<![CDATA[Bruegel - Latest Updates]]> http://www.bruegel.org Thu, 02 Oct 2014 04:51:14 +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[The New EU Political Cycle: Addressing the Growth Agenda]]> http://www.bruegel.org/nc/events/event-detail/event/464-the-new-eu-political-cycle-addressing-the-growth-agenda/ even464

Centre for European Affairs, member of the Central European Strategy Council, Bruegel, the Ministry of Finance of SR
and Ministry of Foreign and European Affairs of SR are organizing another round of TATRA SUMMIT conferences in Bratislava.

The event will review the unfolding design of the 2014 EU political cycle, shaped by changes in the leadership posts of the EU institutions and their outlined policy goals for the next five years. The main aim of the conference is to address strategic growth agenda. Furthermore, the debate will look at the key priorities of the new political cycle in Europe. In reference to that, the panels will seek to address the following areas - the flexibility of the stability and growth pact; the state of EMU completion; the area of multispeed Europe in the context of the new EU architecture; buildup of the EU energy union and its impact on the industry competitiveness.

TATRA SUMMIT 2014 will also provide a platform for Central Europe to present its recommendations and regional priorities, and, thus, make its voice heard in the unveiling political cycle of the EU.

More information of this event will be available shortly

Practical details

  • Time: 12 November, 17:00 - 13 November 17:00
  • Location: Kempinski Hotel River Park, Bratislava

Conference partners are the Centre for European Policy Studies, Ministry of Finance of the Slovak Republic and Ministry of Foreign and European Affairs of the Slovak Republic

Wed, 01 Oct 2014 13:28:20 +0100
<![CDATA[The 'dos and don'ts' of a growth-friendly policy mix for the Euro area]]> http://www.bruegel.org/nc/blog/detail/article/1446-the-dos-and-donts-of-a-growth-friendly-policy-mix-for-the-euro-area/ blog1446

1 Speech by Mario Draghi, Annual central bank symposium in Jackson Hole, 22 August 2014

When looking at possible ways out of the euro area crisis, there is a growing consensus that it will require “a policy mix that combines monetary, fiscal and structural measures at the union level and at the national level”, as Mr. Draghi recently put it.1 However, stipulating the details of this policy mix is far more controversial. On the monetary side, there is a debate on the extent to which the TLTRO operations of the ECB would achieve the desired goal of reactivating the credit flow in the euro area (Claeys, 2014; Merler, 2014). Similarly, it is not clear whether the ECB should push its expansionary monetary policy into the realm of ‘non-conventional measures’ to fight the risks of deflation (Claeys et al., 2014; Altomonte and Bussoli, 2014). On the fiscal / structural side, the status of the debate is in even more dire straits. No clear consensus exists on the direction of the fiscal stance, often summarized through the ‘flexibility vs. austerity’ controversy; at the same time the implementation of the national reforms’ agenda keeps facing many internal political obstacles, especially at a time of stagnation and high unemployment.

And yet, leaving aside the (relatively more mature) monetary debate outlined above, recent results from a research line on competitiveness, based on previously unavailable micro-level data (e.g. EFIGE, available here, and the ECB CompNet), allow us to point to some clear ‘dos’ and ‘don’ts’ when looking at the fiscal/structural side of a growth-friendly policy mix for the euro area.

2 To grasp this idea, think at the 80-20 rule, in which 80 per cent of a given phenomenon (e.g. the total number of people living in cities in the world, or the total exports of a country) is explained by just 20 per cent of the concerned observational units (e.g. the top 20% largest cities or exporting firms). In a ‘normal’ distribution these figures would be 50-50.

The key starting point of this line of research is the recognition that competitiveness is essentially a firm-level phenomenon. Often, competitiveness policies are designed at sector or country level, but targeting the sector or country means targeting the “average firm” of a given sector/country. The idea is that what is good for the average firm is good for all the firms. Nevertheless, this might reveal itself to be highly problematic as the “average firm” does not exist; rather, firms are very heterogeneous in their performance. Indeed, like the length of rivers in the world, or the size of cities, where it is possible to observe a large number of relatively short rivers (or small cities), and a few very long rivers (or very large cities), firm performance across countries and industries is typically characterized by many relatively ‘bad’ firms performing below the average, but also a certain number (although less numerous) of particularly good firms. Technically, we can thus claim that firm level data on a given performance index (e.g. productivity) are typically characterized by a distribution ‘skewed to the right’, i.e. what is known as a ‘Pareto’ distribution, versus an assumed symmetric normal distribution (see Altomonte et al., 2011 for a detailed discussion, and Altomonte et al., 2012 for some evidence from EFIGE data).[2]

3 In emerging economies these within industry differences in performances are even larger, with the best firms making up to five times more than the worst firms, always controlling for the same amount of inputs (Hsieh and Klenow, 2009).

This evidence is there even for firms observed within narrowly defined (4-digit SIC) industries, i.e. firms producing essentially the same product. In the US, for example, the best firms producing a given product make twice as much output with the same amount of inputs (i.e. their total factor productivity (TFP) is twice larger) with respect to the worst firms in the same industry (Syverson, 2004).[3] Recent data now available for Europe thanks to the CompNet project (see ECB WP 1634, 2014) convey essentially a similar message, as reported in Figure 1.

Figure 1: Heterogeneity in Firm Performance Within and Across Sectors

Among the ‘don’ts’ is trying to achieve competitiveness through ‘internal devaluations’ in times of crisis

There it is shown how, for all the reported EU countries, the average difference (here summarized by dispersion of industry mean productivity) in performance across firms within the same industry (the ‘within-sector’ dispersion) is larger than the average difference in performance across industries (the ‘across-sector’ dispersion). Hence, if one considers two industries in any European country (e.g. Textiles and Bio-tech, with the first on average less productive than the other), the best Textiles firms in a country are likely to be much more productive than the ‘average’ Textile firm, with a dispersion so large that they are actually likely to dwarf also the ‘average’ Bio-tech firm in the same country in performance. This implies that the potential gains derived from a reallocation of economic activity from low to high productive firms within the same industry might be at least comparable, in terms of performance gains, to a change of the ‘average’ performance of firms across industries.

The evidence shown above suggests a number of ‘dos’ and ‘don’ts’ of a policy agenda aimed at fostering growth.

First of all, given the evidence on the role of reallocation in fostering productivity growth, among the ‘don’ts’ there is the idea of trying to achieve competitiveness through ‘internal devaluations’ in times of crisis. In fact, the latter might prove unreasonably painful and somehow relatively ineffective. Painful because, at a time of crisis, the attempt would very likely result in a demand compression that might further compress the investment opportunity of firms, and thus their restructuring as a reaction to the crisis. Ineffective because the policy, by lowering prices and wages across the board, would necessarily work on the ‘average firm’, rather than triggering the beneficial effects of resources reallocation from less to more productive firms.  Of course, this does not imply that, in a situation of escalating public (or private) debt, the necessary deleveraging through appropriate austerity policies does not have to be promptly achieved in order to restore sustainability in public finances; only, we should avoid selling this as a ‘competitiveness’ strategy.

Rather, in terms of actual growth-friendly strategies, activating policies able to foster the reallocation of resources towards the most productive firms is of paramount importance. In particular, reforming labor markets to link individual wages to the productivity of the firm more closely, coupled with additional flexibility of workers across firms, should top the list of the ‘dos’ in the policy agenda of every country in which growth is lagging behind. Together with this line of action, this micro-based line of research has also identified a further set of specific policies that would allow firms to acquire the characteristics that are associated with productivity growth:

Reforms of labor markets able to link individual wages to the productivity of the firm more closely, coupled with additional flexibility of workers across firms, should top the 'dos' list


  • Altomonte C. & Aquilante T. & Békés G. & Ottaviano G.I.P  (2013). "Internationalization and innovation of firms: evidence and policy," Economic Policy, CEPR & CES & MSH, vol. 28(76), pages 663-700, October.
  • Altomonte C. & G. Barba Navaretti & F. di Mauro & G.I.P. Ottaviano, (2011)."Assessing competitiveness: how firm-level data can help," Policy Contributions 643, Bruegel.
  • Altomonte C. & Aquilante T. & Ottaviano G.I.P. (2012). "The triggers of competitiveness: The EFIGE cross-country report," Blueprints, Bruegel, number 738, December.
  • Barba Navaretti, G., M. Bugamelli, F. Schivardi, C. Altomonte, D. Horgos and D. Maggioni, (2011) “The global operations of European firms”, Blueprint 12, Bruegel.
  • Bloom N. & J. Van Reenen (2007). "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1351-1408, November.
  • ECB Working Paper No. 1634.
  • http://www.efige.org/
  • Foster, L., Haltiwanger, J and C. J. Krizan, (2006): "Market Selection, Reallocation, and Restructuring in the U.S. Retail Trade Sector in the 1990s," The Review of Economics and Statistics 88(4): 748-758.
  • Hsieh, C. T. and P. J. Klenow (2009), “Misallocation and Manufacturing TFP in China and India”, The Quarterly Journal of Economics, 124(4): 1403-1448.
  • Krugman, P. (1997), “Pop Internationalism”, Cambridge MA: MIT Press.
  • Marc J. Melitz & Ottaviano G.I.P. (2008). "Market Size, Trade, and Productivity", Review of Economic Studies, Oxford University Press, vol. 75(3), pages 985-985.
  • Syverson, C. (2004), “Market Structure and Productivity: A Concrete Example”, Journal of Political Economy, 112(6): 1181-1222.

Wed, 01 Oct 2014 08:30:18 +0100
<![CDATA[The economics of Uber]]> http://www.bruegel.org/nc/blog/detail/article/1445-the-economics-of-uber/ blog1445

Effectively Uber works as a matching platform for passengers and drivers and makes money by taking a 10-20% cut from each ride

Uber, a San Francisco company founded in 2009, is currently one of the fastest growing startups worldwide. In 2014 its estimated valuation reached 17 billion USD, up from 3.5 billion USD a year earlier. The idea behind Uber is simple. Potential passengers can download a smartphone app that allows them to request the nearest available Uber car. But unlike a traditional taxi company, Uber does not operate its own cars. Instead it signs up private drivers willing to provide rides to paying passengers and passes the ride requests directly to them. Effectively Uber works as a matching platform for passengers and drivers and makes money by taking a 10-20% cut from each ride. The drivers can work in their leisure time and have to maintain a good rating, which is given by passengers after each trip.

Uber was welcomed by the urban population and widely acclaimed for low prices, short waiting times, and good service, as reflected by its rapid growth. However, despite its popularity Uber faces numerous legal challenges across the world. It was recently banned in Berlin, Hamburg and eventually across all of Germany following a court decision in Frankfurt. The Brussels court banned Uber while threatening a 10,000 Euro fine for a single ride. In Seattle, New York, London, Seoul and Toronto, the company was also threatened with litigation. In some places, including Germany, the bans were lifted, but the uncertainty about Uber’s future remains.

Over the past two years the cab use in San Francisco, Uber’s home city, declined by 65%

Most of these charges were brought against Uber by the taxi industry on the grounds of non-compliance with local regulations, operating without licenses or putting taxis at an unfair disadvantage. The motivation of the taxi industry to undertake legal action is clear. The profits of taxis in cities where Uber became active decreased significantly. For example, over the past two years the cab use in San Francisco, Uber’s home city, declined by 65% according to a recent report by the Metropolitan Transportation Agency. Appealing to regulation is one way for taxis to block Uber from market entry, and thus preserve their profits.


Banning Uber would massively disadvantage consumers who are enjoying lower prices and better quality due to the increased competition

The solution to this situation is not straightforward. Banning Uber would massively disadvantage the consumers who are enjoying lower prices and better quality due to the increased competition in taxi services. However, in many cases Uber indeed threatens not only taxis’ profits, but also their investment and assets in form of costly operating licenses. Finally, the ridesharing industry is in need of regulation that levels the playing field for it and the taxis, and protects its customers and employees.

Benefits to consumers

Ridesharing companies like Uber are strong competitors to the established taxi industry on their own, but their utilization of information technologies and innovative business model provides further benefits to consumers. For example, “surge pricing”, a temporary increase in prices during peak demand time, like Friday evening, invites a larger number of inactive drivers to offer rides. While the service comes at a higher price, this significantly increases the availability of rides and decreases waiting times. However, the companies are required to inform their customers of such practices and limit surge pricing in cases of emergency.

While elimination of information asymmetries was cited as a major motivation for taxi industry regulation, ridesharing companies’ reliance on digital technology precisely provides consumers with a better overview of quality and prices. The drivers are rated by consumers and are banned from the system if their rating falls below a certain threshold. Prices of the rides are estimated beforehand and can be easily compared across several applications, introducing greater transparency - something that taxi regulation attempted for years by requiring taxis to publish their price lists inside and outside of the cab.


The cost of a single-taxi medallion has varied between 700,000$ and 1,000,000$ in large US cities like New York and Chicago

Taxi regulation differs across countries and individual cities, varying from a deregulated market in Ireland to quotas and price controls in France. Many cities limit the number of taxis on the streets by requiring drivers to hold a license to operate a taxi. Since licenses are issued rarely, entering the market often requires buying one from a current owner at a high price. In fact, growing urban populations and stagnating supply has led to skyrocketing prices for taxi medallions in some of the large cities. For example, the cost of a single-taxi medallion has varied between 700,000$ and 1,000,000$ in the large US cities like New York and Chicago.


License holders can no longer monetize their asset as expected

Strict government quotas and regulation protected the industry from competition and allowed it to reap increasingly large profits, as reflected in the rising bidding prices for the licenses. In fact, a taxi license was treated as an asset which could later be sold for a similar or higher price. Its value was severely reduced by Uber’s entry. First, licenses no longer grant protection from competition. And second, becoming a driver no longer requires buying a license, since joining Uber can be done for free. As a result, the license holders can no longer monetize their asset as expected - increased competition dilutes profits and reselling a license also yields a lower price. As most cab drivers and companies have no financial protection against a sudden devaluation of their licenses, this situation can have detrimental effect on their welfare and generate a lot of bitterness among them.

The cities with tighter market controls like Barcelona, Paris and Berlin recently saw more intense protests by the taxi industry, as opposed to, say, Dublin which deregulated its taxi market and lifted restrictions on the number of taxis practically overnight in 2000 (the fares remain regulated). To deal with the problem at the time, Ireland set up a “hardship fund” with payments of up to 15,000 Euro to alleviate the financial hardships suffered by license holders due to the devaluation of their assets, although the general consensus was that the government was under no obligation to compensate the taxi industry. Liberalization in Ireland brought massive benefits for consumers - the number of taxis in Dublin increased threefold, waiting times were reduced to a minimum and service reportedly improved.


Unlike taxis, Uber and other ridesharing companies were indeed subjected to few rules at the start of their operations, as regulations for companies of the “sharing economy” often does not exist yet. Nevertheless, such regulation is needed to protect customers and employees, and ensure a level playing field for ridesharing companies and taxis alike. However, such regulation should also take the peculiarities of Uber’s business model into account and aim to stimulate competition between companies, rather than restrict it.

California was the pioneer in regulating the “sharing economy” when complex issues related to provision of insurance and taxation arose

As the experience of Uber and Airbnb shows, an efficient solution can be found. California was the pioneer in regulating the “sharing economy” when complex issues related to provision of insurance and taxation arose. With regards to insurance, Uber drivers initially operated under private policies, while cabs were required to purchase a more expensive commercial insurance. It was argued that passengers and drivers were at risk, as private insurance coverage could be limited or denied if the accident took place during commercial use. Although there were attempts to force Uber to provide 1 million USD blanket coverage to the drivers at all times, California legislators reached a compromise with ridesharing companies, requiring them to provide insurance of up to 200,000 USD for drivers in search of a customer and 1 million USD for drivers and passengers in the car.

Although Uber drivers are employed as independent contractors and are thus subjected to a different taxation structure than the taxi drivers, the debate around taxation of the “sharing economy” revolved mostly around Airbnb, Uber’s counterpart for sharing apartments. Airbnb’s users were criticized for not paying local hotel occupancy taxes. However, the problem was quickly resolved when Airbnb itself started to collect taxes from its users on behalf of the California government. While there still may be some disparity in requirements for background and technical checks between Uber and taxis,this can also be eliminated by closing gaps in the regulation.

However, not all regulations benefit consumers and put companies on the equal footing. The progress on regulation of “sharing economy” in California comes in stark contrast with the recent regulation passed in France, where Uber drivers were required to wait 15 minutes before picking up a passenger! This regulation was later scrapped and replaced by a prohibition for Uber drivers to share their GPS location, thus effectively disrupting Uber’s operations. While such steps indeed give the taxi industry a fighting chance, they handicap the competitor, reduce competition, deprive customers of choice and reduce service quality for passengers.

Concluding remarks

Uber’s business model is still fairly novel. Yet such new “sharing” business models use previously underutilized resources more efficiently, increase competition in the markets and provide consumers with more choice. However, as the ongoing debate shows, these innovations may strongly disrupt existing markets and their success may depend on the willingness of regulators to open markets for competition. Meanwhile, regulators will have to face several challenges, including balancing the interests of consumers and incumbents, creating efficient rules for the “sharing economy” and fostering competition.

Regulation will have to be quickly adapted to the changing realities of the market. The Internet and further developments in ICT increasingly reduce the costs of search and matching, eliminate the information asymmetries with the help of rating systems, provide greater transparency of prices via real-time auctions and enable entry by smaller entrepreneurs. These developments not only increase the competition in the markets and bring them closer to scenarios with perfect competition and information, but may also make certain regulations obsolete.

Excellent research assistance by Elena Zaurino is gratefully acknowledged.

Tue, 30 Sep 2014 13:55:48 +0100
<![CDATA[Interactive: Do it yourself European Unemployment Insurance]]> http://www.bruegel.org/nc/blog/detail/article/1444-interactive-do-it-yourself-european-unemployment-insurance/ blog1444

Following on from our previous blog post on this topic, we invite you to try out our improved European Unemployment Insurance (EUI) scheme simulator which now includes a line graph to chart the evolution of the net flows from the scheme and its situation, as well as a heat map of all European countries.

Ctrl + shift +L will generate a permanent url to share the selected combination of inputs.

Tue, 30 Sep 2014 09:55:38 +0100
<![CDATA[Russian Roulette, reloaded]]> http://www.bruegel.org/nc/blog/detail/article/1443-russian-roulette-reloaded/ blog1443

European attention will be back to Russia and Ukraine this week, as sanctions are reviewed.  In the meantime, important changes have taken place. European FDIs and loans to Russian borrowers have started to dry up, while lending from China has reached new highs, raising important questions about the effectiveness of measures supposed to restrict Moscow’s room of maneuver in seeking access to capital.

Geopolitical conflicts have one common characteristic: they catalyse attention according to cycles. The Ukraine-Russia affaire is not an exception, in this respect. On Tuesday, EU diplomats will meet to review the sanctions imposed to Russia with the aim to “amend, suspend or repeal them”. At the moment, the FT reports, there seem to be no signs that the measures would be suspended or changed.

Russia did not look particularly open to compromise last week, when president Putin demanded a reopening of the EU-Ukraine recently-ratified trade pact - which was the casus belli in the Ukraine crisis. According to the FT, Putin accompanied his demands with threats of “immediate and appropriate retaliatory measures” if Kiev were to actually implement any part of the deal. These points were not welcomed well in Europe, in particular in Germany, which is reportedly insisting that there should be no dilution of sanctions imposed on Russia.

This new stand-offs will attract Europeans' attention back to their Eastern borders. The first question to answer - before wondering what to do with the sanctions in place - is whether they have been effectively biting. It may be too early to tell, but some recently published data - which are reviewed here - show interesting signs that may support the points of those who are skeptical.

Capital has been flowing out of Russia over the last quarter of 2013 and the first quarter of 2014 and the financial account at the end of Q1 2014 reached a deficit of almost 9% of GDP

On net terms, capital has been flowing out of Russia over the last quarter of 2013 and the first quarter of 2014. The right panel of figure 1 shows that the financial account at the end of Q1 2014 reached a deficit of almost 9% of GDP, excluding the movements in reserves assets. Reserves - shown in the left panel of figure 1 - have been decreasing since a peak in 2012, and more markedly since end-2013, reaching 458 USD bn on the 19th September 2014. This amounts to a 10% decrease over the nine months since the beginning of the year. As a comparison, during the crisis of 2008-09, reserves went down in Russia by 37% over six months, and by about 13% monthly during the two worst months.

To be fair, the fact that reserves have not dropped nearly as fast as in 2008-09 does not preclude the possibility that Russia may experience another balance of payment crisis. Reserves have in fact been constantly decreasing - although slowly - and psychological factors could play as an amplificator, if external pressure were to intensify significantly (which may come from expected redemptions on external debt, especially if sanctions were to be simultaneously thoughened).

But what is behind the relatively contained drop of the Russian financial account? Understanding this may be an essential prerequisite to assess the effectiveness of sanctions. On one hand, the limited coverage of the data - which stops in the first quarter of 2014 - does not (yet) allow us to assess the impact of the second wave of sanctions. But there might be something - quite interesting - going on.

Figure 2 reports quarterly data on foreign direct investments (FDI) in Russia from 2007 till the first quarter of 2014, broken down by investing countries. Data were taken from the Central Bank of Russia’s website, and they are provided already in net terms (i.e. inflows minus outflows), meaning that a negative number in one quarter represents a net outflow in that quarter and a positive number represents a net inflow. The upper-left panel shows FDI coming from European countries, both EU and non-EU. The other three panels show FDI coming from Asian, American and Caribbean countries.

Foreign Direct Investment in the Russian Federation in 2007 - 2013, Q1 2014 (Balance of Payments Data, inflows minus outflows)

Over time (if we disregard possibly dubious flows from the Caribbeans) Europe has played a crucial role in providing FDI to Russia, with the largest share of European FDI coming from Euro area countries (in particular Ireland and the Netherlands, followed by France and Germany). Cyprus and Luxembourg are clear outliers in Europe and their abnormal flows are more similar to those from the Caribbean countries, together with which they are represented (see here for wide discussion of Cypriots FDI flows to and from Russia).

FDI flows from Europe have been shrinking significantly in the last three quarters up to March 2014, while flows from Asia - mostly China - picked up to high levels during the same period

Figure 2 shows that FDI flows from Europe have been shrinking significantly in the last three quarters up to March 2014. This occurred probably in anticipation of escalating tensions, and speeded up during the first quarter of 2014, when the first wave of sanctions was agreed.

More interestingly, FDI flows from Asia - mostly China - picked up to high levels during the same period and literally exploded in the first quarter of 2014. During the first three months of 2014, European net FDI inflows to Russia amounted to 2.9 USD billion (2 billion of which coming from the euro area), i.e. down 63% year on year. Asian net FDI flows to Russia were instead 1.2 USD billion (1 billion of which coming from China), i.e. up 560% year on year.

This is not the only sign suggesting that Russia might have been re-orienting the geography of its capital flows over the latest months (something I already looked at here). Figure 4 shows the amount of loans to Russia non-financial corporations and households from foreign lenders, over the period 2007-2014Q1. These are net loans (i.e. disbursement net of repayments) so they can be taken as a proxy of the new lending.

The data for the first quarter of 2014 is not properly comparable with the previous - annual - points, but it is nevertheless striking. It shows the expected negative net new lending by European lenders and the - less expected - positive and big net new lending by Chinese lenders. As a comparison, China net new lending to Russian NFCs and Households was 13 USD billion for the sole first quarter of 2014, compared to 7.5 USD billions for the entire 2013.

The sanctions to make access to European financial market more difficult for Russian banks and companies may prove far less effective than expected

Obviously, it is too early to draw conclusions, and assessment at this point in time needs to be cautious. But this data may be the first sign of a geographical reshuffling of capital flows to Russia, with China possibly starting to substitute outgoing European countries. Data on the past two quarters - covering the period during which sanctions were toughened on the European side - will be key to understand whether this development can be a lasting trend.

But if this were to be the case, then the sanctions that were supposed to make access to European financial market more difficult for Russian banks and companies may prove far less effective than expected.

Tue, 30 Sep 2014 07:33:26 +0100
<![CDATA[The new normal of monetary policy]]> http://www.bruegel.org/nc/blog/detail/article/1442-the-new-normal-of-monetary-policy/ blog1442

What’s at stake: Since 2008, the asset purchases made under QE have increased drastically the aggregate level of bank reserves, thereby weakening the control of the Fed's federal funds rate. On Wednesday 17 September 2014, the Federal Reserve announced a revised plan for the mechanics of how it will raise interest rates from near zero despite large excess reserves.

The primary tool for moving the fed funds rate will be the interest rate the Fed pays on the money, called excess reserves

Real Time Economics writes that as part of the so-called exit strategy, the Fed will continue to rely on its benchmark federal funds rate, an overnight interbank lending rate, as the key rate used to communicate Fed policy.  But the primary tool for moving the fed funds rate will be the interest rate the Fed pays on the money, called excess reserves, that banks deposit at the central bank. The Fed also will use an interest rate it pays on trades called reverse repurchase agreements, or reverse repos, to help ensure the fed funds rate stays in its target range.

The old way of raising rates

Michael Woodford writes that it will be an interesting experiment in monetary economics because the Fed will be attempting to control short-term interest rates in a situation where almost certainly its balance sheet is going to be unusually large. That means that there are going to be extraordinary quantities of excess reserves in existence, and this means that Fed control of short-term interest rates will not be achievable in the way that it always was in the past: through rationing the supply of reserves. The Fed would maintain a fairly small supply of reserves, small enough that there was indeed an opportunity cost of reserves, and it could adjust that opportunity cost fairly precisely through relatively small changes in the supply of reserves.

John Cochrane illustrates in the figure below the standard story for monetary policy, and one option for the Fed when it wants to raise rates. In this story, the Fed controls interest rates by rationing the amount of non-interest-paying reserves. Banks must hold reserves in proportion to their deposits. If the Fed sells bonds, taking back reserves, the banks must get along with fewer reserves. They bid up the Federal Funds rate they pay to borrow reserves from each other. Treasury rates and other rates rise by arbitrage with the Federal Funds rate. So all interest rates rise.

The new way of raising rates

Attention turned to an alternative approach to monetary policy implementation by effectively “divorcing” the quantity of reserves from the interest rate target

Todd Keister, Antoine Martin, and James McAndrews writes that recently, attention has turned to an alternative approach to monetary policy implementation by effectively “divorcing” the quantity of reserves from the interest rate target. The basic idea behind this approach is to remove the opportunity cost to commercial banks of holding reserve balances by paying interest on these balances at the prevailing target rate. Under this system, the interest rate paid on reserves forms a floor below which the market rate cannot fall. The Reserve Bank of New Zealand adopted a particular version of the “floor-system” approach in July 2006.

Todd Keister, Antoine Martin, and James McAndrews writes that the key feature of this system is immediately apparent in the exhibit: the equilibrium interest rate no longer depends on the exact quantity of reserve balances supplied. Any quantity that is large enough to fall on the flat portion of the demand curve will implement the target rate. In this way, a floor system “divorces” the quantity of money from the interest rate target and, hence, from monetary policy. This divorce gives the central bank two separate policy instruments: the interest rate target can be set according to the usual monetary policy concerns, while the quantity of reserves can be set independently.

Policy "normalization” principles and plans

In its press release, the FOMC writes that during normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate.

Real Time Economics writes that since the authority to pay interest on reserves does not extend to other participants in short-term rate markets, such as government-sponsored enterprises and money market funds, the central bank has developed so-called overnight reverse repurchase agreements that allow it to withdraw liquidity from the system even from non-banks.

The Fed should stop referring to "normalization” when it talks about reducing the size of its balance sheet

The FOMC writes that it intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA. John Cochrane writes that the Fed should stop referring to "normalization” when it talks about reducing the size of its balance sheet. The Fed may discover that a huge balance sheet, reverse repos for everyone, and even near-zero rates and zero inflation are a permanent and healthy policy configuration. If you've called tiny reserves that don't pay interest "normal," it's going to be awfully hard to accept that the "new normal" is just fine.

Mon, 29 Sep 2014 07:27:53 +0100
<![CDATA[The G20 financial reform agenda]]> http://www.bruegel.org/publications/publication-detail/publication/849-the-g20-financial-reform-agenda/ publ849

Yesterday marked the five-years anniversary of the Pittsburgh Summit, the culmination of the initial phase of G-20 activity.

Five years ago, the declarations of the G20 in landmark leaders’ summits in London and Pittsburgh listed specific commitments on financial regulatory reform. When measured against these declarations, as opposed to the surrounding rhetorical hype, most (though not all) commitments have been met to a substantial degree.

However, the effectiveness of these reforms in making global finance more stable is not so far proven. This uncertainty on impact mirrors the absence of an analytical consensus on the 2007-08 financial crisis itself. In addition, unintended consequences of the reforms are appearing gradually, even as their initial implementation is still unfinished.

At a broader level, the G20 has established neither an adequate institutional infrastructure nor a consistent policy vision for a globally integrated financial system. This shortcoming justifies increasing concerns about economically harmful market fragmentation. One key aim should be to make international regulatory bodies more representative of the rapidly-changing geography of global finance, not only in terms of their membership but also of their leadership and location.

The G20 financial reform agenda (English)
Fri, 26 Sep 2014 05:32:12 +0100
<![CDATA[The European Investment Bank should invest more, not less]]> http://www.bruegel.org/nc/blog/detail/article/1440-the-european-investment-bank-should-invest-more-not-less/ blog1440

There is a growing recognition among policymakers, not least thanks to the Jackson Hole speech of ECB President Mario Draghi, that Europe faces the problem of demand shortage, in addition to various structural problems which can be resolved only with suitable supply-side reforms. A good way to stimulate more demand is to increase the investment of the European Investment Bank (EIB); see the promotion of this idea in our memo to the new ECFIN Commissioner Pierre Moscovici.

The EIB has played to some extent a counter-cyclical stabilising role by increasing its investment in 2009 and in 2013 and by investing more in harder-hit countries

In fact, the EIB has played to some extent a counter-cyclical stabilising role by increasing its investment in 2009 and in 2013 and by investing more in harder-hit countries.

In the height of the crisis, the EIB has increased its investments from € 47.5 billion (0.38 percent of EU GDP) in 2007 to € 78.8 billion (0.67 percent of EU GDP) in 2009 (see Figure). The increased investment, about 0.3 percent of EU GDP, was non-negligible, but modest compared to fiscal stimulus in other advanced countries such as the United States and Japan. Unfortunately, there was a decline in EIB investment in 2010-12, at a time when the cyclical situation of the European economy deteriorated and most EU countries embarked on a significant fiscal consolidation path. Facing a relapsed economic situation, in 2012 EU leaders agreed to provide €10 billion of new capital to the EIB (which leads to much more investment, because the EIB leverages up its capital) and encouraged the EIB to invest more, which is reflected in the increase in EIB investments in 2013 to € 71.7 billion (0.55 percent of EU GDP).

Figure 1: Annual investment by the European Investment Bank (EIB) according to main sectors in 2000-2013 and the targets for 2014-16 (€ billions)

Note: the sectors are ordered according to their share in total investment (largest in bottom, smallest in top).

The country composition of EIB investments suggests that, quite rightly, the EIB tends to invest more in countries (a) hard-hit by the crisis and (b) which are less developed. See a simple regression analysis supporting this hypothesis at the end of this post.

Instead of cutting investment, the EIB should significantly increase its investment

Unfortunately, now when there is a growing recognition that more public investment would be desirable, the EIB plans to reduce investment to €67 billion in 2014 and 2015, while the middle of the targeted range for 2016 is €58.5 billion (see the EIB’s three-year Corporate Operational Plan). Instead of cutting investment, the EIB should significantly increase its investment, which would require a clear call from national leaders of EU countries and further new capital to the EIB beyond the €10 billion agreed in 2012.


Annex: regression analysis

In order to assess the possible motives behind the allocation of EIB investments across EU countries, we run a very simple regression using data for 27 EU countries:

EIB investment share – GDP share = alpha*unemployment rate + beta*initial GDP per capita + error

That is, we calculated the share of countries in total EIB investments in EU27 (e.g. Italy’s share was 14.8% in 2009-2013), we calculated the share of countries in EU27 GDP (which was 12.4% for Italy) and regressed their difference (which was 2.4%-point for Italy) on the average unemployment rate during the same period and on the GDP per capita at purchasing power standards a year before (i.e. the 2008 value when analysing investments during 2009-13). We run this very simple linear regression both on a pre-crisis sample (2005-2007) and on the sample during the crisis (2009-2013) using data of 27 EU countries.

Note: the dependent variable is the difference between the share of countries in EIB investment and the share of countries in EU GDP. The number of observations is 27 (Luxembourg is not included due to its very large GDP/capita figure, which is the result of the special characteristics of the Luxembourg economy.) The explanatory variables were transformed to have zero means. R2 is the coefficient of determination, which measures the goodness of fit of the regression. There may be an endogeneity issue with the regressions (whereby EIB investment is having an impact on unemployment), but in our view this should be a minor issue.

The following table shows that both before and during the crisis, initial GDP per capita is somewhat related to EIB investment (as the t-statistics are larger than 1 in absolute terms, though well below 2). The negative estimated parameter suggests that more developed countries tend to receive less EIB investment.  Unemployment does not correlate with EIB investments before the crisis, but significantly correlates during the crisis. The positive estimated parameter suggests that harder-hit countries tended to benefit more from EIB investments than countries with lower unemployment rates.

Table 1: Regression results



initial GDP/capita








Unemployment rate












See note to the right of the table.

Wed, 24 Sep 2014 13:44:12 +0100
<![CDATA[Who’s afraid of the AQR?]]> http://www.bruegel.org/nc/blog/detail/article/1439-whos-afraid-of-the-aqr/ blog1439

Banks have incentives to recapitalize in socially undesirable ways and to hide losses on their balance sheets. Will the comprehensive assessment solve these issues by forcing significant European banks to recognize losses and to recapitalize by issuing new equity instead of deleveraging? Between January and July 2014 euro area banks have announced equity issuance of about 38 billion, of which 28 billion has currently been issued. Over 75% comes from banks in Greece, Spain, Italy and Portugal.  In addition, banks issued about 14 billion of Additional Tier 1 (AT1) capital, or CoCos. Here, banks in Spain, France and Germany have been big issuers. The total of 52 billion lies below earlier predictions of 80-130 billion of required recapitalization. In addition to the strengthening of their regulatory capital, banks also reported provisions and impairments totaling up to 135 billion.

Deleveraging is socially undesirable because the resulting contraction of credit hits growth of healthy firms

If banks have to recapitalize, they prefer deleveraging over issuing fresh capital because of two market failures. Banks prefer to increase their capital ratios by deleveraging over issuing fresh capital because (1) the cost of issuing fresh capital are born by the existing shareholders due to debt overhang and (2) because issuing capital is seen as a negative signal by the market due to information asymmetry (see e.g. Marinova et al. 2014 for review of relevant literature). Deleveraging is socially undesirable because the resulting contraction of credit hits growth of healthy firms.  This is not just theory: the empirical literature documents the negative effect of capital shocks on bank lending and the real economy (see e.g. Peek and Rosengren, 2000; Albertazzi and Marchetti, 2010; Jiménez et al. 2012).

Under existing regulation, supervisors can specify what capital ratio banks should have, but not in what way banks should recapitalize if they fall short of that ratio. To address the two market failures mentioned above supervisors currently have only two instruments: (1) enhance the transparency of bank’s balance sheets to reduce information asymmetry, and (2) impose tight deadlines for recapitalization which reduces the possibility to use deleveraging. The Comprehensive Assessment (CA), consisting of the asset quality review (AQR) and stress tests, should be seen in this light. By applying a uniform measure to determine the quality of banks’ balance sheets, the ECB aims to identify hidden bank losses. The limited time between the AQR, the publication of the results in the autumn and the deadline to recapitalize, stimulates problem banks to raise new capital. The deadlines to significantly improve capital ratios are too short for substantial deleveraging.

Because the stress tests are carried out on the basis of year-end 2013 figures, banks have an incentive to clean up their year-end 2013 balance sheets. To avoid capital shortfalls resulting from the CA, banks can issue fresh equity or convertible contingent bonds (CoCo’s, debt like contracts that convert to equity under certain pre-specified conditions) that count as Additional Tier 1 capital (AT1). Table 1 below shows capital and CoCo’s issuance in 2012, 2013 and 2014. Data was gathered manually from public sources.

Table 1 Capital and CoCos issuance between 2012 and 2014 (*)

* 2014 is up to and including July


Issued capital

Issued Coco’s


 € 17 billion

€ 0


 € 16 billion

€ 6.3 billion


 € 28 billion

€ 14 billion

Between January and July European banks have announced to issue for about €38 billion in fresh capital and about €14 billion in CoCos. From the announced €38 billion of equity, about €28 billion has actually been issued. Compared to 2013 and 2012 capital issuance has substantially increased. On the one hand this can be explained by incentives provided by the CA. On the other hand, conditions in equity markets have also improved.

The ECB claims that since July 2013, more than €140 billion has been added in additional capital or by reducing business

In addition to the strengthening of their regulatory capital, these banks also reported provisions and impairments totaling up to €135 billion. Combining capital reinforcements and provisions, European significant banks have, since the beginning of 2014, been bolstering their balance sheets by over €180 billion. The ECB claims that since July 2013, more than €140 billion has been added in additional capital or by reducing business. Our figure is consistent with this claim. Because we do not consider deleveraging here, our numbers differ.

Figure 1 shows the distribution of capital issuance and impairments over countries. From the announced €38 billion of new equity, about €28 billion has currently been issued. Over 75% is from banks in Greece, Spain, Italy and Portugal.  Banks in Spain, France and Germany have been big issuers of AT1 capital, or CoCos, as a way to beef up their capital ratios. The CoCo-market has been growing since last year, when banks in Spain, Italy, Denmark and Belgium launched their first CoCo -deals. This year, euro area banks have issued over €14 billion of CoCos. The same banks reported provisions and impairments totaling up to €135 billion. Compared to other banks in euro area Member States, banks in Spain and Italy have been recognizing considerable amounts of losses. One explanation is that they have anticipated on the strict(er) measures for loss-recognition as applied in the AQR.

There is no clear relation between capital or CoCo issuances, and the risk-weighted capital ratio

If risk-weighted capital ratios are a sufficiently reliably proxy for the resilience of a bank, one might expect that predominantly banks with low risk-weighted capital ratios are bolstering their balance sheets. However, as the figure below suggests, there is no clear relation between capital or CoCo issuances, and the risk-weighted capital ratio. This might imply that the risk weighted capital requirements are not a reliable indicator of the banks’ resilience. Since banks are increasing their non-risk-based leverage ratios, the CA addresses this issue partly.


Banks might be be healthier than predicted or the stress test may be less strict than expected

The AQR has clearly provided banks with an incentive to clean-up their balance sheet and bolster the level of regulatory capital by issuing equity and AT1 capital. The amount of already issued and announced issues seems limited compared to earlier predictions of required recapitalization for euro area banks: €52 billion against predicted recapitalizations of €80-130 billion. One conclusion could be that European banks are healthier than predicted earlier. It could also mean that the stress test is less strict than expected. Only time will tell.

Wed, 24 Sep 2014 06:48:49 +0100
<![CDATA[Launch of the Memos to the new EU leadership ]]> http://www.bruegel.org/videos/detail/video/140-launch-of-the-memos-to-the-new-eu-leadership/ vide140

The new Commission, European Parliament and President of the European Council will enter office at a challenging time for Europe, the EU and the Commission itself. 

Tue, 23 Sep 2014 10:11:24 +0100
<![CDATA[“Women are Japan’s most underused resource”]]> http://www.bruegel.org/nc/blog/detail/article/1438-women-are-japans-most-underused-resource/ blog1438

“Unleashing the potential of ‘Womenomics’ is an absolute must if Japan's growth is to continue. (…) I will make other proposals at the U.N. for further empowering women and will promise to spend more than $3 billion in the three years to come solely for that purpose—all in the firm belief that Japan (…) and countries around the world can benefit”.

Shinzo Abe, Wall Street Journal, September 2013.

Unleashing the potential of ‘Womenomics’ is an absolute must if Japan's growth is to continue

Engaging the full potential of the female labour force is one of the main objectives of the third arrow of Shinzo Abe’s eponymous “Abenomics” policy ensemble. The aim is to revive the Japanese economy in the short-run via a mix of monetary and fiscal stimulus (arrows one and two) and structural reforms to reinvigorate the long term growth potential of the Japanese economy (the third arrow).

This chart presents the recent evolution of the Japanese female employment rate. To account for secular changes in the labour market it’s presented as a fraction of the same rate for men.

We see women have been making steady progress for some time, closing the gap on their male counterparts, and with a possible faster-than-trend rate since the introduction of “Abenomics”. 

Is just a random uptick, or part a deeper shift in the Japanese labour market? Only time will tell…

Tue, 23 Sep 2014 08:13:45 +0100
<![CDATA[So far apart and yet so close: Should the ECB care about inflation differentials?]]> http://www.bruegel.org/publications/publication-detail/publication/848-so-far-apart-and-yet-so-close-should-the-ecb-care-about-inflation-differentials/ publ848

Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates.

In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences.

It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.

So far apart and yet so close: Should the ECB care about inflation differentials? (English)
Mon, 22 Sep 2014 13:30:31 +0100
<![CDATA[European energy and climate strategy beyond 2020(20)]]> http://www.bruegel.org/nc/events/event-detail/event/463-european-energy-and-climate-strategy-beyond-202020/ even463

The EU is updating its energy strategy with new targets for 2030 and the intention to create an Energy Union.

At this event we want to discuss the quantitative headline targets for 2030* but also the instruments to reach such targets and at the same time create an Energy Union.

*(Commission proposal: 27% renewables, 30% energy efficiency and 40% greenhouse-gas reduction)

The event will be live-streamed on this page.


  • 12:00: Registration
  • 12:15: Presentation Georg Zachmann: Elements of Europe's Energy Union
  • 12:45: Comments by Jesse Scott, Eurelectric
  • 13:00: Comments by Daniel Fuerstenwerth, Agora-Energiewende
  • 13:15: Discussion
  • 13:45: Lunch

Event materials

Presentation by Georg Zachmann -

Presentation by Jesse Scott -

Presentation by Daniel Fuerstenwerth -

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday 1 October 2014, 12.00-13.45.
  • Contact: Matilda Sevón - registrations@bruegel.org

Mon, 22 Sep 2014 10:14:35 +0100
<![CDATA[Europe’s Single Supervisory Mechanism: Most small banks are German (and Austrian and Italian)]]> http://www.bruegel.org/nc/blog/detail/article/1437-europes-single-supervisory-mechanism-most-small-banks-are-german-and-austrian-and-italian/ blog1437

A well-known limitation of Europe’s banking union is the fact that most banks in the euro area will escape direct supervision by the European Central Bank (ECB) and the Single Resolution Board that will address insolvent banks from next year. Indeed, the ECB’s recently published mapping identifies 3,652 banks in the euro area, of which only 120 groups are subject to its direct supervisory authority, though these 120 larger banking groups represent at least 80 percent of total euro-area banking assets.

Germany, Austria and Italy together are home to almost four-fifths of all smaller banks, and Germany carries the lion’s share

A closer look at the ECB’s list shows that the smaller banks are concentrated in a limited number of countries, much more so than larger ones. Germany, Austria and Italy together are home to almost four-fifths of all smaller banks, and Germany carries the lion’s share. (1,697 out of the 3,532 smaller banks which the ECB calls “less significant supervised entities” are in Germany.)

This imbalance is linked to the structure of the banking market in Germany, where many savings banks (Sparkassen) and cooperative banks (generally called Volksbanken or Raiffeisenbanken) serve local customers. Austria is also home to hundreds of often tiny cooperative Raiffeisenbanken and Raiffeisenkassen. In Italy, small local banks take different forms, including many cooperative credit banks (banche di credito cooperativo), rural savings banks (casse rurale), and cooperative casse Raiffeisen in former territories of the Austrian Empire.

By contrast, in many other countries, local banks are consolidated into groups that are large enough to be subject to the ECB’s direct supervisory authority. This is the case of most Spanish savings banks following recent consolidation (cajas de ahorros and cajas rurales); of Finnish Osuuspankki cooperatives within the OP-Pohjola Group; of French savings and cooperative banks (Crédit Mutuel, Caisses régionales du Crédit Agricole, and Banques populaires and Caisses d’épargne et de prévoyance within BPCE Group); and of Dutch rural Raiffeisen-Boerenleenbank cooperatives within Rabobank. It is also the case of Austrian savings banks (Sparkassen), consolidated within Erste Group, and Volksbanken under Österreichische Volksbanken AG.

The ECB’s separation of euro area banks into “significant” and “less significant” relies on objective criteria, but these criteria’s economic relevance may be tested over time

The ECB’s criteria for distinguishing between groups it considers integrated (such as Rabobank or Erste) and those scattered across independent local entities (such as the German Sparkassen or Austrian Raiffeisen cooperatives) are based on legal form and ownership. Whether this distinction is meaningful for prudential purposes is not a trivial question, however. German savings banks rely on an elaborate system of mutual oversight and contingent guarantees, which suggests that they might be consolidated as one single entity for the purpose of systemic risk analysis. In other terms, the ECB’s separation of euro area banks into “significant” and “less significant” relies on objective criteria, but these criteria’s economic relevance may be tested over time.

One additional twist is that, in several countries and systems, local banks pool functions such as asset management and wholesale market activity into separate entities that are typically large enough to be caught in the ECB’s direct supervisory net. Specifically, Germany’s Sparkassen rely on regional Landesbanken, which are all directly supervised by the ECB (except the tiny one in Saarland), and on DekaBank for asset management. German Volksbanken and Raiffeisenbanken similarly rely on DZ Bank and WGZ Bank, and so do Austrian Raiffeisenbanken on Raiffeisen Zentralbank. While the nature of these links does not lead to accounting consolidation, the corresponding financial interdependencies could be significant in at least some crisis scenarios – especially as the European Commission’s recently strengthened assertiveness on state aid control could limit the availability of alternative support by municipalities or other territorial entities, as has often been observed in the past.

In contrast to small banks, the 120 larger banking groups subject to the ECB’s direct supervisory authority are much more equally spread across all euro area member states:

Member states are represented among large banks broadly according to their economic weight – with a slight overrepresentation of Luxembourg and Spain

The much longer “tail” (the grey quadrant) in this chart is due to the legal minimum of three “significant” banks per member state, which leads to comparative overrepresentation of the smaller countries. Otherwise, and unlike the above chart about smaller banks, member states are represented broadly according to their economic weight – with a slight overrepresentation of Luxembourg, as a significant financial center, and of Spain, where recent consolidation of Cajas has led to a large number of medium-sized banks. France is slightly underrepresented in this count, because its banking sector is uniquely concentrated.

These observations have policy implications. The exemption of small banks from the ECB’s direct supervisory authority was not in the European Commission’s initial proposal for the Single Supervisory Mechanism Regulation (September 2012). This exemption was introduced during the negotiation within the Council, reportedly at Germany’s vocal insistence. Its consequences on the structure of Europe’s banking union are asymmetrical: the exempted banks (for which the ECB will be the ultimate license-granting authority, but will delegate supervisory tasks to the relevant national authority) form a minor part of most participating countries’ financial systems, but loom large in Germany, and to an extent also in Austria and Italy. It remains to be seen how this asymmetry may, or may not, lead to future political tension and/or regulatory arbitrage across European nations.

Mon, 22 Sep 2014 06:46:46 +0100
<![CDATA[Economic Patriotism and National Champions]]> http://www.bruegel.org/nc/events/event-detail/event/462-economic-patriotism-and-national-champions/ even462

Foreign takeovers are often a source of concern for national governments. There is a public perception that when a company owned by domestic shareholders loses control to the benefit of a foreign investor, the risk of losses for the national economy is increased. It is believed that foreign investors may, for example, be less concerned with productivity drops, job losses or cuts in research expenditure. Last spring Alstom/GE and Pfizer/Astrazeneca prompted new waves of debates in the public domain. Should Europe or Member States change their approach to merger control in order to favor the creation of national champions? Do current merger control rules offer enough guarantees that a merger will not harm the national economy? What is the best way to create true European Champions without distorting market competition? During this workshop we will address those questions with the intention of rationalizing a debate too often drifted by emotions.


  • Ferdinando "Nani" Beccalli-Falco, President and CEO of General Electrics Europe
  • Andreas Mundt, Head of Bundeskartellam and Chair of the International Competition Network
  • Damien Neven, Graduate Institute Geneva and former Chief Economist DG Competition, European Commission
  • Xavier Ragot, Paris School of Economics and President of the Observatoire français des conjonctures économiques

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday 12 November 2014, 12.00-15.30
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Fri, 19 Sep 2014 11:45:55 +0100
<![CDATA[Fact: T.L.T.R.O. is Too Low To Resuscitate Optimism]]> http://www.bruegel.org/nc/blog/detail/article/1436-fact-tltro-is-too-low-to-resuscitate-optimism/ blog1436

Yesterday the ECB held the first auction of liquidity under its new TLTRO programme. The take up was well below expectations, raising questions about the actual ability of the ECB to regain control of its balance sheet.

It’s the third week of September and the sky is already getting quite grey, over Frankfurt. The ECB held yesterday the first allotment of liquidity under its new TLTRO programme. It was introduced in June and it foresees two initial auctions (September and December 2014) in which banks will be able to borrow up to an initial allowance of roughly 400bn plus a number of additional leveraging operations.

Expectations on the take up in the first operation were high. A Bloomberg poll this week showed that analysts, on average, expected banks to bid for €174bn of loans in September and €167bn in a second auction in December. The actual amount allotted, however, was only 82.6 billion, i.e. less than half the average expectation for this first operation.

Actual amount allotted was only 82.6 billion, less than half of the expected for this first TLTRO operation

Results at the country level are not known in full yet, but sparse news suggest that around 46% of the total went to Spanish and Italian banks (Figure 1) . Reuters reports that ten Italian banks, including Italy's top three lenders Intesa Sanpaolo, UniCredit and Monte dei Paschi di Siena, took a combined 23 billion euros. This represents 28 percent of the total 82.6 billion allotted, and about 30% of Italian banks’ potential allotment (of 75 billion). El Mundo reports that Banco Santander, BBVA, Caixabank, Banco Popular and Bankia took in total 15 billion, whereas Banco Sabadell and Bankinter did not participate. This represents 18 percent of the total and about 28% of Spanish banks’ initial allowance. Bloomberg reports that Amsterdam-based ING Groep NV and ABN Amro Bank NV said they subscribed for funds (but did not disclose the amount), whereas Austria’s three largest banks, Erste Group Bank AG, UniCredit Bank Austria AG and Raiffeisen Bank International AG, didn’t take part.

In light of this outcome, a number of questions forcefully ask to be answered.

First, why was the take up so low compared to expectations? Quite obviously, it is not a matter of price. The interest rate has never been so low. Actually, Mario Draghi himself stressed during the last press conference that the cut in the interest rate was also meant to signal “ to the banks that are going to participate in the TLTRO that they should not expect any further lowering in interest rate, so they should not hesitate to participate in the TLTRO because of this reason, because they could wait for a lower interest rate in the future.”

Rather than using very cheap liquidity, euro area banks are actually reimbursing it

It may be, as many suggest, that banks may just prefer to wait for the end of the ECB’s comprehensive assessment of bank balance sheets, before taking up more ECB liquidity. If this were a correct interpretation, take up in the December TLTRO should be significantly higher. The “stigma” argument was a powerful one at the height of the crisis, when there existed a liquidity emergency in some part of the euro area banking system and therefore borrowing at the ECB facility could have a bad signalling effect. But the current situation is very different and the “liquidity emergency” (with its implications) is an old memory. Not to mention that the ECB assessment is almost complete (and run on balance sheet data of end-2013), so it’s not obvious how borrowing now could affect the results.

The real reason may actually be more of a thorn in the side for the ECB. While it is true that interest rates are at record low, banks in the euro area have had the possibility to borrow very cheap liquidity for years, by now. But rather than using it, they are actually reimbursing it. Figure 2 below shows the evolution of excess liquidity outstanding in the euro area together with what appears to be the main factor behind its shrinkage: anticipated repayments by banks of the funds they borrowed at the ECB under the previous LTRO. Banks have been repaying ECB liquidity since february 2013. Interestingly enough, between June (when Draghi announced the TLTRO) and now, repayments have accelerated, probably with the objective to “swap” the repaid LTRO funds for TLTRO ones.

There is not an exogenous shortage of cheap liquidity in the euro area right now. But in the South of the euro area - where non-performing loans are high - banks would need to discount high expected default rates (and relative provisions). Moreover, lending to SMEs implies high risk weights and, consequently, capital charge. The profitability of borrowing very cheaply at the ECB to lend to the private sector (especially SMEs) is therefore not guaranteed, and the incentive of banks to take part in the TLTRO is not guaranteed either.

This however raises important and uncomfortable questions for Frankfurt, about the actual ability to deliver on the commitments recently taken in the fight against low inflation. During the last press conference, Mario Draghi in fact said that the aim of the ECB’s measures is to bring the size of the balance sheet back to the level it had in mid-2012.

From that peak (3 trillion) the ECB’s balance sheet has shrunk by about 35%, mostly due to the aforementioned reimbursement of LTRO funds. Bringing it back would require a boost of about 1 trillion.

Bringing the ECB balance sheet back to peak would require a boost of about 1 trillion

Speaking with Bloomberg, vice-president Constancio said that “within the whole package of measures that we have taken, in terms of the effect they can have on our monetary base, the bulk will come from the targeted longer-term refinancing operations”, which isn’t surprising in light of both the reduced size of the ABS market in Europe and the difficulties that the ECB is facing in its attempts to broaden the range of instruments it could buy.

But is it realistic? Figure 2 shows that the 400 billion available for the first two TLTRO operations are barely enough to cover the reimbursement of the outstanding 372 billion of old LTROs. This means that the net effect of these two initial operations on the ECB balance sheet will be a small additional 28 billion. Therefore, even assuming full take up in the December operation, the participation to the second phase of the TLTRO - which is based on banks meeting certain net lending benchmarks - looks crucial for the scheme to be sizable. And as far as this is concerned, we already pointed out that one important issue is still pending, i.e how banks will be prevented from using the funds borrowed now and in December for purposes different from lending.

There are a number of factors possibly playing a role in the low take up of this TLTRO operation. In addition to those already mentioned, the ECB itself might have modified the reaction function of banks, with its announcement of an ABS programme. Knowing that the ECB is going to buy ABS starting soon, and knowing that  - at least for the moment - the ECB is unlikely to buy ABS that it would not accept as collateral, banks might prefer to wait and sell those ABS to the ECB rather than just pledge them now.

T.L.T.R.O. may soon become famous as an acronym for “Too Low To Resuscitate Optimism”

Certainly, we need to wait until December to have a clearer view on the matter. But there is something that can and should be pointed out already. These results show yet one more time the risk of doing a “(not so) unconventional” monetary policy à la ECB: it is ultimately outside the central bank’s control, because it is driven by banks’ demand. Regaining control of the balance sheet with measures that are less demand-driven is a prerequisite to make an impact, but if the ECB’s great expectations are predominantly put on the refinancing operations, this might not happen. And the T.L.T.R.O. may soon become famous as an acronym for “Too Low To Resuscitate Optimism”.

Fri, 19 Sep 2014 08:07:28 +0100
<![CDATA[Blogs review: The economics of sanctions between Russia and the West]]> http://www.bruegel.org/nc/blog/detail/article/1435-blogs-review-the-economics-of-sanctions-between-russia-and-the-west/ blog1435

What’s at stake: In the context of Russian involvement in Ukraine and the annexation of the Crimea, the EU, US and other countries have announced sanctions against Russia. These include restrictions of access for Russian banks to EU and US financial markets, bans on military and “dual use” goods as well as travel restrictions for individuals close to the Russian government. Russia has retaliated by imposing bans on the import of food from Western countries.

Long-term financial prospects of the Russian oil sector depend on its ability to continue pressing into new sources of oil

Matthew Yglesias writes that the last package of EU sanctions agreed on July 29 deals Russia three big blows: Firstly, cutting a large share of the Russian banking sector from EU-based sources of financing forces the Russian government to either spend money on the banking system that then cannot be used for creating mischief in Ukraine or watch the economy collapse as bank finance dries up. Secondly, the ban on arms trade is more effective by stopping imports of Russian-made equipment to the EU (EUR 3.2 bn p.a.) than by restricting EU arms exports to Russia (EUR 300 m p.a.). Thirdly, the ban on EU exports of equipment used in deep-sea drilling, arctic exploration, and shale oil extraction won’t put much pressure on the Russian economy in the short run, but will divide the Russian elite: The long-term financial prospects of the Russian oil sector depend on its ability to continue pressing into new sources of oil.

Fig. 1 Russia gross export sales, 2013, USD bn

Francesco Pappadia looks at the impact of the events around the Ukrainian crisis (including sanctions announcements but also the Crimean “referendum” or the shooting down of flight MH17) on stock markets in Russia, the USA and EU. While the impact was generally negative in all markets concerned, the Russian economy suffered more than twice as much as the American one. EU markets took a middle position with no significant intra-EU differences. In order to predict the impact on political reactions, the ability to bear economic pain is however just as crucial as the damage sustained. Russia with its little democratic vigour may have an advantage in the short run and in the long run one should expect democracies to prevail – but the short to medium run may be rough.

If a Russian bank that is more than 50 percent owned by the government issues stock or bonds, no European can participate

Peter Spiegel  summarizes the EU’s financial markets sanctions: if a Russian bank that is more than 50 percent owned by the government issues stock or bonds, no European can participate. According to the European Commission’s estimate, between 2004 and 2012, $16.4bn was raised by Russian state-owned financial institutions through IPOs in EU markets. And in 2013 alone, about 47 per cent of all bonds issued by those banks — €7.5bn out of €15.8bn – were issued in the EU. However, no restrictions are Russian sovereign bonds will be implemented at this time, as a retaliation in kind by Russia could put EU sovereign bonds that currently enjoy low borrowing costs under pressure.

Robert Kahn writes that although the markets may underprice the escalation risks, Russia had (in April) already suffered a 9% stock market decline and capital flight of USD 60-70 bn in the first quarter of 2014 alone. Further sanctions (which have since been implemented) could meaningfully reduce Russian wealth through bans on trade and investment, but the most powerful effect on Russia comes from financial sanctions. The complexity of Russian entities' financial dealings with the West creates the potential for forced, rapid deleveraging—an intense "Lehman moment" of the sort witnessed in global markets after the failure of Lehman Brothers in September 2008. Risks of Russian retaliation exist particularly in the domain of energy exports, but the longer-term effects of a reorientation of European energy imports elsewhere would be far more damaging to the Russian economy than to the West.

The Economist writes that, as of September 2014, the sanctions have so far been in vain. Sanctions have hurt the Russian economy, but they have had no discernible effect on Mr Putin’s military strategy. Further measures could include blocking the property and accounts of entire sectors of the Russian economy, stretching asset freezes and financing restrictions across the entire banking industry or blocking Russia access to the SWIFT network, which is the arterial system for international bank-to-bank payments (and would make life very difficult for all Russia’s internationally active companies). Although historic precedents give rise to some scepticism over the effect of sanctions, which often do not achieve their immediate goals, there are two good reasons to impose them: First, they force aggressors to factor the growing costs of escalation into their decision-making. Second, they can be used as a bargaining chip to be conceded later, when the other side is coaxed into talks.

Contagious effects of sanctions?

It seems improbable that no contagion should exist, as financial streams between East and West will be affected

Wolfgang Münchau  wonders at adjustments of the IMF’s economic forecasts after the announcement of sanctions. The 2014 growth forecast for Russia has been reduced by 1.1 percentage points to 0.2%, the forecast for Germany has been raised from 1.7% to 1.9%, but it seems improbable that no contagion should exist, as financial streams between East and West will be affected.

Robert Kahn writes that due to the view that Russia is of little systemic importance to the global economy (e.g. due to limited integration in global supply chains), the view of most investors is that sanctions against Russia would have limited regional contagion effects. In reality, contagion through trade channels is indeed likely to be limited. However, the financial market sanctions could cause strong effects on other markets: Particularly given the high external debt of Russia (equity exposure is limited), a rapid deleveraging of Russian financial institutions could cause sizeable losses for Russian and external investors. It is too sanguine to assume in a global market that the effects of sanctions will be limited to a region.

Retaliatory sanctions by Russia

Open Europe analyses the exposure of European countries to Russia in agricultural trade. In aggregate terms, agricultural exports are about 7% of total EU exports. Of this, 10% goes to Russia and not all goods are affected by the sanctions. In terms of specific countries, the Baltic countries (Latvia, Lithuania and Estonia) will be hardest hit in terms of the trade as a share of GDP. In absolute terms, Poland, the Netherlands, Germany and Denmark will also face losses. On the Russian side, agricultural imports are 13.3% of total imports, equivalent to 1.2% of annual GDP.

Fig. 2 Shares of agricultural trade with Russia as percent of annual GDP, 2013

Food price rises will have a significant impact on the average Russian household, affecting the poor the most

Sarah Boumphrey writes that although the Russian ban on imports may strongly affect some EU countries, Russia may score an own goal here. Russia is a food importer with a trade deficit in food, live animals and beverages of US$23,878 million in 2013; and the ban on EU products could push up inflation, already high at 6.8% in 2013. Also, food and non-alcoholic beverages accounted for 30.5% of all consumer spending in the country in 2013. Food price rises will therefore have a significant impact on the average Russian household, affecting the poor the most.

Gabi Thesing and Whitney McFerron write that lower food prices, not restrictions in the gas supply, may give rise to the biggest negative fallout of the Ukraine crisis on the EU’s economy. Exports of EU food products now banned by Russia were worth €5.1 billion ($6.5 billion) last year, or 4.2 percent of the bloc’s agricultural shipments, according to the European Commission. Food prices now are falling: According to Copa-Cogeca, one of Europe’s largest farmers’ unions, prices for Dutch cucumbers and tomatoes dropped 80 percent and the price of apples in the Czech Republic dropped by 70 percent after the ban went into effect. Falling food prices seem now to be the biggest downward influence on already critically low Euro area inflation.

The Economist’s Buttonwood is surprised by Russia’s retaliatory ban on food imports from Western countries. As Russia will presumably still have to buy these goods on the world market, world market demand will remain unchanged, with just some pairings of producers and consumers changed. The problem is that food is a fungible good and one demand market can simply be substituted by another as long as aggregate demand remains the same. The same holds for export embargoes to selected countries: Sanctions may just create intermediary traders (also see this older piece by Johny Tamny on trade embargoes and fungible goods). Only if a good is not fungible – like gas, which could not easily be replaced – do trade sanctions seem potentially more effective. But Russia’s dependency on gas revenues makes this another possible own goal.

Coordination issues and smart sanctions

Daniel Drezner (HT Tyler Cowen) empirically investigates whether cooperation between multiple sanctioning states improves the success of sanctions – and finds that it does not. His evidence suggests that the lack of success of cooperation in sanctioning is due to enforcement problems, not bargaining difficulties between would-be sanctioning countries. After an agreement between cooperating sanctioners is reached, these equilibria seem not to be robust as incentives of cooperating parties may change, destabilising equilibria dependent on cooperation. If sanctions are supported by an international organisation, however, the success probability of cooperative sanctions is higher.

Erik Voeten advances the argument that “smart sanctions”, targeting the elites of the target country instead of its broad population, may fail because restricting access to finance and financial services in other countries, including blocking access to assets, could tie elites even more strongly to their regimes.  This argument is similar to one often voiced against the International Criminal Court, namely that it restricts exit options for elites. Of course, the normative appeal of smart sanctions as well as their possible deterrence effect should also be weighed in the argument, but when ways to undermine regimes are sought (the author wrote on the issue of Syria), positive incentives such as rewards for defectors should also be considered as another option.

Wed, 17 Sep 2014 09:07:32 +0100
<![CDATA[Do it yourself European Unemployment Insurance]]> http://www.bruegel.org/nc/blog/detail/article/1434-do-it-yourself-european-unemployment-insurance/ blog1434

In their Policy Brief prepared for the September 13 informal meeting of EU finance ministers (ECOFIN), Claeys, Darvas and Wolff (2014) discuss the benefits, drawbacks and possible designs for a potential European Unemployment Insurance (EUI) scheme. They end their discussion by formulating 10 key decisions that policy makers would have to take before implementing such a scheme.

To illustrate this Policy Brief, this blog post proposes to give the reader the opportunity to make the main decisions on the design of an EUI scheme. Given that one of the main purposes of an EUI scheme would be to act as a stabilization mechanism by providing resources to the countries with increasing unemployment rates, these simulations allow you to see what would have been the potential outcomes of such a scheme if it had existed since 2000 depending on the various design parameters.

The decisions to take concerning the parameters are the following:

  1. At what level should the scheme be implemented: at the European Union (EU) or at Euro Area (EA) level?
  2. Should it be an ‘all-time” basic unemployment insurance (that would replace partly or fully national schemes) or a ‘catastrophic’ one (which would only be activated when there is a significant increase in the unemployment rate in a country)? In the case of a catastrophic insurance, what should be the trigger to activate it?
  3. Should the scheme try to be neutral over the cycle for each country (thanks to differentiated contribution rates across countries) or should it allow potential persistent transfers (with a single rate across the EU/EA)?
  4. What should be the replacement rate (i.e the share of the previous wage received as unemployment benefit)?

In order to simplify the choices for the non-expert reader, another possibility offered by our simulation tool is to run simulations by choosing directly the objectives you want the scheme to achieve rather than the exact parameters:

  1. Again, you will have to choose at what level the scheme should be implemented:  European Union or Euro Area?
  2. What should be the degree of stabilization achieved by the scheme? Do you want it to deal with all shocks, just large shocks, or only very large shocks?
  3. What should be the degree of solidarity achieved by the scheme?  Do you want a scheme that minimizes lasting transfers across countries or not?

The table resulting from your design choices displays net payments as a percentage of GDP that would have been received by the countries from an EUI scheme since 2000. Positive numbers, in green, represent net payments to the countries, whereas negative numbers, in red, represent net contributions to the EUI scheme. The last 4 rows of the table indicate annual and cumulative cash positions of the scheme for each year (in % of GDP and in € billions).  Positive numbers, in green, represent positive cash positions of the scheme that could be saved for the future, whereas negative numbers, in red, represent negative cash positions that would have to be financed by borrowing in the capital markets.

Sat, 13 Sep 2014 13:32:49 +0100
<![CDATA[Benefits and drawbacks of European Unemployment Insurance]]> http://www.bruegel.org/publications/publication-detail/publication/847-benefits-and-drawbacks-of-european-unemployment-insurance/ publ847

Prepared for the ECOFIN in Milan on 13 September 2014.

See also interactive simulation to design your own EUI scheme.

The issue: Unemployment in Europe has increased to high levels and economic growth has remained subdued. A debate on additional policy instruments to address the situation is therefore warranted. Fiscal stabilisation mechanisms have not provided adequate fiscal stabilisation during the crisis in some countries nor in the euro area as a whole. Different preferences and historical developments mean that national labour markets are differently organised, which sometimes hinders the efficient working of the monetary union. European Unemployment Insurance (EUI) has been proposed as a measure to contribute to fiscal policy management and improve labour markets.

Policy challenge: European Unemployment Insurance is one option for stabilising country specific economic cycles thanks to risk sharing, but it would not substantively influence the area-wide fiscal stance. Moral hazard problems are significant but can be reduced by a less generous design and more harmonisation of labour markets. The former would, however, reducethe scheme’s stabilisation effect. Reform and harmonisation of labour markets would improve the functioning of monetary union, but would undermine long-standing preferences and ideals which the subsidiarity principle guarantees. The complexity of the design and implementation of EUI and the question of the rightlegal base suggests that it would be a long-term project and not a measure to help quickly the millions currently unemployed.

Benefits and drawback of European Unemployment Insurance (English)
Sat, 13 Sep 2014 12:03:23 +0100
<![CDATA[The comprehensive assessment, the ECBs´ new role and limits of a common supervision in the EU]]> http://www.bruegel.org/nc/events/event-detail/event/461-the-comprehensive-assessment-the-ecbs-new-role-and-limits-of-a-common-supervision-in-the-eu/ even461

We are happy to announce the conference “The Comprehensive Assessement, the New Supervisory Role of the European Central Bank and Limits of a Common Supervision in the EU”, to be held on Thursday, October 30, 2014 at Auditorium Friedrichstrasse in Berlin.

The conference topic relates to the new supervisory architecture in the Euro area. The European Central Bank will take over the direct supervision of big European banks beginning November and has been conducting an asset quality review in combination with stresstests. The outcome of the Comprehensive Assessment will have far reaching implications, as regards financial stability, credibility of the ECB, economic recovery in EU member states as well as on burden sharing. We will also shed ligth on limits of a common supervision in the EU, tackling political issues and constraints in shaping a workable Banking Union. We will end with a panel on the future of the financial system and unfinished reforms debating also constituents of a fair financial order in the EU.

We will discuss these topics intensely, with a public interest and scientific stance. In the discussions we will bring together regulators, politicians, academics and industry experts. We think that having a public debate on these issues is very reasonable and also necessary.

Note that the programme of this event is under construction and more information will be available shortly


Confirmed keynote speakers:

Keynote I Thomas Hoenig, Vice Chairman, FDIC

Keynote II Erkki Liikanen, Governor, Bank of Finland

Confirmed panel participants:

Prof. Arnoud Boot (University of Amsterdam and ESRB Scientific Advisory Committee), Constanza Bufalini (Head of Europ and Regulatory Affairs, Unicredit), Matthias Dewatripont (National Bank of Belgium) Andrea Enria (Chairperson, European Banking Authority), Sven Giegold (MEP/The Greens), Andrew Gracie (Executive Director Resolution, Bank of England), Dr. Dierk Hirschel (Head of the Economic Policy Division, Verdi Trade Union), Dr. Levin Holle (Federal Ministry of Finance), Aerdt Houben (Director Financial Stability, Dutch National Bank), Dr. Elke König (President, Federal Financial Supervisory Authority), Sylvie Matherat (Global Head of Gov and Regulatory Affairs, Deutsche Bank), Paulina Przewoska (Senior Policy Analyst, Finance Watch), Prof. Lucrezia Reichlin (London Business School), Dr. Natacha Valla (Deputy Director, CEPII), Nicolas Veron (Senior Fellow, Bruegel and Peterson Institute for International Economics), Prof. Jose Vinals (Director Monetary and Capital Markets Dep, International Monetary Fund), Jeromin Zettelmeyer (Director General for Economic Policy, Federal Ministry for Economic Affairs) as well as the heads of the scientific co-organizers Prof. Henrik Enderlein (Jacques Delors Institut Berlin), Prof. Marcel Fratzscher (DIW Berlin), Prof. Jörg Rocholl (ESMT) and Dr. Guntram Wolff (Bruegel).

Practical details

  • Time: 30 October 2014, 8.00-18.00.
  • Contact: conference(at)frsn.de

Conference partners are the Financial Risk and Stability Network (organizer), the Brussels Think Tank Bruegel, the German Institute for Economic Research DIW Berlin, the ESMT European School of Management and Technology and the Jacques Delors Institut Berlin (scientific co-organizers).

Fri, 12 Sep 2014 10:29:16 +0100
<![CDATA[11th Asia Europe Economic Forum]]> http://www.bruegel.org/nc/events/event-detail/event/460-11th-asia-europe-economic-forum/ even460

We are pleased to announce that the 11th AEEF conferencewill take place on 5-6 December 2014 in Tokyo, Japan. The event is jointly organised by this year’s host Asian Development Bank Institute (ADBI), Chinese Academy of Social Sciences (CASS), and Korea University (CEAS) on the Asian side and Bertelsmann Stiftung, Bruegel and Centre d'Etudes Prospectives et d'Informations Internationales (CEPII) on the European side. The event will bring together a range of high-ranking participants, including active and former senior policymakers, recognized academic experts and private sector specialists.

The programme of this evet is still under construction. More information will be available on this page shortly.

About AEEF

With a growing recognition for the need to diversify and consolidate the linkage between economists and practitioners from Asia and Europe, five institutions from Asia and Europe agreed in 2006 to establish an Asia Europe Economic Forum (AEEF) to serve as a high level forum, giving Asian and European policy experts an occasion for in-depth research-based exchanges on global issues of mutual interest.

Thu, 11 Sep 2014 15:37:32 +0100
<![CDATA[Mobility of students in European higher education]]> http://www.bruegel.org/nc/events/event-detail/event/459-mobility-of-students-in-european-higher-education/ even459

Education is central to the growth agenda in Europe. Knowledge and skills are key drivers of productivity growth in advanced economies. Enrolment in tertiary education has increased in recent years, especially in newer EU member countries. The earning premiums for people with higher education are significant.

However, education is not just about the level of attainment, but also about the skills acquired and whether those capabilities are adequate for the job market. Increasing youth unemployment and the growing skill and job gaps in Europe unfortunately suggests that it is not the case. In that regard, mobility can play an important role, as one of a set of measures, by expanding the experiences and perspectives of young people and broadening their mindset about future opportunities.

The importance of both higher education and mobility are reflected in EU policy. Currently, only 10% of students in higher education are mobile. Under the Bologna Process agreement, the mobility of at least 20% of higher-education students should complete some of their studies in another country by 2020.

In this session, we will discuss the opportunities and challenges of mobility for students in higher education as part of the broader issue of addressing the skills and employment gaps in Europe. A recent EIF working paper, “Financing the Mobility of Students in European Higher Education” will be shared which provides an overview of the importance and tendencies of financing higher education and students’ mobility. The analysis investigates problems stemming from unequal access to financing of education and associated costs of mobility and the necessity of policies to correct existing market failures. These and other EU-level policies will be discussed.

The discussion will be moderated by Karen Wilson, Senior Fellow at Bruegel. The meeting will start promptly at 12:00 and run until 13:30. A light lunch will be served until 14:00 to provide time for further discussion and networking.


  • Michael Gaebel, Head of Higher Education Policy Unit, European University Association (EUA)
  • Marjut Santoni, Deputy Chief Executive, European Investment Fund
  • Chair: Karen Wilson, Senior Fellow, Bruegel

About the speakers

Michael Gaebel is the head of the Higher Education Policy Unit, at the European University Association (EUA). The Unit focuses on issues related to higher education learning and teaching, including the Bologna Process, lifelong learning, e-learning and MOOCs, internationalisation and global dialogue. When he first joined the organisation in 2006, he was in charge of developing EUA’s international strategy and global exchange and cooperation. Before joining EUA, Michael worked for more than a decade in higher education cooperation and development in the Middle East, the former Soviet Union and Asia. From 2002 to 2006, he was the European Co-Director of the ASEAN-EU University Network Programme (AUNP) in Bangkok. Michael graduated with a Masters in Middle Eastern Studies and German Literature and Linguistics from the Freie University Berlin, Germany.

Marjut Santoni has been the Deputy Chief Executive of the EIF since 1 August 2013. Previously, she was in the European Commission, Directorate General Economic and Financial Affairs (1996 - July 2013) holding various roles in the field of SME and infrastructure financing as well as sovereign lending. Prior to joining EIF, Marjut Santoni dealt with the strategic design and implementation of financial instruments for infrastructure and climate change policies, which also included the management of the Euratom loan facility in the nuclear sector. From 2008 until 2010 the balance of payments lending to non-euro countries or macro financial assistance lending to third countries also fell under her responsibilities. From 2001 until June 2007, she was advisor to Commission’s members on the EIF Board of Directors. Earlier, she was in the Internal audit department of Dresdner Bank in Frankfurt am Main (1992-1995) and before that Loan officer in the credit department of Dresdner Bank, Cologne and Leipzig (1991-1992).

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Tuesday, 14 October 2014, 12.00-14.00. Lunch will be served at 13.30.
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Thu, 11 Sep 2014 11:24:00 +0100
<![CDATA[To restructure or not? Managing the euro area debt crisis]]> http://www.bruegel.org/nc/events/event-detail/event/458-to-restructure-or-not-managing-the-euro-area-debt-crisis/ even458

Will debt restructuring save Europe from economic stagnation?

William R. Cline’s new book, Managing the euro area debt crisis, addresses this question. The author – a Senior Fellow at the Peterson Institute of International Economics - traces the history of the recession and makes projections of future debt sustainability. The book offers a detailed analysis of the mistakes, successes and options for Europe as it struggles to overcome its worst economic disaster since World War II.

At Bruegel’s Talk Cline will present his findings and engage in a discussion with the audience. To attend, please register through the online form below. We look forward to welcoming you on the 24th September at 12:45pm. Lunch will be provided.


  • William R. Cline, Senior Fellow at the Peterson Institute for International Economics
  • Discussant: Zsolt Darvas, Senior Fellow at Bruegel
  • Chair: Guntram Wolff, Director of Bruegel

About the speakers

William R. Cline has been a senior fellow at the Peterson Institute for International Economics since 1981. During 1996–2001 while on leave from the Institute, Dr. Cline was deputy managing director and chief economist of the Institute of International Finance (IIF) in Washington, DC. From 2002 through 2011 he held a joint appointment with the Peterson Institute and the Center for Global Development, where he is currently senior fellow emeritus. Before joining the Peterson Institute, he was senior fellow, the Brookings Institution (1973–81); deputy director of development and trade research, office of the assistant secretary for international affairs, US Treasury Department (1971–73); Ford Foundation visiting professor in Brazil (1970–71); and lecturer and assistant professor of economics at Princeton University (1967–70). He graduated summa cum laude from Princeton University in 1963, and received his MA (1964) and PhD (1969) in economics from Yale University.  He is the author of 25 books, including Managing the Euro Area Debt Crisis (2014); Financial Globalization, Economic Growth, and the Crisis of 2007-09 (2010); The United States as a Debtor Nation (2005); Trade Policy and Global Poverty (2004); International Debt Reexamined (1995); and The Economics of Global Warming (1992).

Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also Research Fellow at the Institute of Economics of the Hungarian Academy of Sciences and Associate Professor at the Corvinus University of Budapest.

From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics and but also in other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

Practical details

  • Venue: Bruegel, Rue de la Charité 33, 1210 Brussels
  • Time: Wednesday, 24 September 2014, 12:45-14.30. A light lunch will be served from 12:45 to 13:00.
  • Contact: Matilda Sevón, Events Manager - registrations@bruegel.org

Thu, 11 Sep 2014 09:56:52 +0100
<![CDATA[Chart: Alibaba IPO underlines rise of Chinese private sector]]> http://www.bruegel.org/nc/blog/detail/article/1432-chart-alibaba-ipo-underlines-rise-of-chinese-private-sector/ blog1432

On Friday, September 5, Alibaba Group filed details about its forthcoming Initial Public Offering, suggesting a mid-range valuation of 155 billion US dollars. This would make the Hangzhou-based web retailer the most valuable listed private-sector company headquartered on the Chinese mainland, ahead of its Shenzhen-based online rival Tencent Holdings.

For all the fashionable talk of China’s dominant state capitalism and “Guo Jin Min Tui”, the numbers tell a slightly different story

Alibaba’s coming of age underlines a continuous trend of the last half-decade. For all the fashionable talk of China’s dominant state capitalism and “Guo Jin Min Tui” (“the state advances, the private sector retreats”), the numbers tell a slightly different story, as illustrated by the following chart:

This chart shows the shares of four categories of companies in the aggregate market value of the largest listed Chinese firms, namely those that feature in the FT Global 500 list of the world’s 500 largest listed companies by market capitalization which is regularly compiled by the Financial Times. Companies are included irrespective of the location of their main stock market listing, whether Hong Kong, Shenzhen, Shanghai or, in Alibaba’s case, New York. The three main groups are state-owned enterprises (SOEs) of the People’s Republic of China (PRC), such as Petrochina, Industrial & Commercial Bank of China, or China Mobile; companies from Hong Kong and Macao (mostly private-sector but also including municipal companies such as MTR, which operates the profitable Hong Kong metro system), such as Hutchison Whampoa, AIA Insurance, or Sands China; and private-sector companies from the mainland, such as Tencent or Ping An. A smaller fourth group includes banks with hybrid ownership of state and private-sector shareholders (with a public-sector majority), such as China Merchants, Industrial Bank, or Shanghai Pudong Development Bank.

The numbers are as of December 31 of each year except in 2014, where the ranking as of June 30 is used. In the right-hand bar, Alibaba is added to the list on June 30 with the notional market value of USD155bn. This inclusion results in a corresponding expansion of the relative share of the mainland private sector. (The other companies’ market values were not adjusted from their June 30 amount, but this would not materially change the overall picture.)

Alibaba’s IPO is likely to be remembered as the symbolic moment of a momentous transformation of the Chinese corporate landscape

The chart suggests three observations. First, with about two-thirds of the total, the PRC’s government retains a firm control of the “commanding heights” of Chinese business, as has been plain since the massive IPOs of state-owned enterprises in the mid-2000s. Second, however, this measure suggests a continuous erosion of state control for the past half-decade, as new entrants such as Tencent and Alibaba gain ground – and as private firms in Hong Kong and Macao have also comparatively recovered somewhat from their low point of the late 2000s. Third, and for the first time with Alibaba’s addition to the mix, large private-sector companies from the mainland collectively weigh as much as their peers from Hong Kong and Macao when measured by aggregate value.

As always in China, one must keep in mind that the distinction between public and private sector remains somewhat fuzzy. Ultimate ownership of private-sector firms is often unclear, and the Communist Party of China retains ways to influence the strategy and behaviour of many nominally private-sector companies. Nevertheless, the gradual rise of private-sector companies as compared with the state-owned giants is too continuous to be ignored. Alibaba’s IPO is likely to be remembered as the symbolic moment of this momentous transformation of the Chinese corporate landscape.

Thu, 11 Sep 2014 07:00:56 +0100
<![CDATA[Elements of Europe's energy union]]> http://www.bruegel.org/publications/publication-detail/publication/846-elements-of-europes-energy-union/ publ846

Read Georg Zachmann's Memos to the new Commissioner for Energy and the new Commissioner for Climate Action

The issue: European Union energy policy is guided by three objectives: sustainability, security of supply and competitiveness. To meet its goals in these areas, the EU is updating its energy strategy with new targets for 2030. The starting point for this is the assessment of the previous EU climate and energy package, at the centre of which were the 20-20-20 targets for 2020. Although the EU is largely on track to meet these targets, EU energy policy is generally not perceived as a success. Recent events have undermined some of the assumptions on which the 2020 package was built, and the policies for achieving the 2020 targets – although at first sight effective – are far from efficient.

Policy challenge: ;To meet the EU's objectives for emissions, electricity supply and gas security of supply, well-designed European markets could provide better results at lower cost than uncoordinated national approaches. In other areas – such as energy efficiency and supporting innovation – markets alone might not be enough. Europe should thus rethink its quantitative headline targets for 2030.The proposed 40 percent decarbonisationtarget is in line with a stronger emission allowance market, but the target for renewables should be defined in terms of innovation rather than deployment, and the energy-efficiency target should be defined in terms of encouraged energy and cost savings, not the amount of energy consumed in a certain period.


The European Union is largely on track to meet the so-called 20-20-20 climate and energy targets1, which were seen as quite ambitious when they were adopted in 2009. EU final energy consumption fell by 7 percent from 2005-11 (Figure 1), energy production from renewable sources increased by 4.2 percentage points from 2005-12 (Figure 1) and greenhouse gas emissions dropped by 13 percent in the same period (Figure 2). By 2012, emissions were already 19.2 percent below the 1990 level, leaving just a small gap before the EU meets the 20 percent reduction target for 20202.

However, EU energy policy is generally not perceived as a success. Recent events have undermined some of the assumptions on which the 2020 package was built, and the policies for achieving the 2020 targets – although at first sight effective – are far from efficient.

In terms of supply security, the Ukraine crisis has shown that energy efficiency and increased deployment of renewables have been so far insufficient to eliminate Europe’s reliance on Russian gas.

In terms of sustainability, other major emitters have not wholeheartedly followed the EU lead to cut emissions. New fossil energy resources make it more difficult to believe that such a global agreement is feasible because it would imply not using most of the fossil-fuel bounty. So the global impact of Europe's emission reductions will be close to insignificant, while Europe’s decarbonisation strategy turned out less ambitious than originally claimed, because the recession (and some other factors) supplied much of the promised emissions reduction.

In terms of competitiveness, various developments have made the energy mix envisaged in 2008 relatively more expensive. The Fukushima accident resulted in the closure of cheap nuclear plants while increasing the already high cost of new nuclear. It also became clear that carbon capture and storage technology3 is unlikely to become competitive any time soon relative to other low-carbon electricity generation technologies. Consequently, decarbonisation in Europe might have to rely even more on variable renewables, which is likely to drive up the cost of the transition. Meanwhile, the US shale gas boom caused a widening transatlantic energy price gap. All this happened during the EU’s most severe economic crisis, and shifted the focus of policymakers from long-term industrial policy projects such as developing renewables, to defending the competitiveness of sectors such as energy-intensive steel plants.

In addition, the 2020 climate and energy policies have inherent problems. Decarbonisation has been mainly delivered by a combination of economic downturn and renewables policy (CDC, 2014). Consequently, the EU emissions trading system (ETS) – which would have been able to identify much cheaper abatement options – was barely used. Furthermore, most investments in power plants, networks and consumption have been based on national remuneration schemes, undermining the internal energy market and failing to deliver a well-balanced European energy system that could support the climate and energy policy objectives.

Nevertheless, the EU package for 2020 was a valid hedging strategy in a world of scarce and expensive energy. It addressed the questions of its time, and could have been quite effective in a scenario that saw renewable energy quickly become indispensable in all parts of the world.

Now, European Commission proposals for 2030 foresee an emissions reduction of 40 percent and a 27 percent share of renewables (European Commission, 2014). There is also some momentum for a binding energy efficiency target that could be set at 30 percent. The differentiated increase in the three targets indicates a change in priorities:

  • The 40 percent emissions reduction relative to 1990 is a compromise. It is an ambitious unilateral target as long as there is no global agreement. It provides a signal for low-carbon investment and allows the political decarbonisation instruments – such as emission trading – to be boosted without excessive cost. It therefore keeps the door to a more aggressive decarbonisation policy open, should other major economies join the battle. But the target is less than optimal to deliver Europe's share of the global 2050 objective4.
  • The 27 percent renewables target is essentially insignificant5. Its main justification is to form the legal basis for national renewable support schemes that might otherwise be challenged for undermining the internal energy market.
  • A 30 percent energy efficiency target would be an acknowledgement of the importance of efficiency to achieve the energy policy objectives. But the case for the chosen metric and the corresponding number is weaker than that for the other two targets.

The proposed quantitative targets testify to the prioritisation within EU energy policy – 40-30-27 instead of 20-20-20 – but are not a consistent strategy to respond to the changing energy policy challenges6. The strategic task is to translate the prioritisation of objectives and the interaction between instruments into a consistent policy framework.

From a strategic perspective, it is important to note that it is impossible to determine which menu of investments is most conducive to achieve security of supply, sustainability and competitiveness of energy supply. So the main role of policy is to develop reliable frameworks that will encourage the investment that will enable stable energy services at the lowest direct and external cost.

A well-functioning internal energy market is the core of such a framework, complemented by an equally well-functioning European market for emission allowances and a market for supply security. Europe also needs an ambitious framework to speed up low-carbon innovation. The final element is a system to make energy efficiency policies at different levels of government comparable in order to come up with the best mix.

Revamping the market

A functioning internal energy market in which companies and technologies freely compete to provide the best services at the lowest price, while respecting societal and environmental constraints, could be hugely welfare enhancing. Despite three EU legal packages, neither the provisioning of gas nor of electricity is organised in such markets. In electricity, the attempt to create a European market by coupling national day-ahead markets proved only partially successful. While national prices have somewhat converged, no internal electricity market has developed because important parts of the electricity sector are still subject to widely differing national rules and arrangements7. Investment decisions in the electricity sector are thus based on national policies, not European markets. This non-cooperation is costly, and the corresponding welfare loss is set to increase with the rising shares of renewables in the power system8.

A European electricity market will not spontaneously evolve based on the enforcement of some first principles. Functioning electricity markets need to be designed: products need to be defined and schemes for their remuneration need to be engineered. An efficient market design needs to include all parts of the relevant system. It must ensure efficient incentives for trade-offs such as demand response versus storage, transmission lines versus decentralised generation or solar versus lignite. And to be efficient, this design needs to be European.

The first step is to ensure that national energy regulations are not used for domestic industrial or social policy. Regulated final consumer tariffs in France below what the market would offer, the same electricity price in south and north Germany despite a lack of interconnection, or paying premiums to domestic plants – which is essentially what capacity mechanisms and renewables support schemes do – are all inconsistent with a functioning internal market.

This implies that the fuel mix prerogative of the member states should be restricted to preferences against certain technologies, such as ‘no nuclear in Germany’ or ‘no shale gas in France’. While restricting certain technologies, if done transparently and predictably, would be consistent with a functioning European market, there can be no European market if member states prescribe certain fuel mixes, such as ‘more than 40 percent of electricity from German renewables in Germany’ or ‘more than 80 percent of Polish electricity from Polish coal’.

Given the substantial distributive effects9, a European energy market requires accountable governance. Market designs need to be regularly adapted to changing circumstances, so the governance structure needs to be institutionalised. But, the European Commission has neither been given the authority to strike a deal between vested interests, nor does it possess the manpower for such a complex task10. Consequently, the Commission relies on selected stakeholders to negotiate compromises over individual issues11.

To develop a truly functioning internal market, the Commission needs to prepare a fourth legal package outlining the European energy market framework. This should not shy away from curtailing the role of national energy policymaking. It should propose one or several generic market designs. The European Parliament and Council should then decide which of those generic designs should be developed further. Because of the complexity, the substantial information asymmetries between stakeholders and the significant redistributive effects, this task of developing a market model should be entrusted to a well-staffed and accountable institution that will also be responsible for the ongoing implementation of the design12 – for example, the Agency for the Cooperation of European Regulators (ACER). This would, however, require resources matching its responsibility13 and an overhaul of the decision-making process. The final design would then be ratified by the European Parliament and Council.

Creating a functioning internal energy market would be a major shift that will not be achieved through smooth convergence of national markets. The alternative would be to return to a system of more-or-less managed national electricity systems – with some unreliable cross-border exchanges of energy. This would not only make the systems less efficient. It will also make national security of supply more costly, and deployment of renewables beyond a certain level prohibitively expensive.

Re-establishing the ETS

The ETS covers most carbon-emitting industries and will run indefinitely, with a shrinking annual supply of allowances. It is an effective and efficient tool to mitigate emissions14.

But, the price of ETS allowances has collapsed because of an oversupply15 and the undermining of the system’s credibility. The risk in these developments is that the ETS gets replaced by less-efficient national, sectoral and time-inconsistent measures. A revamp is therefore important to incentivise the use of current low-carbon alternatives (for example burning gas instead of coal) and to ensure low-carbon investment.

The European Commission proposal to revamp the ETS is (1) to increase the speed by which the annual allocation of allowances are curtailed from 1.74 percent to 2.2 percent every year after 202017 and (2) to introduce a ‘market stability reserve’ through which any surplus of allowances above a certain level will be removed from the market, and reintroduced when the surplus falls below a certain level.

Steeper reduction of annual allowance allocations after 2020 is a sensible step to ensure that Europe plays its part in the containment of global warming. There is however a risk that the sectors covered by the ETS could fall out of step with the emission reductions in sectors that do not fall under the ETS, such as transport and heating. For example, electricity for electric vehicles and heat pumps falls under the ETS, while combustion-engine cars and oil heating do not. The most elegant solution to avoid different carbon prices for different technologies would be to extend the scope of the ETS to all relevant sectors18.

The Commission's proposed ‘market stability reserve’ is intended to avoid politically motivated intervention in the market. But the use and workability of such a mechanism are highly disputed19.

A more promising way to effectively shield the ETS from political interference would be to ensure that future policymakers that decide to undermine the ETS have to compensate companies that invested based on the claims made by policymakers today that the ETS is stable.

This could be organised through private contracts between low-carbon investors and the public sector. A public bank could offer contracts that will pay in the future any positive difference between the actual carbon price and a target level20. Low-carbon investors would bid to acquire such contracts to hedge their investments. This would produce three benefits. First, the public bank would be able to collect money upfront (a sort of insurance premium) and make a profit if a sufficiently tight climate policy is maintained. Second, the private investor significantly reduces its exposure to the – political – carbon market and hence accepts longer pay-back times for its investments. This would unlock long-term investment that is currently too risky. Third and most importantly, public budgets would be significantly exposed to the functioning of the ETS. If future policymakers take decisions that increase the number of available allowances, they might be called back by their treasuries because this would activate the guarantees pledged to investors. This would serve as a much more credible commitment to preserve the integrity of the ETS.

Supply security

The EU's perceived vulnerability to a reduction in gas (and oil) supplies from Russia in the context of the Ukrainian crisis has put supply security back on the agenda21.

Security of gas supply is not primarily about reducing import dependency or increasing Europe’s negotiating power with foreign suppliers. Rather, it is about maintaining unused alternatives that could be tapped into for an indefinite period in case the most important supplier fails for technical or political reasons.

There is a long-standing debate about whether completing the internal market will deliver supply security. A functioning internal market offers the most efficient rationing mechanism during crises and market-based long-term prices in Europe ensure that suppliers have the right incentives to develop new sources. On the other hand, the market – which typically goes for the cheapest available source – might fail to sufficiently diversify. For example, the current market design will not provide infrastructure to connect sources that are in normal circumstances uncompetitive, but which serve as insurance in case the cheapest supplies become unavailable.

But managed approaches, such as providing security via public investment in certain infrastructure, could crowd out private investment if not properly shielded from the market. If, for example, Europe financially supports a pipeline from Turkmenistan, the business case for the corresponding volume from the Levant region might disappear. Furthermore, national managed approaches regularly fail to select the most efficient options (eg demand curtailment, storage, LNG plants, pipelines, domestic production, domestic fuels).

So neither the current market design nor ad-hoc managed approaches appear well suited to efficiently ensure gas supply security. We therefore propose a market for ‘reserve supplies’. Each domestic gas supplier would be legally required to maintain a certain amount of alternative supply, such as 20 percent of the contracted energy demand for three years. Suppliers can meet their obligation through different options such as (i) interruptible contracts with their consumers, (ii) volumes in storage, or (iii) option contracts with other domestic and foreign suppliers. Europe's suppliers would need to make sure that the transport capacities – pipelines and terminals – needed to deliver the corresponding volumes to customers are available. Furthermore, ‘reserve supplies’ could not be met by options involving pivotal suppliers/infrastructure. That is, holding an option for additional supplies from Russia would not qualify as ‘reserve supplies’. To ensure this, pivotal suppliers/infrastructure will have to be identified. In case a supplier finds itself in a situation in which all existing infrastructure is either already used or pivotal, it will have to invest in new infrastructure. Suppliers would only be able to draw on these ‘reserve supplies’ in security crises following an official declaration. This system, the cost of which the domestic suppliers will largely pass through to their customers, should ensure security of supply for all at lowest cost and without undermining the internal market.

Such an approach would obviously have distributive effects. Consumers in well-connected regions that face a very limited risk of supply disruptions will have to pay for ‘their’ share of reserves, which most likely only their less well-connected neighbours might need. But this solidarity will not wash away regional differences arising from different infrastructure endowments because suppliers in areas with less-developed infrastructure will find it more costly to ensure the level of supply security. This is efficient because it provides an incentive against locating the most vulnerable sectors in vulnerable markets. For example, a chemical plant in Cyprus will only get an interruptible contract because no supplier could affordably secure the required reserve capacities.

RES-innovation target

Since the EU 20 percent target for renewables was decided, some of the reasons for investing in renewables have become less urgent. There is less risk that fossil fuels will run out quickly, more reliable suppliers are entering the global energy market22 and a global agreement to mitigate greenhouse gases seems distant. Nevertheless, in the longer-term, issues such as dependence on imports from uncertain sources and rising hydrocarbon costs will return. Most importantly, affordable decarbonisation of the energy sector will require competitive renewable energy sources (RES).

Consequently, the focus of renewables support should shift from a deployment target that encourages the quick roll-out of the cheapest currently renewable technology, to an ambitious innovation target that encourages investment to cut the cost of RES. If successful, an innovation target will be the largest possible contribution of Europe (and its partners) to saving the global climate, and might be instrumental in developing a competitive edge in what will become a major global market23.

It is difficult to establish the optimal size, selection, balance and timing of 'push' and 'pull' measures – for example, public R&D support, or feed-in tariffs to create demand for a new technology. Zachmann et al (2014) indicate that both public support to boost innovation and the timing of instruments matters. It is not massive actual deployment24, but the prospect of deployment that is the carrot for industry to commercialise the technologies developed through publicly-supported R&D. A long-term deployment target – such as the 20 percent for 2020 – is helpful, not least because it incentivises innovation and investment in complementary technologies such as storage or networks. However, the deployment target should be broken down to technology-specific targets and developed as part of an innovation policy that optimally supports a broad portfolio of technologies at different stages of maturity. A revised Strategic Energy Technology Plan25 could form the basis for defining measures and allocating support to technologies.

The current and envisaged renewables policies are not focused on innovation. Europe currently spends on relevant R&D about a hundredth of what it spends on renewables deployment (Figure 3)26. It does not integrate its deployment and R&D policies into a strategic innovation policy and does not coordinate its deployment policies across borders.

Energy efficiency

The key tool to ensure efficient energy usage is confronting all users with market-based price signals. Wasteful usage does not only refer to using more energy to produce a certain good, but also artificially maintaining a specialisation in energy-intensive goods. As Europe should not strive to subsidise labour costs to make the European textile industry competitive with Asia, Europe should not subsidise energy costs to make European aluminium production competitive with the US, especially as defending energy-intensive sectors at all cost locks in high energy consumption and implies that Europe needs to draw on more expensive supplies for all other sectors.

Beyond the issue of prices, the question is if energy efficiency needs to be regulated and if this should be done at European level. The need for regulation is often deduced from the finding that even efficiency measures with positive net present values are not delivered by the market27. As energy efficiency is an issue in virtually all sectors, there is a myriad of existing and proposed measures. So, energy efficiency policies can be welfare enhancing, but their efficiency depends on their design.

The same holds for the question of subsidiarity. The obvious argument for a European energy efficiency policy is its interdependence with the single market. National product energy-efficiency standards, national energy-efficiency schemes for energy companies or even distorting energy taxes could weigh on the single market’s integrity. On the other hand, national regulatory environments and structures for important energy consuming sectors (eg buildings) differ markedly. This might make a one-size-fits-all European energy efficiency policy very inefficient in these fields.

So the somewhat generic conclusion on energy efficiency is that individual market failures should be addressed by the most efficient measures at the right level of government. For the broad portfolio of regional, national and European policies that is necessary, a binding EU 2030 energy consumption target is not well suited. It neither addresses who has to deliver nor does it properly take economic developments into account. To benchmark energy-efficiency policies we would suggest a bottom-up approach. Based on the ex-post evaluation of each individual energy efficiency policy, the incentivised demand reduction and the corresponding policy cost should be reported. For example, the energy-efficiency loans in Germany in 2011 had an estimated cost of about €1 billion and encouraged annual savings of 0.1 million tonnes of oil equivalent (Mtoe).

Two targets would then serve to benchmark the success of the overall policy framework up to 2030: one for total incentivised energy savings (eg more than 400 Mtoe of induced energy savings between 2020 and 2030) and one for total energy efficiency policy cost (eg less than €100 billion). This target might be broken down by member state (or even to sub-national level) and even made binding.


Policy and market failures in the energy sector are common. There is too little energy saving, too little investment in security and innovation and emissions are too high. Governments tend to over-invest in big supply projects and use energy-sector regulation for other national policy purposes, preferring to solve the issues of the day instead of addressing the structural problems.

The European 2030 framework should strive to address the market failures without falling for the government failures. Essential elements will be well-designed European markets for emissions, electricity supply and gas security of supply. Better policy frameworks are also needed to encourage energy efficiency and innovation in low-carbon energy technologies.

This would be a radical step-change in European energy and climate policy, but so were the 2020 targets. But in planning for 2030, Europe cannot avoid substantially revising the governance of its energy sector, without compromising on security of supply, sustainability and competitiveness.

Research assistance from Marco Testoni is gratefully acknowledged. The author would also like to thank those who provided valuable comments on an earlier draft. The research underpinning this paper benefited from support from the Simpatic project (EU Seventh Framework Programme, grant agreement 290597, www.simpatic.eu). All notes and full references are available in the .pdf.

Elements of Europe's energy union (English)
Wed, 10 Sep 2014 13:53:20 +0100
<![CDATA[Fact: The World still fears fiscal crises (and much else)]]> http://www.bruegel.org/nc/blog/detail/article/1431-fact-the-world-still-fears-fiscal-crises-and-much-else/ blog1431

Last week, the World Economic Forum (WEF) published its Global Risk Report for 2014/15. The report is an exercise conducted by the WEF since 2006, but this year’s issue is particularly interesting because it adopts an historical perspective, offering very interesting insights on how the world has changed in respondents’ eyes and concerns.

The Global Competitiveness Report (GRR) assesses risks that are global in nature and have the potential to cause significant negative impact across entire countries and industries if they take place. A “global risk” is defined - for the purpose of the GRR’s exercise) - as “an occurrence that causes significant negative impact for several countries and industries over a time frame of up to 10 years”. 31 such risks are identified in the report and grouped under five categories – economic, environmental, geopolitical, societal and technological.

  • Economic Risks include fiscal and liquidity crises, failure of a major financial mechanism or institution, oil-price shocks, chronic unemployment and failure of physical infrastructure on which economic activity depends.
  • Environmental Risks encompass both natural disasters and man-made risks such as collapsing ecosystems, freshwater shortages, nuclear accidents and failure to mitigate or adapt to climate change.
  • Geopolitical Risks cover politics, diplomacy, conflict, crime and global governance. These risks range from terrorism, disputes over resources and war to governance being undermined by corruption, organized crime and illicit trade.
  • Societal Risks are intended to capture risks related to social stability – such as severe income disparities, food crises and dysfunctional cities – and public health, such as pandemics, antibiotic-resistant bacteria and the rising burden of chronic disease.
  • Technological Risks covers major risks related to the centrality of information and communication technologies to individuals, businesses and governments (such as cyber attacks, infrastructure disruptions and data loss).

The objective of the report is to map the risks - by means of a survey - according to the level of concern they arouse, their likelihood and their potential impact. Additionally, the GRR also looks at the perception of interconnections between risks and the strength of their potential systematicity. The survey for this edition was conducted between October and November 2013 among respondents from business, government, academia and non-governmental and international organizations.

Note: From a list of 31 risks, survey respondents were asked to identify the five they are most concerned about.

Table 1 show the top-10 of risks for respondents in the GCR 204/15. Economic issues dominate the lists. The possibility of fiscal crises in key countries appears to be the concern that kept everybody awake at night, followed by post-recession structurally high unemployment or underemployment and concerns of severe income disparity. These concerns appear to be well-substantiated if one looks at the current situation in the euro area (even though the GCR unfortunately does not give a country or region breakdown of the responses).  

Environmental concerns are also high-ranked, with failure to mitigate/adapt to climate change rank in the top-5 as well as water crises, whereas geopolitical risks are low in the ranking. This is most likely due to the timing of the survey (October-November 2013), which was conducted before the escalation in the Ukrainian crisis and the conflicts in the Middle East (which were in the top-5 back in 2008). Health issues - which disappeared from the list in 2011 - are also likely to come back next year, as the world struggles to manage the Ebola outbreak in Africa.

Figures below show the ranking of risks in terms of both likelihood and impact separately, for 2014 as well as for the previous 7 years. It has to be stressed that the exact definition of these risks has been changed by the WEF over the years, but the insights are many and interesting.

Economic risks are recurrently perceived as highly likely risks and as those having the strongest impact

Economic risks are recurrently perceived as highly likely risks and as those having the strongest impact. But it is very interesting to see how the economic concerns have changed over the years, following the developments in the global financial crisis first and of the euro sovereign crisis later. In 2008-10, the most dangerous economic risk in the perception of respondents was most naturally asset price collapse. In 2011, following the emergence of a sovereign crisis in Europe, fiscal crises climbed on top of the list. As the sovereign-banking troubles intensified during 2011/12, the risk of major systemic financial failures gained relevance. Now, as the emergency phase of the crisis is over but we are left to face its legacy of high debt burdens and economic slack, the focus has shifted to fiscal crises and structurally high unemployment as the high impact economic risks.

It is also interesting to see that the risk of growing income disparity has been ranking first in terms of likelihood since 2012 (well before the whole Piketty’s debate started) but does not seem to be considered a high-impact risk (even though the question asked explicitly clarifies that “impact” is “to be interpreted in a broad sense beyond just economic consequences”).

The risk of a major systemic financial failure appears less pressing than it was two years ago, but it still remains in the top-10, perhaps signalling that at the time the survey was conducted there was still significant uncertainty about the ongoing process of financial sector assessments in Europe and about banks’ possible capital needs in the near future (as we mentioned here).

Note: Global risks may not be strictly comparable across years, as definitions and the set of global risks have been revised with new issues having emerged in the 10-years horizon. For example, cyber attacks, income disparity and unemployment entered the set of global risks in 2012. Some global risks were reclassified: water supply crisis and income disparity were reclassified as environmental and societal risks, respectively, in 2014.

Another interesting part of the GCR exercise concerns the mapping of perceived interconnectedness across risks. Fiscal crises are perceived to be strongly connected with structural unemployment and underemployment, which in turn feed back social risks e.g. rising income inequality and political and social instability. The central node to the map of risk interconnectedness is represented by the risk of failure in global governance, from which a cascade of economic and socio-political risks would spill over.

The recent history of the Euro area proves perhaps better than any other case studies the existence of risk interconnectedness

The recent history of the Euro area proves perhaps better than any other case studies the existence of such interconnectedness. The financial turmoil of 2008-09 evolved into a sovereign-banking crisis with fiscal consequence, which in turn left behind a legacy of high unemployment and dissatisfaction vis à vis Europe, with the risk of increased social malaise and political instability. Governance played a great role in shaping the developments over the last five years and it will have to play a (perhaps even bigger) role in dealing with what will hopefully be a normalisation, over the next five years. In our recently published EU2DO list of memos for the new EU leadership, we try to offer some advice in view of this enormous challenge.

Wed, 10 Sep 2014 08:32:05 +0100
<![CDATA[EU to DO 2015-2019: Memos to the new EU leadership]]> http://www.bruegel.org/publications/publication-detail/publication/845-eu-to-do-2015-2019-memos-to-the-new-eu-leadership/ publ845

The new EU leadership – the president of the European Commission and his team of commissioners, and the presidents of the European Council and of the European Parliament – will have to address pressing challenges.

Go to eu2do.bruegel.org to read all the Memos, download the individual Memos and send the Memos to your Kindle.

‘THERE IS NOW A DISTINCT POSSIBILITY that this crisis will be remembered as the occasion when Europe irretrievably lost ground, both economically and politically’. This was the starting sentence of our memos to the new EU leadership five years ago. Five years later, it is fair to say that this possibility has become a reality. Unemployment has reached record levels and growth has disappointed. Meanwhile, the world outside the EU has continued to change rapidly. Emerging markets in particular have increased their weight in the global economy and in decision making.

The new EU leadership – the president of the European Commission and his team of commissioners, and the presidents of the European Council and of the European Parliament – will have to address pressing challenges. Despite the significant steps taken by Europe – among them the creation of a European Stability Mechanism, the start of a banking union, the strengthening of fiscal rules and substantial structural reforms in crisis countries – results for citizens are still unsatisfactory. It is impossible to summarise all the memos in this volume but a common theme is the need to focus on pro-growth policies, on a deepening of the single market, on better and more global trade integration. Reverting to national protectionism, more state aid for national or European champions – as frequently argued for by national politicians – will not be the right way out of the crisis. On the contrary, more Europe and deeper economic integration in some crucial areas, such as energy, capital markets and the digital economy, would greatly support the feeble recovery. But in other areas, less Europe would also be a highly welcome signal that the new European leadership is serious about subsidiarity. Internal re-organisation of the European Commission to ensure that it better delivers would also be welcome.

Beyond the pressing challenges – above all crisis resolution, jobs and growth – the memo to the presidents recommends that the new EU leadership should make sure that Europe makes the necessary treaty changes to strengthen Economic and Monetary Union and to permit the coexistence within the EU of countries belonging to the euro area and those that have no intention to join it. Working towards a consensus on this within the European Council and with European citizens is crucial for Europe’s future and to enable bold decisions on pressing issues.

Our focus in these memos is on economics. But clearly, political and other challenges have multiplied in the last five years. We therefore offer strategic policy advice that we deem both sensible given the problem at hand and politically achievable.

Regrettably, we have unexpectedly not been able to include in this volume a memo to the new Commissioner for Employment and Social Affairs. Yet, we believe that this Commissioner will have the major task of setting out how to improve Europe’s employment and social performance. In many countries, labour market institutions need to be modernised, for instance by making unemployment insurance systems more efficient. Benchmarking could be a way of converging on more sustainable and equitable social models. But reducing unemployment rates will also require better macroeconomic policies, on which the new Commissioner for Economic and Financial Affairs will have an important role to play.

The memos have all been written by Bruegel scholars and their preparation has been coordinated by Senior Fellow André Sapir. Like all Bruegel publications, the content reflects the views of the author(s), and there has been no intention to write a ‘Bruegel programme’. But the memos have been discussed extensively within the team to improve quality and ensure coherence.

Throughout the preparation of this volume, Bruegel’s editor Stephen Gardner has contributed considerably to improving the formal and substantive quality of the individual memos. Our gratitude goes to him as well as to all of those who have given feedback on drafts of specific memos.

André Sapir and Guntram Wolff

September 2014

Memos to the new EU leadership (English)
Wed, 10 Sep 2014 06:55:09 +0100
<![CDATA[Why does Italy not grow?]]> http://www.bruegel.org/nc/blog/detail/article/1430-why-does-italy-not-grow/ blog1430

In April this year, the Italian debt-to-GDP ratio was expected to peak by year-end at 135 percent of GDP. That projection assumed a real GDP growth rate of 0.6 percent and inflation of about 0.7 percent. The projected decline in the debt ratio starting 2015 required a step up in growth and inflation along with historically large primary budget surpluses.

Italy is now in a six-year-long recession and has barely grown since joining the euro in 1999

However, at this point in 2014 (in September), the prospects for Italian growth and inflation have weakened considerably—they may well be close to zero for the year. By U.S. criteria, as Frankel (2014) points out, Italy is now in a six-year-long recession. Indeed, the Italian economy has barely grown since it joined the euro area in 1999.

The stakes are high. With the government committed to an austerity mode for several years, growth and inflation are likely to be held back. And households facing tougher times are unlikely to open their pockets and start spending. The public debt ratio could rise relentlessly. An urgent search is on for a restart to Italian growth.

Much hope has been pinned on “structural” reforms to jump start growth. Germany’s Hartz reforms are often invoked as the example to emulate. But as the recent research reaffirms (Dustmann et al., 2014), German growth after the Hartz reforms was due primarily to a prior, nearly decade-long, restructuring of German businesses in concert with labor and new outsourcing networks in Eastern Europe. These investments allowed the leverage of deep German expertise in manufacturing in an unusually buoyant period of world trade between 2003 and 2007. 

Italy has been technologically and physically aging for some decades. It has been unable to keep pace with the technological demands of a competitive global economy. The Italian technological lag reflects a falling behind in educational standards: low growth and weak investment in technology and human capital have reinforced each other. The aging population has made reversing these trends a formidable task.

The Miracle Fades

The Italian economic “miracle” after the Second World War was the economy bouncing back from devastation. Barry Eichengreen has described the bounce back as extensive growth—economic reconstruction based on widely-available techniques, requiring limited domestic technological effort to enhance and differentiate. Much of the early growth came in the agricultural sector, where this characterization was especially appropriate. However, that early dividend was self-limiting and growth gradually slowed down (Figure 1a). However, growth slowed everywhere in Europe—and, starting as a “poorer” country, Italy’s faster growth allowed it to catch up by the 1990s (Figure 1b).

Italy’s virtual economic stagnation after 1999 reflects, above all, a dismal productivity performance.

Italy, however, had not prepared to replace the fading momentum of the post-war bounce with a new source of growth. After the oil-price-induced turmoil in the second half of the 1970s, growth required more intensive domestic technological effort. But Italy was unable to rise to that challenge. Hassan and Ottaviano (2013) report that Italian total factor productivity began a steady decline from its 1970s pace, turning negative in the years after Italy joined the euro area. Italy’s virtual economic stagnation after 1999 reflects, above all, a dismal productivity performance.

In the rest of this article, we compare Italy’s economic performance with that of Sweden, which again raced ahead while Italy struggled to grow. France, which falls in between the two, helps emphasize the forces we focus on.

The Innovation Gap

We use the number of patents registered by the residents of each country in the United States patent office. By focusing on the United States, we apply the high standards of the world’s most competitive technological environment. As figure 2 shows, despite swings over time, Sweden has continuously had a sizeable lead over Italy (and France) in terms of patenting propensity.

In turn, the Swedish patenting advantage derives from its lead in research and development (R&D).  While Swedish R&D ratios have been in the range of 3.5 to 3.8 percent of GDP, the Italian ratios have been between 1 and 1.3 percent of GDP. France has fallen in between at about 2¼ of GDP. The differences in R&D propensities across these countries represent two sources. Sweden moved to a “high-technology” based production economy in the 1990s after a period of eroding international competitiveness in the 1980s. The higher Swedish R&D ratio reflects, in part, the fact that high-tech production sectors are, by definition, more R&D intensive. But, in addition, a sectoral analysis shows that Italian R&D ratios are lower even when compared sector-by-sector. In other words, not just the composition of production, but an overall lag explains the lower Italian R&D ratio.

Compromises between egalitarianism and efficiency have largely resulted in achieving neither, as Italy has fallen behind its peers

The Swedish innovation lead is attributed to many factors—more public support of entrepreneurship, university-business links, availability of venture capital. However, at its core, Swedish innovation capacity and growth derive from the country’s long-standing commitment to education.  This proposition mirrors the diagnosis by Alesina and Giavazzi (2006) and Bertola and Sestito (2011) that at the root of Italian economic ills is an education gap. Bertola and Sestito conclude that a set of compromises between egalitarianism and efficiency have largely resulted in achieving neither, as Italy has fallen behind its peers.

The Education Gap

Figure 3a—an index of human capital per person—shows that Italy’s human capital is of lower quality than Sweden’s (and France’s) human capital. The index reflects a combined measure of years of education and returns to education in the domestic economy, providing a general measure of how much education contributes to a person’s economic life in each country.  

In 2012, only 18% of the Italian labor force had some tertiary education, compared to Sweden’s 34%

Italy measures even more poorly against Sweden when rates of tertiary education are isolated (Figure 3b). Ang, Madsen, and Islam (2011) find that tertiary education is more appropriate to innovation, whereas primary and secondary education are more useful for adopting foreign methods and technologies. In 2012, only 18 percent of the Italian labor force had some tertiary education, compared to Sweden’s 34 percent.  Bertola and Sestito (2011) emphasize that not only in terms of quantity, but the Italian quality gap relative to peers has also increased over time.

Piero Cipollone (2010) suggests that Italian educations levels are low because returns to education are relatively low in Italy. This tends to be self-perpetuating. The OECD (2012) reports that children of poorly-educated parents are often caught in a low-education trap. Additionally, Figure 4 shows that government spending on education in Italy is also relatively low when compared to Sweden and France. Indeed, in 2011, Sweden invested 6.82 percent of its GDP on education, France 5.68 percent, and Italy only 4.29 percent of its GDP.  Not only do Italians invest less in their education because of lower returns to their efforts; the Italian government also sees it as less worth its while to spend money on education.

As the Italian growth crisis digs in, the returns to education continue weaken, compromising future growth. With high unemployment, Italian children are at elevated risk for underperforming in school or even dropping out of school (OECD, 2012).

The Demographics

With an ever declining share of young citizens, who are likely to be most technologically dynamic, the demographic trend is aggravated by extremely high youth unemployment (unemployment among those between the ages of 15 and 25 years, which reached as high as 33 percent in 1999 and in January 2014 topped 42 percent).  Moreover, in 2013, among unemployed Italians under the age of 25, the share of long-term unemployment was possibly as high as 46.8 percent, according to Eurostat. These young long-term unemployed tend to have limited education and reside largely in the Italian South.

The more highly-skilled Italians leave, the worse the domestic economic performance

Finally, traditionally, Italians with tertiary education have been more likely to emigrate than their counterparts in Sweden and France. 1990, 4.5 percent of Swedes with tertiary education migrated abroad whereas 10.28 percent of Italians did. Although the gap between Sweden and Italy appears to be slowly closing, Italians with tertiary education continue to migrate in large numbers: In 2010, 6.55 percent of tertiary-educated Swedes migrated abroad, while 9.14 percent of Italians did so. France consistently fell in between. Presumably, many of the most educated Italians have left because of the poor future prospects for the Italian economy. But the more highly-skilled Italians leave, the worse the domestic economic performance, which perpetuates the tendency for future generations to also leave.


A consistent pattern emerges. Italy has failed to reshape its comparative advantage. Low GDP growth and virtually non-existent productivity growth reflect lagging innovation and educational attainments. In turn, the incentives to invest in education and innovation are weak since economic prospects are bleak. In an aging population, this trap has become self-reinforcing. Breaking the trap is the policy challenge. Ultimately, such particularities of Italy as the North-South differentials in economic dynamism will guide specific policy measures. Some have proposed more competition for Italian producers (Forni et al., 2012); Manasse and Manfredi (2014) propose that wage bargains should be decentralized to the firm-level. But, as Gros (2011) points out, both product and labor market competition in Italy are no lower than in Germany. A longer list of reform no doubt exits. But for Italy to grow again, it needs an audacious investment in a new generation of education and infrastructure.  

We are very grateful to Giuseppe Bertola and Ugo Panizza for their help.


Ang, James, Jakob Madsen, and M. Rabiul Islam. 2006. “The Effects of Human Capital Composition on Technological Convergence.” Journal of Macroeconomics 33: 465-476

Alesina, Alberto, and Federico Giavazzi. 2006. The Future of Europe: Reform or Decline. Cambridge, MA: MIT Press.

Bertola, Giuseppe, and Paolo Sestito. 2011.  "A Comparative Perspective on Italy's Human Capital Accumulation", Banca d'Italia Quaderni di Storia Economica n.6, 2011. An abridged version is published as “Human Capital” (with Paolo Sestito), Chapter 9, 249-270 in G.Toniolo (ed.) The Oxford Handbook of the Italian Economy Since Unification, New York: Oxford University Press, 2013.

Brücker H., Capuano, S. and Marfouk, A. (2013). Education, gender and international migration: insights from a panel-dataset 1980-2010.

Cipollone, Peiro. 2010. “Spending on Research and the Returns to Education in

Italy.” Review of Economics Conditions in Italy 3: 323-343, 345-349.

Dustmann, Christian, et. al. 2014. “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy.” Journal of Economic Perspectives 28(1): 167-188.

Eichengreen, Barry. 2007. The European Economic Since 1945: Coordinated Capitalism and Beyond. Princeton: Princeton University Press.

Eurostat Euroindicators. 2014. Accessed August 24, 2014 from epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-28022014-AP/EN/3-28022014-AP-EN.PDF. 28 February

Eurostat education and training indicators. 2014. Accessed August 26, 2014 fromhttp://epp.eurostat.ec.europa.eu/portal/page/portal/education/data/ main_tables

Forni, Lorenzo, Andrea Gerali, and Massimiliano Pisani. 2012. “Competition in the Services Sector and Macroeconomic Performance in the European Countries: The Case of Italy.” Vox EU. April 3, accessed August 26, 2014 from www.voxeu.org/article/raising-competition-case-italy

Frankel, Jeffrey. 2014. “Italian growth: New recession or six-year decline? Vox EU. August 11, accessed August 25, 2014 from www.voxeu.org/article/italian-growth-new-recession-or-six-year-decline.

Gros, Daniel. 2011. “What is Holding Italy Back?” Vox EU. November 9, accessed August 26, 2014 from www.voxeu.org/article/what-holding-italy-back

Hassan, Fadi, and Gianmarco Ottaviano. 2013. “Productivity in Italy: The Great Unlearning.” Vox EU. November 30, accessed August 24, 2014 from www.voxeu.org/article/productivity-italy-great-unlearning.

Manasse, Paolo, and Thomas Manfredi. 2014. “Wages, Productivity, and Employment in Italy: Tales from a Distorted Labour Market.” Vox EU. April 19, accessed August 26, 2014 from www.voxeu.org/article/wages-productivity-and-employment-italy

OECD. 2012. Education at a Glance 2012: Italy. Accessed May 29, 2014 from www.oecd.org/italy/EAG2012%20-%20Country%20note%20-%20Italy.pdf.

Tue, 09 Sep 2014 06:42:47 +0100
<![CDATA[Blogs review: The shift in the Beveridge curve]]> http://www.bruegel.org/nc/blog/detail/article/1429-blogs-review-the-shift-in-the-beveridge-curve/ blog1429

What’s at stake: The traditional interpretation of shifts in the Beveridge curve – the relationship between the vacancy rate (jobs openings/labor force) and the unemployment rate – as increases in the structural level of unemployment has been challenged over the past few weeks as the shift identified in 2009 for the US economy appears to vanish. Recent research also points that outward shifts in the Beveridge curve have been common occurrences during previous recoveries and that, by itself, an outward shift does not say much about future levels of structural unemployment.

The traditional interpretation of a shift in the Beveridge curve

The euro area Beveridge curve suggests the emergence of a structural mismatch across euro area labor markets

In his Jackson Hole speech on euro area unemployment, Mario Draghi writes that the euro area Beveridge curve suggests the emergence of a structural mismatch across euro area labor markets. In the first phase of the crisis strong declines in labor demand resulted in a steep rise in euro area unemployment, with a movement down along the Beveridge curve. The second recessionary episode, however, led to a further strong increase in the unemployment rate even though aggregate vacancy rates showed marked signs of improvement. This may imply a more permanent outward shift. […] All in all, estimates provided by international organizations – in particular, the European Commission, the OECD and the IMF – suggest that the crisis has resulted in an increase in structural unemployment across the euro area, rising from an average (across the three institutions) of 8.8% in 2008 to 10.3% by 2013.

Peter A. Diamond and Ayşegül Şahin write it is tempting to interpret a deterioration in the matching/hiring process in the economy as a structural change in the way that the labor market works and thus to assume that it is orthogonal to changes in aggregate demand. Indeed, that approach to interpreting a shift in the Beveridge curve has been standard in the academic literature, going back to Dow and Dicks-Mireaux (1958). If valid, this interpretation would support an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is presumed to be structurally less efficient than before in creating successful matches.

In their lecture on hysteresis for an advanced undergraduate class, Christina Romer and David Romer write that a shift in the Beveridge curve may also show that the normal vacancy rate has risen or that both the normal vacancy rate and normal unemployment rate has risen. Since between the 1960s and 1980s, the unemployment rate associated with a given level of vacancies rose about 4 percentage points and that most experts think that the natural rate of unemployment rose about 2 percentage points over the same period, a rule of thumb might be that the raise in the natural rate is ½ the shift out in the Beveridge curve.

Historic shifts and unemployment recoveries

Peter A. Diamond and Ayşegül Şahin write that looking at 60 years of data, instead of just the last 14 years, reveals that outward shifts in the Beveridge curve after the point of maximum unemployment rate are common occurrences in the U.S. labor market. Interestingly, the only business cycle during which the unemployment-vacancy pairs did not shift, but stayed on the same downward sloping Beveridge curve, is the 2000-2006 cycle. In all the others there is a notable outward shift in the curve after the maximum unemployment rate is reached.

The Beveridge Curve has moved outward seven times before. Four times the unemployment rate didn’t make it back to its previous lows

Real Time Economics writes that Beveridge Curve has moved outward seven times before. Four times the unemployment rate didn’t make it back to its previous lows. But three times, it did. The Beveridge Curve shifted out but then the unemployment rate still made a complete recovery. Peter A. Diamond and Ayşegül Şahin write that if, by itself, the outward shift were a good predictor of a sustained rise in structural unemployment, it should be the case that, after a shift in the curve, the unemployment rate does not reach its pre-recession minimum during the recovery period.

Christina Romer and David Romer write that this typical pattern early in recoveries may reflect the changing composition of firms toward those that tend to post more vacancies (bigger firms, non-construction firms).

Was there a shift to begin with?

Murat Tasci and Jessica Ice write that whether or not a shift implies an actual structural change – specifically, a decline in the matching efficiency of the labor market – is still debatable. However, one thing is clear: there is no shift to begin with. 

Murat Tasci and Jessica Ice write that early on in the current recovery, economists and policymakers were worried about a potential shift in the Beveridge curve. The data at the time suggested to some that a shift was occurring that would indicate that efficiency was falling: Job vacancies were rising, but the unemployment rate was not declining, fueling a debate about a structural problem in the labor markets. Exactly four years ago, we touched upon this issue here, and argued that it was too early to call what had happened a shift. Most of the arguments for a shift were based on data from the Job Openings and Labor Turnover Survey (JOLTS), which had only started measuring economy-wide job openings in December 2000. It is safe to say that what seemed like a shift in the Beveridge curve ended up being another manifestation of the “normal” dynamics of unemployment and vacancies in the United States. 

Mon, 08 Sep 2014 07:32:37 +0100
<![CDATA[Quantifying the macroeconomic impact of the European fund for investments]]> http://www.bruegel.org/nc/blog/detail/article/1428-quantifying-the-macroeconomic-impact-of-the-european-fund-for-investments/ blog1428

Introduction: The European Fund for Investments

In his keynote address at the 2014 Bruegel Institute annual dinner Poland’s Minister of Finance Mr. Mateusz Szczurek laid out a proposal for jumpstarting the EU economy, avoiding a prolonged stagnation and building solid foundations for long run growth. This proposal is based on European-level program of scaling up public investment by around 5.5% of European Union GDP or 700 billion euros within the next 5 years. The capital spending would start at 0.5% of European GDP in 2015, peak at 2% in 2017, and be gradually phased out afterwards (Figure 1). The gradual path reflects the nature of large scale public investment projects and gives policymakers time to react and adjust the size of the program to changing economic conditions. In order to mobilize such considerable investments, European Fund for Investments (EFI) would be established. A gradual injection of paid-in capital and guarantees by all EU Member States would be leveraged by borrowing in the financial market. The Fund capital would be directly invested in the selected infrastructure projects, with particular focus on energy, transportation and ICT.

This note presents the background calculations of the program’s potential effects on the EU GDP and justifies its proposed size of 5,5% of EU-28 GDP.

Figure 1. Proposed path of EU-28 public investment under the EFI

Uncertainty about the sources of low growth and the size of output gap

The weak economic recovery across Europe and the risk of the so-called secular stagnation are the key motivations behind the proposal. Nearly six years since the beginning of the financial crisis the European GDP is still well below its pre-crisis level and around 10% below the level consistent with trend growth prior to the crisis. Figure 2 summarizes this situation. It shows three curves. The solid line is the evolution of actual real GDP of the 28 EU economies since 2002. The dashed line is an extrapolation of the average 2% trend-growth prior to the financial crisis; this is the EU’s potential output if no permanent underlying stagnation occurred. The dotted segment on the other hand is an extrapolation based on the meager average growth of 0.8% since the trough in 2009. The EU economy is now about 10% below where it could be if the pre-crisis trends were maintained. If the current slow growth continues, it will be 16% below in 2019.

Figure 2. Losing ground after the crisis

There are two polar ways to interpret the current (and projected) economic weakness.


  • EU economy is only suffering from depressed demand in the aftermath of the global financial crisis and sovereign debt troubles in Europe. In this scenario, EU could and should return to the pre-crisis potential growth path (dashed line). Expansionary macroeconomic policies are needed in order to achieve this goal.
  • EU has entered a prolonged period of slow or non-existent growth which fully explain current output size. In this scenario, EU’s potential growth is permanently lowered due to productivity slowdown, regulatory burden and demographic changes, and deep structural reforms are needed to boost long run growth.

The truth lies somewhere in between and uncertainty over the nature of the current economic weakness complicates the proper policy response to the current situation. If deficient demand is to blame, relying exclusively on structural reforms is likely to be insufficient. Such reforms take a long time to affect growth and in the meantime a prolonged recession (due to deficit of demand) may turn into structural problems (stagnation of potential GDP) through the so-called hysteresis effects, e.g. because of the loss of skills and labor-force attachment of long term unemployed, forgone investment in physical and human capital and innovation (DeLong and Summers, 2012). If underlying problems are of structural nature, stimulating macro policies will be ineffective and risk overheating the economy, but this risk can be easily managed as discussed below.

Europe needs investment stimulus

While the output gap persists, conventional policy choices for the EU are severely restricted at the moment. Expansionary monetary policy is limited by the zero lower bound while expansionary fiscal policies are constrained by fiscal discipline induced by the SGP.

The situation calls for a new policy approach. The fact that the economic crisis caused a historically unprecedented collapse in capital investment in the EU (Figure 3) and current historically low level of long term interest rates suggest that cheap and plentiful savings are not being transformed into much-needed productive capital by the private sector. Boosting public investment, which is the goal of EFI, seems to offer an attractive and viable option for such a new policy approach. It would address both the lack of demand and the slowdown of potential growth in an environment where the risk of crowding out of private investment is extremely low.

Figure 3. The collapse of EU investment rate

Quantifying the impact and sizing the EFI

The impact of the investment boost on economy, and its optimal size depend on two considerations:  

First, as discussed above it depends on the economy’s current output gap. Given the uncertainty over this variable discussed earlier, the “naïve” but reasonable approach is to target closing about half of the 16% gap between the low-growth projection and the pre-crisis trend that is expected to occur in 2019 in the absence of the EFI.

Second, the effect of the additional public spending of EU-28 GDP depends on the size of the multiplier, so quantifying the effects of EFI program and deriving its size are based on latest research on the size of output multipliers associated with government expenditure.  Namely we adopt a multiplier of 1.5, which is consistent with recent estimates from the IMF (Blanchard and Leigh, 2013) and somewhat conservative, taking into account depressed state of economy, which tends to increase multipliers (Auerbach and Gorodnichenko, 2013).

Figure 4 illustrates the impact of the EFI public investment of 5.5% of GDP on the EU-28 economy under these assumptions. The extra investment boosts average growth over 2015-19 from 0.8% to 2.3%, reducing the gap in 2019 between current output and the path of uninterrupted 2% growth from almost 16% to 8.9%.

Figure 4. Effects of EFI Program on EU-28 GDP


The objective illustrated in Figure 4 seems to be prudent given the uncertainty about the size of the output gap. It is also quite robust.

In the case that true potential is indeed represented by the pre-crisis trend (and thus the output gap is very large) the multipliers will likely prove to be larger than the ones used here. It is now commonly accepted that the magnitude of the effect is likely much greater in a depressed economy where interest rates are close to the zero lower bound and when spending is directed towards productive public capital.  Specifically, in an important recent contribution Auerbach and Gorodnichenko (2013) point to large and persistent effects of government investment in a depressed economy. The impact of the EFI would then probably be higher, if output gap was bigger than assumed here.

The policy itself also offers some important flexibility. If the EU economy continues to experience low inflation and stagnant labor markets as growth rates of GDP pick up, indicating that output gap remains substantial,  the scale of the EFI project should be increased and its duration extended.

In the case that the true potential is much below the pre-crisis growth path (dashed line), there is a concern that a stimulus like the EFI could lead to overheating of the economy and a surge of inflation. This is unlikely to be a serious issue for the EFI for several reasons. First, the latest research demonstrates that the effects of the fiscal expansion in an economy that is not in a recession are much more modest. Thus if the output gap isn’t very large to start with, the policy will have much less potential to overheat the economy (Auerbach and Gorodnichenko, 2013).  Second, the inherent asymmetry of the zero lower bound helps to contain any downside risk to inflation. While it is hard for the ECB to stimulate the economy further with interest rates already at or close to their minimum, it would find no difficulty cooling the economy by raising them, should that be required. Additionally, given the gradual scaling up of investment over the five years, policymakers would have ample time for course-correction should the stimulus prove excessive.

Long Run Benefits of the EFI

One of the crucial aspects of our proposal is that the investment boost is directed at large scale infrastructure projects in energy, transportation and ICT. Such projects will not only add to the economy’s capital stock and mobilize idle saving. They will also increase the economy’s long term potential growth rate. Thus, if we are seriously concerned about the slowdown in potential growth of the EU economy, we should embrace this idea even more wholeheartedly. Given the current economic weakness and dire forecast, doing too little seems like a greater danger than doing too much.


Auerbach, Alan J., and Yuriy Gorodnichenko. 2012. "Measuring the Output Responses to Fiscal Policy." American Economic Journal: Economic Policy, 4(2): 1-27.

Olivier Blanchard, O.  and Daniel Leigh, “Growth Forecast Errors and

Fiscal Multipliers”, IMF Working Paper, January 2013.

DeLong, B. and L. Summers, “Fiscal Policy in a Depressed Economy”, Brookings Papers on Economic Activity,  Spring 2012

Woodford, Michael. 2011. “Simple Analytics of the Government Expenditure Multiplier.” American, Economic Journal: Macroeconomics 3 (1): 1–35.

Fri, 05 Sep 2014 13:46:47 +0100