Economic Policy


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08 April 2014

Notes Regardless of whether Ukraine is ‘lost’, or who lost it, Daniel Gros finds in this new Commentary that the country can still offer an attractive future for all of its citizens if unavoidable economic reforms can be made compatible with regional cohesion. He urges the EU to play an essential role in the process by opening its market and providing funding and technical assistance in crucial areas.

02 April 2014

Click here to download the Table of Contents, Preface and Executive Summary.

28 March 2014

The EMS crisis of the 1990s illustrated the importance of a lack of confidence in price or exchange rate stability, whereas the present crisis illustrates the importance of a lack of confidence in fiscal sustainability. Theoretically the difference between the two should be minor since, in terms of the real return to an investor, the loss of purchasing power can be the same when inflation is unexpectedly high, or when the nominal value of government debt is cut in a formal default.

27 March 2014

Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates.

26 March 2014

Daniel Gros, Director of CEPS, contributed this column to VoxEU, where it was first published on 19 March 2014.

25 March 2014

The European Commission has recently published results of its "in-depth review" in the context of the so-called Macroeconomic Imbalances Procedure (MIP). This provides a valuable occasion to reflect on the design and effectiveness of the MIP. The authors note in this article that the MIP is envisaged to warn of future crisis within the euro area, so it does not make sense to use absolute indicators or thresholds, especially if they are backwards looking.

24 March 2014

In assessing the compromise agreement reached on March 20th on how to deal with banks in difficulty in the eurozone, Daniel Gros finds that the Single Resolution Fund represents an awkward step in the right direction in that it leaves as many problems unresolved as it addresses. But the end result is likely to be quite strong, because it establishes a key innovation: a common fund that effectively mutualises much of the risk resulting from bank failures.

19 March 2014

The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus in 2013. While acknowledging that this is indeed a highly laudable accomplishment, Daniel Gros points out in a new commentary that a more important news item, which has received much less attention, is the fact that Greece exported less in 2013 than in 2012.

11 March 2014

Two of the four macroeconomic adjustment programmes – in Portugal and Ireland – can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure.

12 February 2014

Despite considerable differences, there were also many similarities in economic performance between Latvia and Greece before their respective adjustment crises. After the immediate crisis, however, economic activity rebounded sharply in Latvia but continued to contract in Greece.  This paper argues that this difference was due primarily to developments in credit. In Latvia credit growth fell sharply, and the economy was deleveraging aggressively by 2009. When the pace of deleveraging started to stabilise, the rebound in the credit impulse caused domestic demand growth to recover.

07 February 2014

This paper aims to estimate the crowding-out effect of the Danish mandatory labour market pension reforms begun in 1993 on the level of total household savings for renters. The effect is identified via a large panel of individual administrative records utilising the differences in speed, timing and sectoral coverage of the implementation of the reform in the period 1997 to 2005. Little substitutability was found between current mandatory labour market pension savings and private voluntary savings.

04 February 2014

This volume, published by Oxford University Press and edited by Rosa M. Lastra and Lee Buchheit, contains a contribution by CEPS Director Daniel Gros entitled “Restructuring in a Monetary Union: Economic Aspects”. His chapter discusses the economic aspects of sovereign debt restructuring by first showing how economic and monetary union changes the usual concordance between foreign debt and foreign currency debt.

24 January 2014

Paul De Grauwe writes in this new CEPS Commentary that the recent and surprising conversion of François Hollande to supply-side economics completes the victory of the northern European policy-makers who believe that insufficient aggregate demand should be fought exclusively by supply-side measures. In his view, however, it is not the first time in post-war history that economists and policy-makers apply the wrong medicine; or to put it differently, it's akin to some generals who fight a new war by applying the strategies developed for the previous war.

16 January 2014

Larry Summers has attracted much attention recently for invoking old theories of secular stagnation to explain the persistence of low interest rates in the recent past. The German economist Carl Christian von Weizsäcker has pointed to a retirement savings glut as the cause for low rates. In the view of Thomas Mayer, however, as expressed in this High-Level Brief, these theses lack both theoretical and empirical support and he offers as an alternative explanation the fall-out from the recent credit boom-bust cycle.

15 January 2014

Before the ECB takes over responsibility for overseeing Europe’s largest banks, as foreseen in the establishment of a eurozone banking union, it plans to conduct an Asset Quality Review (AQR) throughout the coming year, which will identify the capital shortfalls of these banks. This study finds that a comprehensive and decisive AQR will most likely reveal a substantial lack of capital in many peripheral and core European banks.

14 January 2014

The upheavals of the Arab Spring in the southern Mediterranean led to domestic and international demands on the governments in the region to implement reforms aimed at enhancing business and investment conditions especially for micro, small- and medium-sized enterprises (MSMEs), which carry out an overwhelming majority of the region’s economic activity. A comprehensive survey among some 600 high-growth potential MSMEs in Algeria, Egypt, Morocco and Tunisia identified and ranked the key obstacles impeding their high-growth potential.

14 January 2014

The Arab Spring, which took root in Tunisia and Egypt in the beginning of 2011 and gradually spread to other countries in the southern Mediterranean, highlighted the importance of private-sector development, job creation, improved governance and a fairer distribution of economic opportunities. The developments led to domestic and international calls for the region’s governments to implement the needed reforms to enhance business and investment conditions, modernise their economies and support the development of enterprises.

09 January 2014

Following the recent ‘third plenum’ in China, CEPS Director Daniel Gros finds that China has reached a difficult crossroads in terms of making the necessary reforms that will foster continued growth and productivity. Continuing in the direction that so far has been followed with astounding success, namely giving the market a greater role and opening to the rest of the world, might no longer be sufficient. He points out, for example, that combating pollution requires more state intervention, not less.

19 December 2013

Calling the Single Resolution Mechanism an “inelegant step in the right direction”, this Commentary singles out the Single Resolution Fund, with its considerable mutualisation of risk, as the key advance – but one that will require changes over time in the extremely complex decision-making mechanisms agreed.

Daniel Gros is Director of CEPS.

19 December 2013

It is generally assumed that any capital needs discovered by the Asset Quality Review the ECB is scheduled to finish by the end of 2014 should be filled by public funding (= fiscal backstop). This assumption is wrong, however. Banks that do not have enough capital should be asked to obtain it from the market; or be restructured using the procedures and rules recently agreed. The Directorate-General for Competition at the European Commission should be particularly vigilant to ensure that no further state aid flows to an already oversized European banking system.

19 December 2013

In his assessment of the compromise agreement reached on the Single Resolution Mechanisn (SRM), Daniel Gros finds that the popular perception that the periphery has the most to gain from the establishment of a unified resolution regime might have gotten it backwards. In reality, he finds that Germany and other surplus countries have a bigger interest in tying the hands of their national resolution authorities, which have a tendency to be too generous.

Daniel Gros is Director of CEPS.

18 December 2013

This edited volume contains a chapter by CEPS Director Daniel Gros entitled “Banking Union instead of Fiscal Union?” in which he draws lessons for the EU from the experience of the United States with fiscal integration. The chapters in the book, edited by Franklin Allen, Elena Carletti and Joanna Gray, were originally prepared for presentation at a conference held at the European University Institute in Florence, 25 April 2013.

10 December 2013

Germany has been an attractive target for external-deficit countries in Europe and beyond, but beating up on Germany alone appears to be the wrong way to get results. This CEPS Commentary by Daniel Gros argues that the discussion of Germany’s surplus confuses the issues in two ways. First, he points out that although the German economy and its surplus loom large in the context of Europe, an adjustment by Germany alone would only modestly benefit the eurozone periphery.

06 December 2013

Against the background of looming demographic decline, the departure of the baby-boom generation from European labour markets and growing economic competitiveness from emerging economies, this CEPS Policy Brief, published jointly with the Bertelsmann Stiftung, looks into the potential benefits of increased intra-EU labour mobility. The authors examine the ‘German case’ on EU labour mobility, digging below the surface of the aggregate data. They offer proposals on how to foster a European fair deal on talent, one that would benefit the EU as a whole.

25 November 2013

Banks in the northern eurozone have capital ratios that are, on average, less than half of the capital ratios of banks in the eurozone’s periphery. The authors explain this by the fact that northern eurozone banks profit from the financial solidity of their governments and follow business strategies aimed at issuing too much subsidised debt. In doing so, they weaken their balance sheets and become more fragile – less able to withstand future shocks. Paradoxically, financially strong governments breed fragile banks.

21 November 2013

This Policy Brief describes and discusses the proposals for a European Single Resolution Mechanism (SRM) for banks and for a Directive on Bank Recovery and Resolution (BRR). The authors find that the proposals are generally well designed and present a consistent approach, yet there is room for improvement, including the streamlining of procedures for the start of resolution, which now entail much overlap in the powers attributed to the various institutions involved (the Commission, the Single Resolution Board and the European Central Bank).

14 November 2013

In this CEPS Commentary Daniel Gros argues that the purpose of the euro was to create fully integrated financial markets; but, since the start of the financial crisis in 2008, markets have increasingly separated along national lines. So the future of the eurozone depends crucially on whether that trend continues or is reversed and Europe’s financial markets in the end become fully integrated. But either outcome would be preferable to something in between – neither fish nor fowl. Unfortunately, that is where the eurozone appears to be headed.

13 November 2013

In this new Policy Brief, CEPS Director Daniel Gros argues that the 13 November announcement of the European Commission that Germany is running an excessive current account surplus appears to be much ado about little. All the Commission can, and will, do is to start an ‘in depth analysis’. This might lead to strong political reactions and an enormous echo in the media. But nothing of concrete substance is likely to follow.

14 October 2013

This paper argues that it should be possible to complement Europe’s Economic and Monetary Union with an insurance-type shock absorption mechanism to increase the resilience of member countries to economic shocks and reduce output volatility. Such a mechanism would neither require the establishment of a central authority, nor would it lead to permanent transfers between countries.

04 October 2013

The recent slight improvement in the GDP growth rates in the eurozone has led European policy-makers to proclaim victory and assert that the austerity programmes imposed within the eurozone are paying off. But is this really the case? In this Commentary Paul De Grauwe and Yuemei Ji argue that the improvement in the eurozone business cycle is the result of the ECB’s announcement of its Outright Monetary Transaction (OMT) programme, and that austerity has left a legacy of unsustainable debt that will test the political resilience of the debtor countries.