aufwenden wollen), um einen komplizierten Kompromiss zwischen den Mitgliedsstaaten auszuhandeln. Die Energieunion wäre dann lediglich eine leere Verpackung – getreu dem Motto, je mehr man darüber spricht, desto weniger muss man hinterher tun.


Die beschriebenen Herausforderungen sind auch für die deutsche Energie- und Klimapolitik elementar. Sie lassen sich selbst in Deutschland nicht rein national lösen. Und die deutsche Position wird entscheidend zum Erfolg oder Misserfolg der Energieunion beitragen. Daher sollte die deutsche Politik nicht versuchen, diese Debatte zu blockieren, sondern sie in Richtung eines ambitionierten europäischen Kompromisses lenken. Dabei spielt auch der Faktor Zeit eine Rolle, da das gegenwärtige ‚Momentum‘ der Energieunionsdebatte irgendwann in der Komplexität des Themas zu versanden droht. Daher sollte sich die deutsche Politik schnell darüber klar werden, welche ihrer energiepolitischen Positionen nicht verhandelbar sind (z. B. Klimaschutz, Atomausstieg), bei welchen Fragen politischer Spielraum besteht (z. B. Solidarität bei Gaslieferungen) und wo möglicherweise ein ambitioniertes Vorpreschen Deutschlands neue Optionen öffnet (z. B. Strommarktdesign).

Tue, 23 Jun 2015 12:02:53 +0100
<![CDATA[The 4% growth target]]> http://www.bruegel.org/nc/blog/detail/article/1652-the-4-percent-growth-target/ blog1652


What’s at stake: To contrast with President Obama’s middle class economics, the Republican Party – from Rand Paul’s proposal to repeal the entire IRS code to Jeb Bush’s 4% growth target – is positioning itself as the party that can drastically expand potential growth in the 2016 presidential election.



The free-market nirvana 

John Taylor writes that the U.S. economy is not a turtle, but a caged eagle ready to soar if released from the captivity of bad government policy.

Timothy Noah writes that 4% growth has never been anything approaching the norm in U.S. economic history, even during the boom years that followed World War II. “I can go back 200 years,” said Claudia Goldin, an economic historian at Harvard, “and not get anything like this in a sustained manner.” John Cochrane writes that what happened in the past is largely irrelevant, since the US has never experienced free-market nirvana. If you were to look in 1990 at historical Chinese GDP plots to assess whether it is possible for China to grow as it has for the last 25 years, you'd say it's impossible. Conversely, if you were to look at postwar US data you'd say our lost decade of 2% growth can never happen. If you think that sand in the gears or inadequate infrastructure or not enough stimulus means we're 20 percent below potential, and potential can grow 2% per year, then 4% growth for a decade follows.

                                                                     Source: John Cochrane

Carola Binder writes that we have a thing for nice, round, kind of arbitrary numbers. The 2 percent inflation target, for example, was not chosen as the precise solution to some optimization problem, but more as a "rough guess [that] acquired force as a focal point." A 4 percent growth target reduces something multidimensional and hard to define – economic success – to a single, salient number. Making 4% growth the standard for success could also change policymakers' incentives and behaviors in some perverse ways. Potential policies' ability to boost growth will be overemphasized, and other merits or flaws (e.g. for the environment or the income distribution) underemphasized.

Paul Krugman tells readers a dirty little secret of economics: we don’t know very much about how to raise the long-run rate of economic growth. Economists do know how to promote recovery from temporary slumps, even if politicians usually refuse to take their advice. But once the economy is near full employment, further growth depends on raising output per worker. And while there are things that might help make that happen, the truth is that nobody knows how to conjure up rapid productivity gains.

Potential GDP, productivity and workforce growth


Jordan Weissmann writes that potential economic growth is productivity growth plus workforce growth. Right now, neither of those forces is working in America's favor. Because the Baby Boomers are aging into retirement, the BLS expects the labor force to grow by 0.5 percent per year in the near future, down from the 0.7 rate we enjoyed from 2002 to 2012. To simplify a bit, that means productivity is going to have to jump up by 3.5 percent per year if we want to hit the magic 4.0. [Slightly more nuanced version: Economic growth = increase in output per hour of work x increase in total hours worked. So, theoretically, even if we're not adding a lot more workers to the economy, growth could rise quickly if everybody started pulling longer hours on the job.]

John Taylor writes that reversing the decline in the labor force participation rate—it fell from 66.0% in 2008 to 62.9% in 2014—would cause a 5 percent increase in employment, or 1% annual growth for 5 years. Some argue that the recent decline in labor force participation is simply due to the baby boom generation retiring, but the decline is larger for teenagers and young adults and has even increased for those of retirement age. Matthew Yglesias writes allowing 1.4 million new workers (out of a population of 140 million employed people) to legally immigrate per year should add about 1 percentage point to the annual growth rate, and put us within striking distance of the 4 percent average.

Gavyn Davies writes that Fed’s central projection of 2.15 per cent for potential GDP growth in the long run implies a productivity projection of about 1.75 per cent. The problem, however, is that this range is not consistent with the actual productivity numbers that have been published at any stage during the present economic recovery. Since 2009, productivity has risen at an average of 1.5 per cent per annum while over the past two years it has risen at only 0.5 per cent. John Taylor writes that reversing the recent productivity slump—it’s been growing at barely 1% recently—would bring productivity growth of 2.5% per year, the average over the past 20 years.

Jeb!onomics in Florida


Timothy Noah writes that Bush wants to contrast the slow pace of recovery from the Great Recession under President Barack Obama with the rapid economic growth in Florida during his governorship. GDP growth in Florida exceeded 4 percent in all but Bush’s last year in office. Wonkblog writes that Jeb Bush owes a large amount of that success to the housing bubble that popped as he was leaving office, leaving Florida in deep and prolonged recession.


Source: Paul Krugman

Paul Krugman writes that Florida fell into a deep slump when the bubble burst, much worse than the nation as a whole — and it has still not made up all the lost ground, so that Florida’s growth rate over the past 16 years is just 1.7 percent, slightly below the national average. This is even more remarkable when you bear in mind that the economy of a favored retirement destination should be growing faster than that of the rest of an aging nation.




Tue, 23 Jun 2015 09:19:52 +0100
<![CDATA[The UK’s EU vote: the 1975 precedent and today’s negotiations]]> http://www.bruegel.org/publications/publication-detail/publication/884-the-uks-eu-vote-the-1975-precedent-and-todays-negotiations/ publ884

• The United Kingdom's European Union Referendum Bill, introduced in the House of Commons on 28 May 2015, legislates for the holding of a referendum before 31 December 2017 on the UK’s continued EU membership. UK prime minister David Cameron is opening negotiations with other EU member states to try to obtain an EU reform deal that better suits UK interests. Both the negotiations and the outcome of the referendum pose major challenges for the UK and the EU.

• It will not be the first time that a UK government has staged a referendum following a renegotiation of its terms of EU membership. The first such referendum took place on 5 June 1975 after nearly a year of renegotiations, and the ‘yes’ won with 67.2 percent of the vote. Notwithstanding obvious differences, the conduct of today’s renegotiations should bear in mind this precedent, and in particular consider (a) how much the UK government can get out of the negotiations, in particular with respect to potential Treaty changes; (b) why political marketing is central to the referendum’s outcome; (c) how the UK administration’s internal divisions risk derailing the negotiations; and (d) why the negotiations risk antagonising even the UK’s best allies.

The UK’s EU vote: the 1975 precedent and today’s negotiations (English)
Mon, 22 Jun 2015 08:55:52 +0100
<![CDATA[Does money matter in the euro area? Evidence from a new Divisia index]]> http://www.bruegel.org/publications/publication-detail/publication/883-does-money-matter-in-the-euro-area-evidence-from-a-new-divisia-index/ publ883

Zsolt Darvas created a a dataset on euro-area Divisia-money aggregates. In this paper, Zsolt estimates theoretically correct responses to money, user cost and interest rate shocks using structural vector-autoregressions. The findings suggest that money matters for output, prices and interest rates, while the European Central Bank can influence monetary developments.


• VARs reveal significant euro-area output and prices responses to Divisia-money shocks.

• After a short-term liquidity effect, Divisia-money shocks increase interest rates.

• Divisia-money reacts to user costs and interest rates shocks.

• Most of these results are not significant when we use simple-sum measures of money.

Click here to access this publication.

Mon, 22 Jun 2015 08:37:30 +0100
<![CDATA[The Russian pipeline waltz]]> http://www.bruegel.org/nc/blog/detail/article/1651-the-russian-pipeline-waltz/ blog1651

This is an eventful period for EU-Russia gas relations. Six months ago Russian President Vladimir Putin surprised the energy world by dismissing the long-prepared South Stream project in favour of Turkish Stream. Like South Stream, Turkish Stream is intended to deliver 63 billion cubic metres (bcm) of gas per year through the Black Sea to Turkey and Europe by completely bypassing Ukraine from 2019.

Yesterday, during the St. Petersburg International Economic Forum 2015, Gazprom unexpectedly signed a set of Memorandums of Intent with the European gas companies E.ON, Shell and OMV. These plan for the construction of two additional gas pipeline strings along the Nord Stream pipeline system that connects Russia and Germany through the Baltic Sea. This project would double the current capacity of Nord Stream from 55 bcm per year to 110 bcm per year.

Both Turkish Stream and an expanded Nord Stream indicate that Russia does not intend to abandon its position in the European market (by for example shifting attention to Asia).

As illustrated in the figure below, current EU-Russia gas trade is based on three key axes: the Nord Stream pipeline, the Yamal-Europe pipeline through Belarus and the pipeline system crossing Ukraine. Of these three routes, only the Ukrainian gas transportation system is not controlled by Gazprom.

EU-Russia existing gas connections


Source: Bruegel based on BP Statistical Review of World Energy 2015, IEA Gas Trade Flows in Europe, Nord Stream website.

Gazprom has asserted several times that it will cut off gas transits through Ukraine by the end of the decade. The current alternative routes (Nord Stream + Belarus), however, only present a capacity of 86.5 bcm per year. To maintain the current level of Russia’s exports (119 bcm in 2014) at least 35 bcm of additional pipeline capacity would be needed.

In fact, current capacities are not being fully exploited due to disputes over the access regime to the OPAL pipeline in Germany which connects Nord Stream to European markets. Gazprom would like to make full use of the pipeline, but the European Commission, the German regulator and Gazprom have not yet reached a decision on the conditions for an exception from the EU's Third Energy Package that would allow Gazprom to control more than 50% of the capacities.

Either Turkish Stream (with its 49 bcm per year devoted to the European market) or an expansion of Nord Stream (55 bcm per year) alone wouldallow Russia to circumvent Ukraine. Both lines together would result in significant over-capacity. So there seems to be a trade-off between Turkish Stream and an expanded Nord Stream.

So, how should the most recent evolutions of the Russian waltz of pipelines be interpreted? There are three possible scenarios:

i) Turkish Stream for Turkey only & Nord Stream for the EU. In this scenario Russia would target the construction of the first string of Turkish Stream to divert the 14 bcm per year currently supplied to Turkey via the Trans-Balkan pipeline (crossing Ukraine, Moldova, Romania and Bulgaria) by 2016, as recently agreed in Ankara. This would allow Russia to capitalize on the massive investments already made in the "Russian Southern Corridor" and to make use of the South Stream pipes already delivered at the Varna harbor and of the pipe-laying ships already placed in the Black Sea. Considering the regulatory and financial barriers to the development of new infrastructure to deliver Turkish Stream gas to EU destination markets, Russia would abandon its plan to supply the EU market via Turkish Stream and rather invest in the expansion of Nord Stream to cover this market.  

ii) Nord Stream expansion as a bargaining chip to advance Turkish Stream. In this scenario Russia would propose the expansion of Nord Stream, in order to have another bargaining chip in the negotiations with Turkey (and Greece), and to quickly advance the full Turkish Stream project and ensure better commercial conditions. This would allow Gazprom to avoid further controversies around the OPAL pipeline and to deliver gas directly to southern European markets. This way Gazprom’s ability to sell gas to southern Europe would not depend on additional north-south pipelines under EU rules, and some price-differentiation between the northern and southern market for Gazprom gas could be maintained.

iii) No pipelines, just politics. In this scenario Russia does not intend to develop either the full Turkish Stream (but at most the first string for the Turkish market) or the expansion of Nord Stream. The proposals are thus intended to create political cleavages within the EU, at a moment when the EU is toughening its stance against Russia due to the Ukraine crisis. They create cleavages between northern and southern EU countries (Germany favoured by Nord Stream; Italy and Greece favoured by Turkish Stream); between the EU and Member States (for example Member states’ actions that counteract the Brussels strategy to diversify away fro m Russia); and within EU countries (by causing the interests of governments and energy companies to diverge). In such a scenario, this waltz of pipelines thus represents a new chapter in Russia’s enduring divide and rule strategy vis-à-vis the EU energy market.

Fri, 19 Jun 2015 14:05:02 +0100
<![CDATA[Collaborative innovation in the entrepreneurial ecosystem]]> http://www.bruegel.org/nc/events/event-detail/event/542-collaborative-innovation-in-the-entrepreneurial-ecosystem/ even542

European policymakers are currently appraising different plans to create jobs and foster economic growth. Entrepreneurship through the creation of innovative young firms is a priority. Entrepreneurial ecosystems that offer models of collaborative innovation can facilitate the establishment and growth of these innovators. Yet many challenges remain.

Bruegel is pleased to be hosting a lunchtime workshop about collaborative innovation. This event will highlight some of the models and challenges for collaboration between large and small firms.

Collaborative innovation can promote long-term growth and enhance competitiveness, especially when dynamic young firms work with established companies to commercialise new ideas. Such collaborations are critical in helping young, entrepreneurial firms to thrive and expand, while enabling established firms to address innovation challenges.

However, companies participating in such partnerships must overcome a number of challenges:

  • How can businesses find and select the right partner in their networks?
  • What are the most effective capital and governance structures?
  • Which mechanisms are best to share and benefit from intellectual property?
  • How can leaders build a positive business case and ensure their teams are organisationally and culturally ready to engage?


  • Nicholas Davis, senior director, Center for the Global Agenda, World Economic Forum
  • Kamil Kiljański, Chief Economist, European Commission, DG GROW
  • Valerie Mocker, principal researcher for startups and entrepreneurship, NESTA
  • Gary Stewart, director, Wayra UK (a Telefonica initiative)
  • Chair: Karen Wilson, senior fellow, Bruegel

Background Materials

  • Summary of a Bruegel Workshop on Building Entrepreneurial Ecosystems in Europe from December 2, 2014 -
  • Comprehensive Guide for Successful Corporate-Entrepreneurial Collaborations

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Date: Tuesday 30 June 2015
  • Time: 12:00 - 14:30 (Lunch: 12:00 - 12:30)
  • Contact: Matilda Sevón, Events Coordinator

Fri, 19 Jun 2015 10:47:03 +0100
<![CDATA[Greece budget update]]> http://www.bruegel.org/nc/blog/detail/article/1650-greece-budget-update/ blog1650

As Eurogroup discussions with Greece continue, the latest budget execution bulletin from the Greek finance ministry has been published yesterday, comparing the actual budget execution with the estimates presented in the 2015 budget.

The state budget balance records a deficit of 1.4 billion euros for January-May 2015, against the target deficit of 3.5 billion, 590 million lower than for the same period of 2014.  Growth in the state budget primary balance has slowed down compared to previous months, but remains above target. Greece recorded a primary surplus of 1.5 billion euros over the first five months of the year, against an expected primary deficit of 556 million euros. In cumulative terms, the state primary balance has therefore exceeded its target by 2 billion euros (figure 1).

Source: Ministry of Economy and Finance, Greece

Revenues had slightly overperformed compared to their cumulative target last month, giving rise to some hope, but this bulletin reveals that revenue collection has now fallen back below target. State budget net revenues amounted to a cumulative 18.6 billion euros for the period January-May 2015, missing the target by 546 million euros. For the month of May alone, net revenues amounted to 2.8 billion euros, 918 million euros short of the monthly target. In fact, this shortfall is very close to the one recorded in January, in the immediate aftermath of the elections. Figure 2 shows that revenue flows for the month of May are the worst since beginning of the year, and this month’s shortfall has effectively wiped out the improvements of three previous months.

According to the Ministry of Finance, the shortfall is partly attributed to the fact that the first installment of corporate income tax was not received (worth an estimated 555 million euros).  It is also partly due to the fact that Greece has not received disbursements related to national central banks’ ANFA holdings, i.e. holdings by National Central Banks’ in their investment portfolio. The missed disbursement is estimated by the Ministry of Finance to be worth 132 million euros. However, these two components explain only 687 million out of the total shortfall of 918 million, and point once again to problems in the revenue side of the Greek budget.

Source: author’s calculations based on MEF bulletin

As has become regular over the last months, the revenues gap was covered by reductions in expenditures against the target. For the month of May, state budget expenditures amounted to 3.7 billion euros, 591 million lower than the target, with ordinary budget expenditures underperforming by 311 million. Over the period January-May 2015, cumulative state budget expenditures amounted to 20 billion euros, 2.6 billion lower than the target. Ordinary Budget expenditures amounted to 19 billion euros and decreased by 1.9 billion against the target, again due to the reduction of primary expenditure by 1.7 billion euros and the reduction of military procurement, down by 219 million compared to the target.

Source: Ministry of Economy and Finance, Greece

Overall, the data confirms what has by now become a clear pattern. Greece’s primary surplus remains positive, but this is mainly due to cuts in primary expenditure, as revenues continue to underperform (particularly this month). As previously mentioned, a significant share of the expenditure cuts come from delayed payments. The budget execution bulletin shows that since January, payments for settlements of general government arrears have been zero, against 181 million for the same period last year. 

This recent deterioration in collection of revenues is worrying, not only because it undermines the improvements achieved over the last few months, but because it could  signal a new drop in confidence, which the Greek government should not underestimate. 

Fri, 19 Jun 2015 08:49:43 +0100
<![CDATA[The Future of the Welfare State]]> http://www.bruegel.org/nc/events/event-detail/event/541-the-future-of-the-welfare-state/ even541

The Vision Europe Summit brings together partners which are highly respected voices in their national contexts and beyond, and command a strong analytical base while maintaining an international outlook. The partners work on a pool of common socio-economic issues. These synergies are now joined in order to infuse national as well as European policy debates.

This year’s summit will focus on the economic, social and governance aspects of the welfare state systems in Europe. At this occasion the policy briefs and the survey will be debated and presented to high-level politicians and experts.

You can find more details here.

Thu, 18 Jun 2015 11:49:00 +0100
<![CDATA[The slow-reform trap]]> http://www.bruegel.org/nc/blog/detail/article/1649-the-slow-reform-trap/ blog1649

A never-ending controversy

The question of optimal reform strategy, especially its speed and degree of ambition, has been repeatedly debated in relation to various historical occasions. The best-known controversy refers to the first period of post-communist transition in central and eastern Europe and the former Soviet Union in the 1990s. It was framed as the ‘shock therapy’ versus ‘gradualism’ debate.

The emotional term ‘shock therapy’ was introduced purposely by the opponents of fast, radical and comprehensive reforms: nobody likes shock or wants to be treated in this way. Opponents argued that ‘shock therapy’ ignored the organic building of institutions (Murrell, 1992), induced the downward demand-driven spiral of falling output and increasing unemployment (Nuti and Portes, 1993; Laski and Bhaduri, 1997), led to deterioration of fiscal accounts (Aghion and Blanchard, 1993) and put newly-born democracies at risk (Przeworski, 1991). A gradual approach would result in less economic and social pain and better institutional outcomes.

Somewhat similar rhetoric (‘austerity’ versus ‘growth’) could be heard twenty years later when the financial and public debt crises hit several European economies. Again, the opponents of fast fiscal adjustment and structural reforms argued about ‘self-killing austerity’ (Krugman, 2010; DeLong and Summers, 2012) – in other words, a hypothetical situation in which fiscal adjustment leads, via a demand multiplier higher than 1, to unacceptable output and employment losses and, as a result, further deterioration of fiscal balances.

Facts tend to favour fast reform

The verdict of historical experience is definitely in favour of fast and comprehensive reforms. Among the former communist countries those that moved quickly (the Baltic and central European countries) recorded the best economic, social and political results (Dabrowski, 2013). They reduced the period of corrective output decline to 2-3 years and limited its depth. They enjoyed the earliest returns to rapid economic growth. They recorded smaller income and wealth inequalities, less corruption and better institutional outcomes, including stable democracies. In 2004, they became EU members, which further anchored and reinforced the positive results of institutional transition, and helped in their further modernisation.

Countries that for various reasons delayed reform or implemented it in a more gradual manner, suffered from prolonged periods of deep output decline. In the extreme cases of Russia, Ukraine and Moldova, this lasted almost 10 years and involved cumulative losses of more than 40 percent of pre-transition output. Countries of the former Soviet Union (except for the Baltic states) and of south-eastern Europe, ie those where reforms were slower and less effective, suffer from greater income and wealth inequalities, the dominance of oligarchs over economic and political life, corruption and organised crime, poor governance and weak rule of law. Several former Soviet Union countries returned to autocracy.

The recent financial crisis experience in Europe also demonstrates the advantage of front-loading fiscal adjustment and structural reform. The Baltic countries (especially Latvia), heavily hit by the crisis in 2008, exited the crisis much faster and with much smaller output and employment loses than Greece (see Balcerowicz, 2014; Aslund, 2015a).

Why does fast reform result in better outcomes?

The potential advantages of rapid reform can be explained by the size of imbalances, which must be addressed, the expectations of economic agents, policy and systemic consistency and political economy factors (Dabrowski, 1996). Of course, these arguments apply to a situation in which an economy must respond to a major shock or overcome large structural and institutional distortions. In case of minor shocks or smaller distortions, there is more room for gradualism.

If the economy suffers from large fiscal, monetary or balance-of-payments disequilibria, the minimal size of adjustment must be large enough to close the existing gap and change the expectations of economic agents. If it fails to do so, imbalances will deepen and economic agents will take a pessimistic view of the economy’s prospects. They will react with flight from domestic money, by withdrawing bank deposits and with capital flight, which will make things even worse than before (the mechanism of multiple equilibria). The attempt to soften the adjustment burden by external borrowing (from the International Monetary Fund or other official creditors) is not always available and cost-free. The official creditors impose conditions, and the loan must be repaid in future. Furthermore, economic agents must believe that a less ambitious but externally supported adjustment package offers the prospect that the country will remain solvent in the medium-to-long-term.

The need to close a financial gap and change market expectations means that a gradualist approach is rarely successful in returning a country to macroeconomic stability – for example, by fighting high inflation, overcoming balance-of-payment crises or avoiding public debt default, once economic agents have already started to panic. There is more room for a gradual approach in other reform areas (Table 1). However, choosing such an approach always involves economic and social costs.

Table 1: What can be done gradually? Experience of post-communist transition


Can be done gradually

If YES, what are negative implications?

Macroeconomic stabilisation



Domestic liberalisation


Price distortions, fiscal problems, delayed de-monopolisation and privatisation

External liberalisation


Price distortions, weaker competition, less pressure for restructuring



Delayed restructuring, pressure for macropolicy, intensive rent-seeking, informal privatisation

Restructuring of the state sector (subsidisation)


Delayed restructuring, fiscal crisis, other pressure for macropolicy, intensive rent-seeking, the information and political barrier in monitoring, credibility problem

Source: Dabrowski (1996)

Gradual domestic and external liberalisation means a longer period of price distortions (often associated by additional fiscal and quasi-fiscal costs), weaker competition, and less pressure for restructuring. Privatisation of over-regulated public enterprises working in a restricted competition environment remains highly problematic. On the other hand, slow privatisation delays the restructuring of enterprises, and creates negative pressures for monetary and fiscal policies. Furthermore, slow privatisation and enterprise restructuring encourages rent seeking, corruption and spontaneous informal privatisation (stripping profits and assets). It also creates information and political barriers in monitoring state-owned firms.

Time is the most precious political resource

Although slower reform can reduce immediate political resistance and the associated risks for policymakers, it delays the potential gains and sometimes multiplies the reform pain because of the necessity of repeating unpopular adjustment measures several times.

In addition, gradual reforms are not easily manageable. By definition, they extend the transition period before the new policy regime is fully operational. In many spheres, the new policies and mechanisms must reach the minimum threshold to become effective (the critical mass of reform). In the meantime, an interim regime is required to avoid a systemic vacuum. Such a hybrid regime might suffer from information barriers and lack of consistency. It often creates intermediate winners who oppose further change (Krueger, 1993; Hellman, 1998). On the other hand, economic agents might not consider gradual change to be credible and can delay adjustment of their market behaviour. Again, expectations play an important role in this respect.

Policymakers dealing with reform will not enjoy unlimited political windows of opportunity. On the contrary, the political credit that they receive (as a result of election, revolution, extraordinary mobilisation of society, etc) is usually time-limited. If not used effectively, it might not be quickly granted again. If wasted several times, the consequence might be social disappointment and the opening of the political door to populists of various colours.

Ukraine: negative consequences of slow reform

Ukraine is perhaps the most convincing example of a victim of slow reform. Since independence in 1991, it has missed several political windows of opportunity to comprehensively reform its economy and state institutions. Had these reforms been put in place, today Ukraine would be a different country. Most probably, it would have been able to avoid the current deep economic crisis and avert the threat of external aggression. Instead, subsequent governments have built a distorted market economy and deeply dysfunctional state institutions controlled by oligarchs and suffering from extremely high levels of corruption (see Dabrowski, 2007; Aslund, 2015b, chapter 4).

The most tragic failure came after the Orange Revolution in 2004. The broad political support for democratic change and deep institutional and economic reform was lost because of a political split inside the ‘Orange’ camp, in particular, the permanent political infighting between then-president Viktor Yushchenko and twice prime minister Yulia Tymoshenko (2005 and 2007-10). The growing popular disappointment led to the election victory in 2010 of Viktor Yanukovych, who built a kleptocratic regime, strengthened Ukraine’s dependence on Russia and ran populist macroeconomic policies.

Have the lessons of the Orange Revolution sunk in?

The next political window of opportunity for serious reform came in early 2014 after the tragic events of the Euro-Maidan and the collapse of Yanukovych’s regime. The new Ukrainian authorities have made general pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. The same must be said about the international financial aid packages granted to Ukraine in April-May 2014 (see Dabrowski, 2014) and again in March 2015 (see Dabrowski, 2015), which have not been accompanied by sufficiently strong policy conditionality, and which remained underfunded.

The insufficient fiscal adjustment and structural reforms conducted in 2014 led to the dramatic balance-of-payments crisis at the end of that year and in early 2015. The National Bank of Ukraine's foreign exchange reserves reached the critically low level of $4.7 billion in February 2015 and the hryvnia lost almost two thirds of its value compared to the beginning of 2014. This accelerated inflation, which will reach the annual level of 46 percent in December 2015, increased the level of public debt above 90 percent of GDP and led to the deterioration of the balance sheets of several Ukrainian banks and companies.

The new fiscal adjustment package backed by the IMF Extended Fund Facility programme (approved in March 2015) again looks insufficient in terms of the amount of financing and attached conditionality. It does not go far enough in the two key areas of fiscal and structural reform, ie, in bringing household gas and heating tariffs to the full cost-recovery level (in the meantime the latter has increased substantially as result of the hryvnia’s devaluation), and pensions, ie increasing both the statutory and effective retirement age.

In several important spheres, the major reform agenda is still far behind. This includes, for example, the reform of the judiciary and law-enforcement agencies, local and regional government, fighting corruption, bank restructuring, comprehensive business deregulation, civil service reform, tax and customs administration and tax collection procedures and privatisation of state-owned enterprises.

A race against time

This brings us to the question of effectiveness of the leadership of the new president, parliament and government, all elected on the pro-reform and pro-European platforms in 2014. Without any doubt, the new authorities received an explicit pro-reform political mandate, but the question is if they are willing and able to use it for the right purpose. This also involves the question of policy coordination between the president and prime minister (in the context of an unclear demarcation of their responsibilities), between the government and the Verkhovna Rada (parliament), and within the government coalition.

Obviously, the conflict with Russia distracts attention, political energy and resources from the domestic reform agenda. However, it also helps to consolidate and mobilise society around the president and government, and can justify politically unpopular decisions. Time is working against the new Ukrainian authorities. Slow progress on reform will delay economic recovery and will weaken the Ukrainian state. It will make the period of pain and sacrifices longer with no visible gains. This might lead to popular disappointment and a weakening of the pro-reform mandate. In fact, a decline in the popularity of the president and the government has been already observed (see Barker, 2015). Its further decline will not help in confronting the domestic reform agenda and external threats.


Aghion, P. and Blanchard O.J. (1993) On the speed of transition in central Europe, European Bank for Reconstruction and Development (EBRD), Working Paper, No. 6, July

Aslund, A. (2015a) Revisiting the Latvian and Greek Financial Crises: The Benefits of Front-Loading Fiscal Adjustment, CASE Network Studies and Analyses, No. 477, http://www.case-research.eu/sites/default/files/publications/S%26A477.pdf

Aslund, A. (2015b) Ukraine: What Went Wrong and How to Fix It, Peterson Institute for International Economics, Washington, DC

Balcerowicz, L. (2014) Euro Imbalances and Adjustment: A Comparative Analysis, Cato Journal, Vol. 34, No. 3 (Fall)

Barker, A. (2015) Poll highlights divisions among public on tackling Ukraine crisis, Financial Times, June 10, http://www.ft.com/intl/cms/s/0/b28f38ae-0ec3-11e5-848e-00144feabdc0.html#slide0

Dabrowski, M. (1996) Different Strategies of Transition to a Market Economy: How do They Work in Practice?, The World Bank, Policy Research Working Paper, No. 1579, March

Dabrowski, M. (2007) Ukraine at a Crossroad, CASE Network Studies and Analyses, No. 350, http://www.case-research.eu/sites/default/files/publications/17209093_S%20and%20A_350_Dabrowski_0.pdf

Dabrowski, M. (2013) Central and Eastern Europe and the CIS: 20 years on, in: Turley, G. & Hare, P.G. (eds.): Handbook of the Economics and Political Economy of Transition, Routledge

Dabrowski, M. (2014) Ukraine: Can meaningful reform come out of conflict? Bruegel Policy Contribution, Issue 2014/08, July, http://www.bruegel.org/publications/publication-detail/publication/843-ukraine-can-meaningful-reform-come-out-of-conflict/

Dabrowski, M. (2015) The harsh reality of Ukraine’s fiscal arithmetic, Bruegel Policy Contribution, Issue 2015/07, http://www.bruegel.org/download/parent/881-the-harsh-reality-of-ukraines-fiscal-arithmetic/file/1798-the-harsh-reality-of-ukraines-fiscal-arithmetic/

DeLong, J.B. and Summers, L.H. (2012) Fiscal policy in a depressed economy, Brookings Papers on Economic Activity, Spring, pp. 233-297

Hellman, J. (1998) Winners Take All: the Politics of Partial Reform, World Politics, vol. 50, pp. 203-234

Krueger, A.O. (1993) Political Economy of Policy Reform in Developing Countries (The Ohlin Lectures), The MIT Press

Krugman, P. (2010) Self-defeating Austerity, The New York Times, July 7, http://krugman.blogs.nytimes.com/2010/07/07/self-defeating-austerity/

Laski, K. and Bhaduri, A. (1997) Lessons to be drawn from main mistakes in the transition strategy, in: Zecchini, S. (ed.): Lessons from the Economic Transition. Central and Eastern Europe in the 1990s, New York, NY: Springer- Science + Business Media LLC

Murrell, P. (1992) Evolution in economics and in the economic reform of the centrally planned economies, in: Clague, C. and Rausser G.C. (eds.): The Emergence of Market Economies in Eastern Europe, Oxford: Basil Blackwell

Nuti, D.M., and Portes R. (1993) Central Europe: the way forward, in: R. Portes (ed.): Economic Transformation in Central Europe. A Progress Report, London: Centre for Economic Policy Research

Przeworski, A. (1991) Democracy and the Market: Political and Economic Reforms in Eastern Europe and Latin America, Cambridge: Cambridge University Press



Thu, 18 Jun 2015 10:40:42 +0100
<![CDATA[How to design the Future Financial System? Resolution Framework, Crisis Prevention and Capital Markets Union]]> http://www.bruegel.org/nc/events/event-detail/event/540-how-to-design-the-future-financial-system-resolution-framework-crisis-prevention-and-capital-markets-union/ even540

We are happy to announce the upcoming conference "How to design the Future Financial System? Resolution Framework, Crisis Prevention and Capital Markets Union", which will take place on Wednesday, October 28, 2015 at European School of Management and Technology in Berlin.

We will be discussing the political and regulatory efforts made so far at the EU level, including the Single Resolution Board programs, how well they work in conjunction with each other, and how effective they are. We will critique whether the aforementioned efforts are comprehensive enough to deal with the crises and safeguard financial stability. We will also discuss improving the European banking sector. Additionally, we will examine the prospects of a capital markets union in relation to the smooth functioning of the economy and sustainable growth strategies. We hope to generate a public debate on building a more resilient financial system which supports sustainable growth.

You can find a more detailed program here. However, please bear in mind that the programme of this event is still under the construction. We will update this page with additional information in the coming months.

Thu, 18 Jun 2015 09:24:22 +0100
<![CDATA[Greece – the three essential elements for a deal]]> http://www.bruegel.org/nc/blog/detail/article/1648-greece-the-three-essential-elements-for-a-deal/ blog1648

This blog argues that a deal for Greece requires three elements: lower primary surpluses than the creditors are currently asking for; little action on debt except for agreeing to delay IMF repayment (similarly to how European Financial Stability Facility repayments have been delayed); and serious institutional reforms and trust building measures by the Greek government to re-establish confidence, Greece’s most scarce resource .

Stances on both sides in the Greek negotiations have hardened, and creditors and debtor still seem far away from each other. In this blog, I charter the three elements that are crucial for a deal. They concern the primary surplus, how to deal with the debt and, most importantly, confidence and trust in a monetary union.

First, on the fiscal target debate, the creditors are requesting a primary budget surplus (revenues less expenses without interest rate payments) of 1 % of GDP this year, 2 % next year, and 3 % in 2017, rising to 3.5% by 2018. Syriza, in contrast, is asking for a more modest adjustment of up to 0.75% this year, 1.75% in 2016 and 2.5% in 2017. Accumulating these fiscal paths over 2015-18, the difference between the two amounts to 1.0% more of GDP requested from the creditors. By any metrics, this difference is substantial regarding its impact on GDP, but rather irrelevant compared to the overall debt burden. In fact, the literature is rather clear that in a recessionary environment, a fiscal adjustment of 1% of GDP per year will lead to GDP losses of even more than 1%. After a decline in GDP of more than 25%, Greece has a point in calling for lower primary surpluses.  

The second issue concerns the level of public debt. International commentators and academics (see here and here) have been calling for debt relief to Greece.  A number of interrelated aspects need consideration in this regard.

Very high primary surpluses rarely occur for an extended period of time and come with high political and economic costs.

  • Do high debt levels demand high primary surpluses, which in turn hurt growth and are politically unachievable? Syriza and the creditors seem to agree on a primary surplus of 3.5% from 2018 onwards. However, we know from Eichengreen and Panizzathat such high primary surpluses rarely occur for an extended period of time and come with high political and economic costs. Arguably, such high primary surpluses are not really necessary. Take for instance a significantly lower primary surplus of only 2.5% and different assumptions as regards inflation and growth (base scenario: 3.7% nominal growth, pessimistic scenario: 2% nominal growth, the average interest rate is set at 3.7% and derived from forward rates, for details see Darvas and Hüttl). Even in the pessimistic scenario that only assumes 2% nominal growth, the Greek debt to GDP ratio would still fall, although at a slower pace (see figure). A slower reduction in the debt to GDP ratio requires either access to the market so that Greece can pay its official creditors on time, or delayed re-payments of official creditor loans, which would de facto amount to some debt relief. Since Greece almost regained market access last year, arguably it will be able to start EU re-payments with access to markets as of 2020. And certainly, a debt-to-GDP ratio in 2030 of 115% could be compatible with market access just as well as a debt-to-GDP ratio of 105%.  


 Source: Bruegel calculations, for details, see Darvas and Hüttl (2014).


  • The focus is often on headline debt-to-GDP numbers instead of on the actual burden of public debt on the Greek economy. One metric by which to measure the burden of debt on the economy is interest payments. In the period 2015-2020, Greece will not pay more than 2.6% of GDP in annual interest. In fact, the European official creditors have waived interest payments until 2020 and debt repayment is stretched over more than 30 years. As a consequence, the Greek interest burden is about the level of interest that France pays.  
  • Others, again, would argue that the empirical literature spearheaded by Reinhart and Rogoff shows that debt levels above 90% of GDP are negatively correlated with growth. This evidence was, however, prominently challenged by Thomas Herndon, Michael Ash, and Robert Pollin. Overall, it is not clear at what level debt has a strong negative impact on growth. Certainly, there is little evidence that a 10 or 20 percentage point difference of debt – as would be achieved by higher primary surpluses – would substantially change growth performance going forward.
  • A corollary to the postponed debt repayment of Greece and the low interest burden is what economists call the low net present value of Greek debt. Hugo Dixon has proposed to make this more easily visible with some financial engineering. Such ideas are worth exploring further, but they certainly require Greece to re-gain market access, a point I will discuss below.
  • The final, and perhaps most contentious issue concerns the repayment schedule of the IMF. The Eurogroup already made substantial concessions back in November 2012 , by agreeing to extend the maturities of EFSF and bilateral loans by 15 years (and repayments will only start in 2023). The IMF, in contrast, has until now refused to ease Greece’s debt burden. A logical step would be to ask the IMF to change strategy. It has still 30 billion euros at stake, all of which should be repaid by 2021. Following the example of the EFSF loans, both the grace period as well as the interest payments to the IMF could be deferred. The IMF was brought in by the Troika to ensure an objectively designed and robust programme. It should now share responsibility for its failings. Referring back to the November 2012 agreement, as has been done recently, is rather unconvincing. A shared programme should mean shared responsibility.
  • Greece has repayment obligations to the ECB of some 27 billion euros over the next few years. The July payment especially cannot be done with market borrowing. Instead, a European Stability Mechanism (ESM) programme appears indispensable in order to replace the ECB as a creditor.
  • If GDP growth remains below expectations, the option of swapping current loans to GDP-indexed loans could also be discussed, so as to provide insurance against unexpected negative shocks to GDP.



The third and most important issue concerns confidence and trust. Perhaps the biggest lesson of the recent turmoil is that an economy cannot grow if there is no confidence in that economy. Since the Syriza government came to power and started confrontational negotiations for a new debt deal, a dramatic decline in confidence has occured. In particular, sovereign yields have increased significantly over recent months. At the same time, the European Commission has revised its real GDP growth forecastsdownwards – despite a substantial reduction in austerity and the neutral fiscal stance implemented by Syriza. Without being hard evidence, this suggests that a country like Greece needs confidence above all. Confidence is a result of political action and building trust with European partners. 

Sources: Panel A: EC country forecasts; Panel B: Datastream Thomson-Reuters

Structural reforms are an important building block in the re-establishment of trust and improving growth prospects (the OECD has identified more than 320 competition-distorting rules and provisions in the Greek service and product markets). IMF research finds that structural reforms can have positive and statistically significant effects on total factor productivity. The OECD concurs: countries with good institutions, low corruption, adequate levels of competition and better education systems typically perform better than countries without such features (seeOECD report on inclusive growth). 

How realistic is it to call for such things? The track-record of imposing reforms from the outside in IMF programmes is rather mixed. Yet, being in a monetary union is not the same as a simple IMF programme in Latin America. Greece – like all countries of the union –  agreed to share sovereignty on economic policies when it signed the Lisbon treaty (Article 121). Granting tax relief to the richest 6000 people, while asking for debt relief from the European creditors was certainly a hostile act. Refusing to reform pensions and introducing early retirement schemes when the pension system is unsustainable, while asking for debt relief, amounts to asking others to pay for Greek pensions. Slowing down the ongoing institutional transformation (that my colleague Zsolt Darvas has shown to be substantial) as the Syriza government seems to be doing, is not acceptable in a monetary union based on shared sovereignty.

To sum up, both sides still have some mileage to go. A sensible deal would consist of 


  • lower primary surplus targets, perhaps as little as 0.75% this year and 1.25% next year and a medium term primary surplus of 2.5%
  • a delay in the debt repayment schedule to the IMF, but no further additional debt relief. Commitment to debt relief is growth severely disappoints.
  • implementing concrete steps towards a further institutional transformation of Greece that is suitable in re-establishing trust, confidence and above all market access.Growth prospects are not so bad if good policies and confidence return.

It is in the interests of both Greece and its creditors to find a comprehensive agreement. Such an agreement requires Greece to implement strong reforms and return to a collaborative political approach, which is essential in a monetary union based on shared sovereignty. It requires the creditors to be less demanding on fiscal austerity in the next years. The euro area can avoid default and exit, but only if collaboration and trust are re-established.

I thank Pia Hüttl for excellent research assistance and Zsolt Darvas and Silvia Merler for comments.

Wed, 17 Jun 2015 13:12:50 +0100
<![CDATA[Is Greece Destined to Grow?]]> http://www.bruegel.org/nc/blog/detail/article/1647-is-greece-destined-to-grow/ blog1647

There is much talk about the impasse between Greece and its official lenders in their bail-out negotiations, so I thought I would write about something else instead: the changes in the Greek economy towards a new growth model.

Greece’s pre-crisis growth model was clearly unsustainable.

Greece’s pre-crisis growth model was clearly unsustainable. It was characterised by widespread state control, inefficient public administration, corruption, excessive increases in public sector employment and wages, large increases in private sector wages well over productivity growth, and insufficient structural reforms. This model led to very unfavourable business conditions, which was reflected in Greece being ranked 108th out of 181 countries in the World Bank’s Ease of doing business indicator in 2008. Major vulnerabilities emerged, such as the -16.5% GDP current account balance in 2008, the -74 % of GDP net international investment position and the huge budget deficit and public debt. In 2008, the budget deficit was 10 % of GDP, which increased to 15% in 2009, by far the largest values in the EU, despite that economic contraction in these two years was not particularly large in Greece (GDP growth was -0.4% in 2008 and -4.4% in 2009). Public debt climbed to 127 % of GDP in 2009 and was on an exploding path. Clearly, the Greek crisis which erupted from late 2009 onwards was self-inflicted.

After 2010 the collapse of the Greek economy accelerated. GDP fell much more than was foreseen in the adjustment programmes (Figure 1). The big question is whether all of this collapse was inevitable given the unsustainable character of the pre-crisis growth model of Greece, or if the two Troika programmes exacerbated the output fall. In my assessment, some elements of the programmes worsened the situation  (as I argued here), but instead of elaborating what went wrong, let me focus on the economic adjustments of the past five years, in comparison to Cyprus, Portugal, Spain and Germany.

Figure 1: GDP at constant prices (2009 = 100), 2009-2014

Source: Programme documents, AMECO database May 2015.

Greece has made significant progress, but there is still a long way to go.

In some aspects Greece has improved a lot. In the ease of doing business indicator, Greece’s ranking has risen from 108th in the world in 2008, to 62nd in 2015 (Figure 2). Greece has made significant progress, but there is still a long way to go.

Figure 2: World Bank ease of doing business ranking, 2006-2015


Source: World Bank. Note: 1=most business-friendly regulations. Data from 153 countries in 2006, and 189 countries in 2015. Cypriot data was reclassified in 2014 and therefore we do not show earlier values.

According to the OECD, labour markets are now more flexible in Greece than in Germany, concerning regular contracts (Panel A of Figure 3), which account for 73% of Greek employment. There has been some easing in the regulations for temporary labour contracts too (Panel B of Figure 3).

Figure 3: OECD index of strictness of employment protection, 2000-2013


Source: OECD. Note: for regular contracts, version 2 of the indicator is used, while for temporary contracts version 1 (in the absence of version 2). Version 3 is available for both indicators, but only for 2008-2013.

There has been a sizeable adjustment in unit labour costs (ULC) in Greece, though not all pre-crisis divergences have been corrected (Figure 4). Unit labour costs matter: as I indicated here, there is a quite close association between ULC-based real exchange rates and export performance. This was true especially before the crisis (when Greece fit very close to the regression line), though the association has become somewhat weaker in the post-2008 period, when Greece is an outlier: exports have not grown as much as the relationship would have predicted.

Figure 4: Unit labour cost developments (2000Q1=100), 2000Q1-2015Q1

Source: updated dataset by Darvas, Zsolt (2012b) 'Compositional effects on productivity, labour cost and export adjustment', Bruegel Policy Contribution 2012/11

Figure 5 shows export developments separately for goods and services: at current prices, goods exports developed almost the same way as goods exports from Germany, Portugal and Spain (panel A of Figure 5) – in fact, Greece even did slightly better. This is very good news. The bad news is that Greek (and also Cypriot) services exports underperformed compared to Germany, Portugal and Spain (Panel B of Figure 5). The Bank of Greece (see page 65) concluded that weaknesses in exports of services were primarily related the prospect of Grexit, in particular the negative impact of uncertainty on tourism, and the decline in the international freight market on shipping. 

Figure 5: Exports at current prices (2008Q1=100), 2008Q1-2015Q1

Source: Eurostat.

While there is some good news about Greek goods export dynamics, our evaluation must be nuanced, for three reasons:

· First, at constant prices Greek export dynamics are somewhat worse.

· Second, the composition of goods exports shows that the category “Mineral fuels, lubricants and related materials” is the primary driver of export growth (Figure 6), an industry which is characterised by low value added. While this category recorded the fastest growth in Germany and Spain too, in these two countries export growth is much more broad-based than in Greece.

· Third, Böwer, Michou and Ungerer (2014) estimate, using gravity models, that Greece exports a third less than regular international trade patterns would predict.

Figure 6: Exports of goods by type (2008=100), 2008-2014

Source: calculation using Eurostat data.

Böwer, Michou and Ungerer (2014) also conclude that weak institutions can explain much of the missing Greek exports puzzle. This implies that continued structural reforms should significantly boost exports.

The benefits of further reforms for GDP growth are highlighted by the calculations of Varga and in’t Veld (2014), who found that by closing half of the gap in structural reform indicators relative to 3 best performers, Greek GDP would rise 4% in 5 years and 18% in 20 years.

There continue to be major obstacles to growth, like the complexity of regulatory procedures

Clearly, despite progress with some of structural reforms in Greece in the past five years, there continue to be major obstacles to growth, like the complexity of regulatory procedures, enforcing contracts, state control, barriers to FDI and trade facilitation, and so on. Addressing these obstacles is difficult, yet their presence also implies that their elimination offers the prospect of growth.

Further good news concerning economic adjustment comes from the share of the tradable sector (defied as agriculture, manufacturing, trade, transport, tourism and ICT) in the private economy, whose decline reversed in 2010 and is now higher than in Germany (Figure 7). The increase in the share of the Greek tradable sector from 2010 was the consequence of a smaller fall of the tradable sector in 2010-12 than the fall of the non-tradable sector, while the tradable sector stabilised in 2013 and started to grow in 2014, when the non-tradable sector continued to shrink.

Figure 7: Share of tradable sector in private sector (%), 2000Q1-2015Q1


Source: calculation using Eurostat data.

Tradables: A: agriculture, forestry and fishing, C: Manufacturing, G-I: Wholesale and retail trade, transport, accommodation and food service activities, J: Information and communication.

Non-tradables: B, D, E: non-manufacturing industry, F: Construction, K: Financial and insurance activities, L: Real estate activities, M-N: Professional, scientific and technical activities; administrative and support activities, R-U: Arts, entertainment and recreation; other service activities; activities of household and extra-territorial organizations and bodies.

Not considered: O-Q: Public administration, defence, education, human health and social work activities.

In Germany, manufacturing accounts for about half of the tradable sector, while the share of manufacturing is much lower in southern euro-area countries (Figure 8). This should not be a problem; for example Germany may have an advantage in designing and producing cars, while Greece may have an advantage in attracting visitors to seaside resorts.

Figure 8: Composition of the Tradable sector (% share in private sector), 2014Q4

Source/notes: see Figure 7.

Finally, let me note that following a dramatic collapse in employment, whereby far fewer people are employed in Greece (and also in Portugal) now than in 2000, job creation has resumed since early 2014 (Figure 9). This implies that the economy may have hit bottom in 2013 and absent suppressing factors like the uncertainty about Greek membership in the euro area and financial obstacles, the economy may rebound from its depressed state.

Figure 9: Employment (2000Q1=100), 2000Q1-2015Q1

Source: Eurostat.

Greece is destined to grow if a comprehensive and credible agreement is reached with the creditors and reforms continue

Is Greece destined to grow? If a comprehensive and credible agreement is reached with the creditors and reforms continue, then my answer is yes, for the following reasons:

·         Transition to a new growth model has already started,

·         Structural reforms have already been implemented,

·         The continuation of structural reforms offers major improvements in exports and growth,

·         The large fall in unit labour costs helps export performance,

·         Only minor further fiscal adjustment is needed,

·         The economy has likely reached the bottom in 2013 and deep recessions have been generally              followed by quick recoveries,

·         The euro-area and global environment is now more supportive than in the past.

Yet my positive assessment is conditional on a comprehensive and credible agreement, which would eliminate the risk of Grexit not just for now, and also on continued structural reforms, which seem politically difficult. If the agreement is not sufficiently comprehensive and credible, then uncertainty will continue and growth may not resume.

And if there is no agreement at all, then Greece will likely exit the euro area, which would lead, in my view, to further major falls in GDP, unemployment increases and paradoxically to fiscal tightening. Tax revenues would plummet due to collapsing GDP, and therefore even if the Greek government completely stopped servicing its debt, revenues would not be sufficient to maintain current expenditures. For lenders, a Grexit would likely mean writing down official loans to Greece and ECB lending to Greek banks. A Grexit would also make the euro area more vulnerable: whenever public finances of another government would come under stress, markets may also bet that country will exit the euro area as well.

The time has now come to find a wise and fair agreement.

This post is based on my presentation I gave on 3 June 2015 in Athens at the conference ”A New Growth Model for the Greek Economy”, organised by the Economic Chamber of Greece, the Greek Parliamentary Budget Office, the National and Kapodistrian University of Athens, the Democritus University of Thrace and the University of Peloponnese.

I thank Pia Hüttl and Allison Mandra for their help in data collection.




Tue, 16 Jun 2015 14:51:55 +0100
<![CDATA[Günther H. Oettinger's speech at Bruegel's event "What Digital Union for Europe?"]]> http://www.bruegel.org/nc/blog/detail/article/1646-gunther-h-oettingers-speech-at-bruegels-event-what-digital-union-for-europe/ blog1646

Dear Minister, Ladies and Gentlemen,

The world is turning digital - faster than we could have imagined. Digital is already everywhere. Yet, this is only the beginning.

Citizens are digital – three quarters use the Internet regularly. Especially for those under 40, the Internet has become an integral part of our life.

Companies are currently starting the 5th or 6th wave of digital – from simple websites many have moved on to using Enterprise resource planning for logistics, social media for branding, eInvoices for accounting. However, too few of them are selling online.

Also public administrations are moving online fast. One quarter of EU citizens makes requests online.

We have heard about the benefits of the digital world for productivity. Digitisation has been, is and will be good for Europe.

Yet I cannot help thinking that it would be much better for Europe if we were able not only to use digital technology, but also to play a bigger role in creating it.

To generate more high-quality jobs, and to contribute to shaping the digital world. Today, we reap some but not enough of the digital jobs and shape very little of this new Internet world.

Every footballer in the world wants to play in Europe. That is where the game is. For the same reason, every IT specialist dreams of going to the US. We should make Europe a place where IT dreams also come true.

To get there, European policy must follow where citizens, companies and administrations have already gone. Otherwise we will end up with a European Union for the analogue world and a return to purely national thinking for the digital world – 21st century technology with 19th century policy.

Europe needs a Digital Union. With common rules and a common policy Europe has much better chances to seize the opportunities of the digital era.

The Digital Single Market is a key element in this. But not just for economic reasons.

The EU is not anymore just an economic community, it is a European Union. Union of common values and principles.

One of these principles is Europeanisation of the rules to be respected by businesses and giving consumers a consistent level of protection. In a truly Digital Single Market, all should be protected by the same privacy rules. Companies should be able to sell online under the same conditions. Copyright should be better harmonised to give companies and citizens legal certainty when accessing copyright-protected content across borders. Telecom and media companies should benefit from a consistent framework allowing for economies of scale and ensuring a level playing field.

Non-discrimination on the basis of nationality is another fundamental principle - and value - of the EU.

A digital economy in which for example a Polish citizen is refused to buy products on a German website and is instead referred to a Polish website is not compatible with the idea of a Europe which we have been building for the last 50 years.

Surely, there are economic arguments why such discrimination is inefficient. And there are areas, for example for copyright-protected digital content, where it may remain justified, for example in order to preserve the value of rights in the audio-visual sector. But we should definitely act – as announced in our recently published Digital Single Market strategy - against the so-called commercial geo-blocking or similar unjustified discriminatory practices. They are not compatible with a Citizen's Europe, even if it were impossible to calculate the exact benefits of getting away with such practices.

It was Einstein who said "not everything that counts can be counted, and not everything that can be counted counts". And I believe that non-discrimination counts in Europe.

So, if we need a Digital Union for Europe, how should it look like?

Of course there needs to be a true Single Digital Market, with no discrimination, no barriers and so many fragmented rules. But for it to create all the benefits which we expect, we need to help our industries to be at the forefront of developing and exploiting ICT. Sustainable manufacturing, usine du futur, automation, Industrie 4.0,name it as you wish, must be our common European priority, so that our industries can serve the markets of the future.

We also need digital skills. Many more than we have so far. Digital skills for everyday life, for a normal job, and for ICT specialists.

Indeed, today many people are afraid that their job can be "digitised away". Who can compete with an iPad?

This is no idle fear. Many jobs as we know them today will disappear. Some famous studies put the number of current jobs which could be replaced by computers at around 50%.

But this is nothing new. Digitisation or no digitisation, "Nothing is as constant as change" said Heraklit, and he certainly did not have digitisation in mind.

Digital will destroy some jobs, there is no question about it. So did the steam engine and electricity. The question is how fast we can adapt to the new technology, to create new jobs.

To be able to adapt and to use the new technologies we need to upgrade Europe's overall level of digital skills.

True, this is already happening. Schools are introducing more ICT in their curricula, companies offer more vocational ICT training, even the EU has already launched two initiatives to promote digital education – the Grand Coalition for Digital Jobs, and the Opening Up Education initiative.

But does anyone really believe we are moving fast enough? Ten years ago even IT specialists thought a driverless car to be impossible in the near future. Today, Mercedes has already been sending driverless cars and lorries in rush-hour traffic on German roads for some time.

Large-scale upskilling to enable new digital solutions which are improving our lives are not a long-term necessity. It is an urgency.

Companies need digitally competent workers and customers. Public administrations switching to digital need digitally competent citizens. It is only when everybody can handle the digital invoice that the paper-based invoice can be abolished. Until then, Gutenberg's printing press of 1522 will peacefully coexist with the latest cloud app. And certainly beyond  - people will still want to touch and smell the real paper – but better for leisure than bureaucratic processes.

So we need to accelerate the upgrading of digital skills. But there is only so much policy can do. In the end, citizens will rapidly learn digital only if they want to.

What we really need to do is to make ICT fashionable in Europe, for industries and for people. That is a tall order. But if we manage to make Europe a place where IT dreams do come true, people will start dreaming.

Thank you for your attention.

Tue, 16 Jun 2015 12:54:18 +0100
<![CDATA[European integration in the face of a security crisis]]> http://www.bruegel.org/nc/events/event-detail/event/539-european-integration-in-the-face-of-a-security-crisis/ even539

European Financial Congress in Sopot from 22 to 24 June 2015

We are happy to announce that the 5th European Financial Congress to be held in Sopot, Poland, on June 22-24, 2015 under the Honorary Patronage of Donald Tusk, President of the European Council. The main theme of this year’s Congress is: European integration in the face of a security crisis.

The 5th European Financial Congress in Sopot takes place during a special time for Europe, a time when after over twenty years geopolitics made its way back to economy. It is a moment when efforts taken in the particular countries and in the entire European Union can test the European solidarity and integration in the face of the security crisis we observe and experience. Will the previously worked out mechanisms and procedures, as well as the stability, innovation and solidarity within the European Union suffice vis-à-vis the risks which we have to face in the 21st century’s second decade? Having this in mind the opening debate of the Congress will focus on fixing the Eurozone, as well as on opportunities and challenges connected with the European Capital Markets Union and Energy Union.

During the plenary session at the Congress opening, Mr Marek Belka, President of the National Bank of Poland will deliver a keynote speech on Moral hazard on the financial markets.

The Congress’ Honorary Committee is chaired by Mr Lech Wałęsa and its Programme Board is chaired by Mr Jan Krzysztof Bielecki.
The debates during the second and third days of the Congress will cover the following subject areas:

  • Security and development of the financial markets in the EU,
  • Challenges for the development of the capital market,
  • Value-based management of enterprises,
  • Sustainable financing of infrastructure.

The Congress will end with the announcing of Recommendations followed by an Oxford-Style debate titled “Without immigration Europe will fall. The Recommendations announced at the Congress closing ceremony allow not only to point out the most up-to-date challenges faced by the modern economy, but also to propose ways of resolving them. The Oxford-Style debate is an initiative of the EFC Academy members, involving students from Poland, Great Britain, Germany, Italy, Spain and Ukraine.</article>

Tue, 16 Jun 2015 09:01:54 +0100
<![CDATA[David Cameron and the EU’s Waterloo]]> http://www.bruegel.org/nc/blog/detail/article/1645-david-cameron-and-the-eus-waterloo/ blog1645


Two hundred years ago this month, at the Battle of Waterloo, Napoleon Bonaparte’s defeat at the hands of an allied army, led by the Duke of Wellington, reshaped Europe’s future. Britain may now be poised to do so once again.

The United Kingdom, whose new majority Conservative government has pledged to hold a referendum on European Union membership by the end of 2017, perhaps even next year, is not the outlier that it is often portrayed as being. Indeed, it is at the vanguard of the EU’s institutional atrophy. Even if it does retain its EU membership, the UK will continue to move steadily away from Europe. With more attractive commercial opportunities elsewhere, most European countries will follow suit.

For the EU, meeting the UK’s demands – to restrict benefits for migrant workers, limit financial regulation that could hurt the City of London, and disavow the goal of “ever closer union” – would require a fundamental transformation, including utterly unfeasible changes to the treaties that underpin European institutions. The discussion has thus turned to the possibility of providing the UK with a special status or allowing it to opt out of more EU provisions.

But, given intensifying doubts about the benefits of integration, even that solution would risk unraveling the EU. By emphasizing that Europe no longer offers an economic dividend, the UK’s move away from the EU will spur ever louder calls for change elsewhere. Simply put, talk of “Brexit” has exposed Europe’s economic and political fault lines – and there is no going back.

Talk of “Brexit” has exposed Europe’s economic and political fault lines – and there is no going back.

Robert Peston, in his 2005 biography of then-Chancellor of the Exchequer Gordon Brown, described Brown’s “pragmatic view that the EU was a good thing only insofar as it delivered practical benefits of peace and prosperity to Britain.” While the British have been particularly open about the nationalist nature of their support for European integration, other EU members have been no less mindful of their domestic interests.

In the wake of World War II, European countries’ national interests were aligned. Nonetheless, efforts to establish political unity through a common army failed in 1954, highlighting that economic common ground was the key to European integration. And, indeed, the 1957 Treaty of Rome, which opened national borders within the new European Economic Community, enabled the rapid proliferation of intra-European trade, thereby contributing to a shared economic recovery. The material gains of these commercial relationships fostered empathy among Europeans, fueling increased support for – and trust in – shared institutions.

This process began later for the UK, which joined the community in 1973; but it followed a similar trajectory, with British citizens responding to economic gains by supporting increased integration. Prime Minister Margaret Thatcher, by advocating the 1986 Single European Act, sought to maximize those gains. In the spirit of the Treaty of Rome, she ensured that the act focused on developing an open and competitive common market, in which all members participated on equal terms.

By contrast, her German counterpart, Chancellor Helmut Kohl, often regarded as one of that generation’s preeminent European champions, offered only lukewarm support for the Single European Act. He preferred to help steer Europe toward monetary and political union, just when its economy had begun to fall behind the rest of the world.

The result was the 1991 Maastricht Treaty – the point when European integration went into overdrive. But the Treaty’s architects were so busy playing internal power games that they failed to recognize that monetary union could not stem Europe’s decline, especially as the United States was experiencing rapid productivity growth and Asia’s economic rise had begun. With Europe’s post-war recovery long complete, the logic of integration had to be rethought. Unfortunately, that did not happen.

As a result, intra-European trade and support for European institutions, having soared in the previous two decades, began to decline practically before the ink on the Maastricht Treaty was dry. The eurozone’s protracted crisis, which began in 2008, has exacerbated this trend, with member countries still struggling to restore economic and financial stability – and likely to continue to lag behind the rest of the world in terms of GDP growth.

No institutional framework can survive unless it serves the material interests of its constituency. In the nineteenth century, when the Tunisian craft guilds failed to adapt to industrialization, they became irrelevant, and the amins, or guild masters, were left as figureheads in shell institutions. Today, European institutions could face the same fate.

No institutional framework can survive unless it serves the material interests of its constituency

Unencumbered by the euro, and benefiting from long-standing commercial relationships beyond Europe, Britain is in a particularly strong position to push back against EU institutions. This may be self-serving, but it should not be a surprise; in fact, with businesses throughout Europe seeking markets elsewhere, Britain’s approach may well herald similar developments elsewhere.

European integration in the shadow of WWII was a wise and magnificent achievement. But, with that historic task now complete, European institutions need a new rationale. And with the EU, unlike other federations, lacking a common political destiny, that rationale must center on material benefits.

The EU must return to the fundamental driver of its success, pursuing a renewed single-market agenda that reflects the rationale of the Treaty of Rome. Unfortunately, Europe is so divided nowadays that the ability to achieve such an outcome is not promising, with new initiatives along these lines facing “increasing political resistance.”

If Europeans merely invoke the lofty mantra of “an ever closer union,” their institutions will atrophy. Without a new unifying objective – one based on shared material gains, not on fear of Vladimir Putin’s resurgent Russia – the European amins will soon be out of business.

This was reprinted with permission from Project Syndicate. To secure the rights to this commentary, please contact Project Syndicate here .

Mon, 15 Jun 2015 16:05:55 +0100
<![CDATA[The empirical shift in economics]]> http://www.bruegel.org/nc/blog/detail/article/1644-the-empirical-shift-in-economics/ blog1644

What’s at stake: Rather than being unified by the application of the common behavioral model of the rational agent, economists increasingly recognize themselves in the careful application of a common empirical toolkit used to tease out causal relationships, creating a premium for papers that mix a clever identification strategy with access to new data.

Economics imperialism in methods

Noah Smith writes that the ground has fundamentally shifted in economics – so much that the whole notion of what "economics" means is undergoing a dramatic change. In the mid-20th century, economics changed from a literary to a mathematical discipline. Now it might be changing from a deductive, philosophical field to an inductive, scientific field. The intricacies of how we imagine the world must work are taking a backseat to the evidence about what is actually happening in the world. Matthew Panhans and John Singleton write that ­­while historians of economics have noted the transition in the character of economic research since the 1970s toward applications, less understood is the shift toward quasi-experimental work.

Matthew Panhans and John Singleton write that the missionary's Bible is less Mas-Colell and more Mostly Harmless Econometrics. In 1984, George Stigler pondered the “imperialism" of economics. The key evangelists named by Stigler in each mission field, from Ronald Coase and Richard Posner (law) to Robert Fogel (history), Becker (sociology), and James Buchanan (politics), bore University of Chicago connections. Despite the diverse subject matters, what unified the work for Stigler was the application of a common behavioral model. In other words, what made the analyses “economic" was the postulate of rational pursuit of goals. But rather than the application of a behavioral model of purposive goal-seeking, “economic" analysis is increasingly the empirical investigation of causal effects for which the quasi-experimental toolkit is essential.

 what made past analyses “economic" was the postulate of rational pursuit of goals.

Nicola Fuchs-Schuendeln and Tarek Alexander Hassan writes that, even in macroeconomics, a growing literature relies on natural experiments to establish causal effects. The “natural” in natural experiments indicates that a researcher did not consciously design the episode to be analyzed, but researchers can nevertheless use it to learn about causal relationships. Whereas the main task of a researcher carrying out a laboratory or field experiment lies in designing it in a way that allows causal inference, the main task of a researcher analyzing a natural experiment lies in arguing that in fact the historical episode under consideration resembles an experiment. To show that the episode under consideration resembles an experiment, identifying valid treatment and control groups, that is, arguing that the treatment is in fact randomly assigned, is crucial.



Source: Nicola Fuchs-Schuendeln and Tarek Alexander Hassan

Data collection, clever identification and trendy topics

Daniel S. Hamermesh writes that top journals are publishing many fewer papers that represent pure theory, regardless of subfield, somewhat less empirical work based on publicly available data sets, and many more empirical studies based on data collected by the author(s) or on laboratory or field experiments. The methodological innovations that have captivated the major journals in the past two decades – experimentation, and obtaining one’s own unusual data to examine causal effects – are unlikely to be any more permanent than was the profession’s fascination with variants of micro theory, growth theory, and publicly avail-able data in the 1960s and 1970s.

Barry Eichengreen writes that, as recently as a couple of decades ago, empirical analysis was informed by relatively small and limited data sets. While older members of the economics establishment continue to debate the merits of competing analytical frameworks, younger economists are bringing to bear important new evidence about how the economy operates. A first approach relies on big data. A second approach relies on new data. Economists are using automated information-retrieval routines, or “bots,” to scrape bits of novel information about economic decisions from the World Wide Web. A third approach employs historical evidence. Working in dusty archives has become easier with the advent of digital photography, mechanical character recognition, and remote data-entry services.

Tyler Cowen writes that top plaudits are won by quality empirical work, but lots of people have good skills.  Today, there is thus a premium on a mix of clever ideas — often identification strategies — and access to quality data.  Over time, let’s say that data become less scarce, as arguably has been the case in the field of history. Lots of economics researchers might also eventually have access to “Big Data.”  Clever identification strategies won’t disappear, but they might become more commonplace. We would then still need a standard for elevating some work as more important or higher quality than other work.  Popularity of topic could play an increasingly large role over time, and that is how economics might become more trendy.

Noah Smith (HT Chris Blattman) writes that the biggest winners from this paradigm shift are the public and policymakers as the results of these experiments are often easy enough for them to understand and use. Women in economics also win from this shift towards empirical economics. When theory doesn’t rely on data for confirmation, it often becomes a bullying/shouting contest where women are often disadvantaged. But with quasi-experiments, they can use reality to smack down bullies, as in the sciences. Beyond orthodox theory, another loser from this paradigm shift is heterodox thinking as it is much more theory-dominated than the mainstream and it wasn't heterodox theory that eclipsed neoclassical theory. It was empirics. 

Heterodox economic theory didn't eclipse neoclassical economic theory. It was empirics.


Mon, 15 Jun 2015 09:24:46 +0100
<![CDATA[Capital requirements and loss absorbing capacity for large banks]]> http://www.bruegel.org/nc/events/event-detail/event/538-capital-requirements-and-loss-absorbing-capacity-for-large-banks/ even538

What kind of structural and behavioral changes can the EU implement in order to prevent another banking crisis? How can EU policies and institutions maintain an environment that is conducive to financially stable business practices?

This roundtable on capital requirements and loss absorbing instruments for large banks will analyse how regulatory measures affect strategic decisions, in terms of asset allocation, portfolio investment decisions, lending to the real economy, and in terms of reshaping the organisational structure of banking groups. Ultimately, the roundtable will investigate how capital requirements affect the relationship between financial stability and the expansion of the real economy.

On this occasion the first issue of European Economy – Banks, Regulation, and the Real Sector will be presented. This new journal and internet platform aims to encourage debate among academics, institutional representatives and bankers on the current regulatory framework and its effects on banking activity and the real economy.


16:30 - 16:40: Opening:

  • Guntram Wolff, director, Bruegel
  • Giuseppe Scognamiglio, executive vice president, UniCredit

16:40 - 17:00: Introduction:

  • Giorgio Barba Navaretti, professor of economics, University of Milan, and chief-editor of European Economy - Bank, Regulation and the Real Sector

17:00 - 17:20: To bail-in or not to bail-in?

Lead intervention:

  • Jan Pieter Krahnen, professor of finance, Goethe University’s House of Finance

17:20 - 18:20: Round Table Discussion

Chair: Nicolas Véron, senior fellow, Bruegel


  • Andrew Gracie, executive director for resolution, Bank of England
  • Mario Nava, director, European Commission
  • Santiago Fernandez de Lis, chief economist, BBVA
  • Waleed El-Amir, head of group strategic funding and portfolio, UniCredit

18:20 - 19:00: Open Discussion

Background materials

Practical Details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Tuesday, 7 July 2015, 16.30-19.00
  • Contact: Bryn Watkins, Events Assistant

Fri, 12 Jun 2015 11:36:15 +0100
<![CDATA[The harsh reality of Ukraine’s fiscal arithmetic]]> http://www.bruegel.org/publications/publication-detail/publication/881-the-harsh-reality-of-ukraines-fiscal-arithmetic/ publ881

• Ukraine is struggling with both external aggression and the dramatically poor shape of its economy. The pace of political and institutional change has so far been too slow to prevent the deepening of the fiscal and balance-of-payments crises, while business confidence continues to be undermined.

• Unfortunately, the 2015 International Monetary Fund Extended Fund Facility programme repeats many weaknesses of the 2014 IMF Stand-by Arrangement: slow pace of fiscal adjustment especially in the two key areas of energy prices and pension entitlements, lack of a comprehensive structural and institutional reform vision, and insufficient external financing to close the expected balance-of-payments gap and allow Ukraine to return to debt sustainability in the long term.

• The reform process in Ukraine must be accelerated and better managed. A frontloaded fiscal adjustment is necessary to stabilise public finances and the balance-of-payments, and to bring inflation down. The international community, especially the European Union, should offer sufficient financial aid backed by strong conditionality, technical assistance and support to Ukraine’s independence and territorial integrity.

The harsh reality of Ukraine’s fiscal arithmetic (English)
Fri, 12 Jun 2015 09:01:40 +0100
<![CDATA[Turkey and the EU after the election]]> http://www.bruegel.org/videos/detail/video/150-turkey-and-the-eu-after-the-election/ vide150

Kemal Derviş, shares his assessment of the Turkish general election results with Guntram Wolff. He discusses the opportunities and challenges for the EU-Turkey relations following this election.

Thu, 11 Jun 2015 12:32:36 +0100
<![CDATA[Waiting for the Four Presidents' Report]]> http://www.bruegel.org/nc/blog/detail/article/1643-waiting-for-the-four-presidents-report/ blog1643

The Four Presidents’ Report on the Economic and Monetary Union (EMU) is expected to be released at the end of June, outlining how to strengthen economic governance in the euro area. Ahead of the report, this blog looks at the most recent Eurobarometer data to understand how attitudes towards Europe have been evolving in the euro area.

Trust in the EU has been declining in the euro area since the beginning of the crisis

Eurobarometer data show that trust in the European institutions is very low. This is not news, as trust in the EU has been declining everywhere in the euro area since the beginning of the crisis, although more markedly so in those countries that have undergone adjustment programmes. In 2008 - before the outbreak of the crisis - almost 75% of respondents in southern Europe said they trusted the European Parliament, the European Commission and the European Central Bank (ECB). By the end of 2013, the percentage had dropped to only 25%. Figure 1 shows that trust levels in EU institutions bounced back in 2014 in the south as well as in France and Italy (the centre), whereas it has remained flat in the north. A couple of weeks ago, the Pew Research Centre released the results of a poll conducted in early 2015 across the six most populous European countries - Germany, France, the UK, Italy, Spain and Poland. The results suggest that the improvement in sentiment towards the EU has continued during early 2015. 

Figure 1 - % of respondents who declare to trust in EU institutions (average of trust in European Parliament, Commission and ECB)

Source: author’s calculations based on data from Eurobarometer.

Note: groups are constructed as averages weighted by population. North=AT; BE; DE; Fi; NL; Centre=FR; IT; South=ES; GR; IE; PT

Part of the reason why trust in the EU has decreased during the crisis is related to changes in what EU projects means for Europeans. The Eurobarometer survey includes a section asking participants what the EU means to them personally. Figure 2 reports the percentage of respondents who mentioned in their answers selected words such as “economic prosperity”, “democracy” and “unemployment”.

One very interesting fact stands out. From 2008 to 2014, the percentage of respondents for whom the EU is associated with the idea of “economic prosperity” and “democracy” has increased in the north, while it decreased (even significantly) in the centre and south. The percentage of respondents who associate the EU with the idea of “unemployment” has instead increased significantly across all the three groups during the crisis, although more in the centre and north than in the south (which is to some extent surprising). This ever closer association of the EU with unemployment also reflects the ineffectiveness of  the EU "social fund" initiatives launched as a response to the crisis (including the Youth Employment Initiative).

The % of respondents who associate the EU with the idea of “unemployment” has increased significantly during the crisis

Figure 2 - “What does the EU mean to you personally?” (% of respondents who mentioned each term vs. did not mention)

Source: author’s calculations based on data from Eurobarometer

Note: groups are constructed as averages weighted by population. North=AT; BE; DE; Fi; NL; Centre=FR; IT; South=ES; GR; IE; PT

Data in figure 3 are consistent also with a more generalized drop in people's satisfaction with democracy, which is especially marked in southern euro area countries. The percentage of respondents in the south who declare themselves to be "very satisfied" or "fairly satisfied" with “democracy in the EU” has dropped from 60% to 30% during the crisis. Satisfaction with democracy in citizens’ home countries has been in freefall since 2007, dropping from 70% to slightly above 20%. 

Figure 3 - Satisfaction with democracy in the EU / the own country (% of respondents)

Source: author’s calculations based on data from Eurobarometer

Note: groups are constructed as averages weighted by population. North=AT; BE; DE; Fi; NL; Centre=FR; IT; South=ES; GR; IE; PT

As already documented here some time ago, there is another important side of the story, which has to do with “relative” (rather than absolute) trust. Figure 2 compares, for each group of countries, the percentage of respondents who declare that they trust the EU, with the percentage of those who declare to trust national governments, for 2008 versus 2014. Despite the loss of trust and confidence, Europeans in southern countries (as well as in France and Italy) still trust the EU more than they trust their national governments. Before the crisis, this was true also for the northern countries, although the confidence gap in favour of the EU was narrower there, than it was in the centre and south.

Europeans in southern countries still trust the EU more than they trust their national governments

Seven years (and several troubles) later, trust in national institutions has literally collapsed in southern Europe, signalling a broader and more generalised crisis of leadership and confidence in domestic political institutions. In part this is probably linked to the perception that corruption is widespread at the national level, which is especially strong in Southern countries (see here for a discussion). Trust in the EU remains significantly higher, despite the fact that Southern countries have experimented with tough European policies over recent years. Conversely, in the northern countries trust in the EU has now dropped significantly below trust in national governments, which has instead increased during the crisis. I had discussed the early appearance of this phenomenon here, and this recent data confirms that essentially northern European citizens seem to feel vindicated by their economic and political models, which are gaining in terms of trust with respect to the European institutions. 

Figure 4 - Trust in EU vs. trust in national government (% of respondents who expressed an opinion)


Source: author’s calculations based on data from Eurobarometer

Note: groups are constructed as averages weighted by population. North=AT; BE; DE; Fi; NL; Centre=FR; IT; South=ES; GR; IE; PT.

These are two separate questions in the Eurobarometer, and percentages here have been re-scaled back so as to exclude from the total those who did not express an opinion.

In conclusion, the data presented here suggest a number of interesting facts to consider, ahead of the release of the Four Presidents’ Report.

First, sentiment towards the EU has massively deteriorated during the crisis, especially in countries that have been subject to macroeconomic adjustment programmes. Recently it has been improving and this is certainly encouraging, but before drawing overly optimistic conclusions about the appetite for further integration we should keep in mind that the improvement is still starting from extremely low levels.

Fewer and fewer people associate the EU with the idea of economic prosperity and democracy

Second, the fact that trust in the EU has dropped so low, has partly to do with a significant change in what the EU means for people. Since the beginning of the crisis, fewer and fewer people have associated the EU with the idea of economic prosperity and democracy, while for more and more Europeans the EU has come to be a synonym for unemployment. Initiatives aimed at strengthening EMU and fostering further integration will have to deal with this, and securing support will go hand in hand with re-building a positive meaning for the EU in the eyes of Europeans.

Third, there is a generalised dissatisfaction with democracy that is deep and widespread in the south of Europe. It concerns democracy at a national level as well as democracy in the EU. This suggests that further steps to strengthen the monetary union cannot afford to disregard this perceived democratic gap and the issue of democratic accountability will need to feature high on the agenda. At the same time, rebuilding trust in national institutions and improving governance at the national level will be a vital starting point. National governments will have a significant role in any discussion on governance, integration and democratic accountability at the European level. If they are de-legitimized in the eyes of their people, any further integration could also appear as lacking the appropriate legitimacy.

Fourth and last, we have reached a point where trust in the EU relative to trust in national governments is varies widely across Europe. In the south people still trust the EU more than their national government, while this is no longer true in the north, where trust in national governments has increased during the crisis and it has now clearly surpassed trust in the EU. This confirms that the appetite for further integration now differs significantly across countries, and the momentum for further integration will most likely have to come from countries in the south or centre, as it is unlikely to come from northern Europe.





Wed, 10 Jun 2015 10:17:04 +0100