• The European Stability Mechanism (ESM) is well suited to having a larger role in the euro area governance framework. During the euro-area debt crisis, financial pressures were eased by ESM loans and many reforms were implemented that targeted former policy mistakes. However, the ESM’s public image is tainted due to a political debate that is (unduly) critical of the fact that financial support is conditional on the implementation of reforms. Currently, the ESM lacks the instruments to support countries with relatively sound economic policy fundamentals.

    But, an ESM instrument appropriate to this type of support is to be created with an envisaged ESM reform. The reform would introduce a changed precautionary credit line (PCCL). This would provide general access to an ESM loan without the respective country necessarily drawing on it. Such a precaution would be intended to calm the financial markets should they begin to doubt the debt sustainability of a country. The new PCCL would not entail reform prescriptions by the ESM (ex post conditionality) but would require sound economic policy fundamentals as a precondition (ex ante conditionality).

    Choosing to use the ESM is a better way to tackle the current challenges than relying on the European Central Bank with its overly lax Transmission Protection Instrument, as appears to be the current choice. While this instrument might calm financial markets for some time, its overly generous application would reduce incentives for sound economic policy. On top of this, lax reform of the Stability and Growth Pact could also carry the danger that public debts rise further. In the end, this could result in the economic situation deteriorating in a dangerous way. With economic policies diverging widely from the course the euro area governance framework provides for, letting the European Central Bank intervene in the financial markets would be increasingly difficult to justify legally. In this case, the danger of a sovereign default and of an escalating financial crisis in highly indebted countries could loom.

    Economy Eurozone Macroeconomics

    Coming out of the Shadows: The European Stability Mechanism and Euro Area Governance

    Policy Briefs

    30 May 2024

  • Greece has long been viewed as the weakest member of the Euro Area. Its three rescue packages, organised initially by the European Commission, European Central Bank (ECB) and the International Monetary Fund (IMF) sparked an unprecedented decade of economic and political turbulence. The austerity (and declining living standards) associated with the bailout period came to define the structural flaws of the Euro currency. For a time in the mid-2010s, Greece’s survival in the Euro was irrevocably entwined with political events in both Brussels and Berlin. Yet, throughout this period Greek public support for both EU and Eurozone membership remained high.

    With the onset of the Covid-19 pandemic in 2020, Greece’s debt to GDP ratio was pushed to a historic high of 207%, higher even than during the bailout crises of the preceding decade.

    However, the past four years have seen a remarkable transformation of Greece’s long term debt sustainability. As of Quarter 3, 2023 Greece’s debt stood at 165% of GDP – a decline of over 42 percentage points, or over a fifth – in just three years. Longer-term projections indicate that debt to GDP levels will continue to fall and may achieve a lower level than Italy and France by the end of the decade.

    In 2023, Greece – for the first time since 2010 – reattained investment grade status from three of the four biggest ratings agencies. Latest forecasts indicate continued strong debt reduction driven by moderate growth and sustained primary budget surpluses. Debt to GDP levels are likely to fall under 150% in late 2024/early 2025. Despite continued structural challenges – low productivity, demographic profile and increasing environmental risks – Greece is still projected to outperform its Euro Area peers in the medium to long term.

    EU Member States Macroeconomics

    The Athens Effect: 5 Reasons Why France (and the EU) Should go Greek on Debt


    13 May 2024

  • Debt is a question of dose. Too much, and you lose your political independence and sovereignty. Too little, and you might miss out on the possibility and necessity of building infrastructure that facilitates future development.

    In 2023, the Martens Centre published its 7Ds for Sustainability strategy document. This text comprised 175 proposals for the next legislature to future-proof EU policy in the areas of debt, decarbonisation, defence, democracy, demography, de-risking globalisation, and digitalisation. Sustainability was chosen as the guiding principle to ensure that the policies reconcile the needs of both the present and the future, and systematically include the interests of the next generations.

    The 7Ds document has already inspired reflection on what to do over the next five years. These discussions are based on Christian Democrat and conservative thinking and the available in-house expertise of the Martens Centre. For the next phase of intense discussions about the programme to be implemented during the 2024–9 legislature, the Martens Centre has invited renowned external experts to put forward their own, more extensive proposals based on the original document, thereby deepening the available expertise. It is hoped that these proposals, published at the beginning of April 2024, will help to clarify the way forward at a critical juncture, when the European Parliament, the European Commission and the European Council are negotiating on and finalising their strategic priorities.

    Economy Growth Macroeconomics

    The 7Ds – Debt in Depth

    The 7Ds

    22 Apr 2024

  • As of March 2023, overall inflation is declining in Europe. However, core inflation levels continue to remain well above the 2% mandate of the European Central Bank (ECB). In fact, the current bout of inflation should continue to weaken as and when supply-chain disruption and energy shortages abate. If prices should decline somewhat from their recent peak levels, their contribution to inflation would even be negative, that is, they would contribute to lower inflation rates.

    However, there are also factors that will prevent a large and immediate decline in inflation as soon as these scarcities wane. As import and supply prices have risen very strongly in recent months, it will take some time for these price increases to feed through the value chains into the final consumption and consumer prices. This is an important reason why inflation will remain significantly higher than 2% for the next one to two years. However, after this period inflation should come down again to more normal levels, unless significant new price pressures or ‘second-round effects’ occur.

    An important second-round effect would be a rise in inflation expectations among economic actors. This is why the ECB needs to continue to signal its commitment to getting inflation down to its target rate of 2% in the medium term. Another important second-round effect—one that is closely connected to inflation expectations—is the potential for a wage–price spiral. In fact, this represents the largest current danger as it could lead to high inflation becoming much more persistent. Import price increases (and particularly energy price shocks) must not be amplified by further labour cost shocks, but instead the resulting loss of purchasing power must be shared between employees (through lower real wages) and employers (through lower profits, as firms cannot usually fully pass on higher input costs in their sales prices).

    If trade unions force significant labour cost increases to keep real wages constant or even rising, renewed cost shocks would lead to new price pressures for firms and force them to increase their sales prices further. This would most likely lead to a wage–price spiral and would force the ECB to raise interest rates even more, thus increasing the costs of disinflation and the danger of a recession.

    To prevent a wage–price spiral, it is thus high time for macroeconomic coordination between the vari­ous policy actors. Monetary policy should focus on targeting price stability, while wage bargaining and fiscal policy should support monetary policy in this objective. Wage negotiation outcomes should include one-off payments by companies on top of normal wage increases. One-off payments would target purchas­ing power losses but would, at the same time, prevent a long-term increase in labour costs. Fiscal policy should make one-off payments attractive for companies and employees by allowing generous tax deduc­tion possibilities. Even more important, fiscal policy should strive to limit the impact of the current large price increases by providing targeted income support for those members of society most negatively affected by higher inflation rates. In any case, due to high inflation rates and actual supply-side constraints, it is cur­rently not the time for a fiscal stimulus via higher government expenditures.

    Economy Macroeconomics

    Why Price Stability Matters

    Research Papers

    27 Jul 2023

  • Inflation is back with surprising force. Should inflation remain significantly elevated over an extended period, detrimental effects on the EU’s economic model, on growth and on social peace can be expected. A coordinated macroeconomic response is required, combining monetary and fiscal policy. The European Central Bank needs to continue to signal its willingness to stick to its price stability mandate to keep inflation expectations under control. It should not succumb to the goal of fiscal dominance by targeting public debt sustainability more than price stability. This would imply giving up its independence. Fiscal policy should facilitate the objective of monetary policy to target inflation while minimising the impact on economic growth. To reduce the danger of a wage–price spiral, fiscal policy should strive to limit the impact of extreme price rises and should be targeted towards those members of society most affected by the higher prices. In contrast, general expenditure increases or tax reductions for an extended period of time carry the danger of overburdening governments. Price interventions should be the very last option, as they decrease the incentive to reduce the demand for higher priced goods and thus do not allow for the signalling power of prices regarding scarcity. Due to high inflation rates and supply-side constraints, it is currently not the right time for a fiscal demand stimulus.

    Crisis Macroeconomics

    Up, Up and Away? A Price Stability Guide for Policymakers


    10 Jan 2023

  • It used to be that politicians in power understood the economic constraints under which they operated. James Carville, an advisor to President Bill Clinton in the 1990s, summed up this unavoidable relationship when noting that “I would like to come back as the bond market. You can intimidate everybody”.

    The context for Carville’s comments – 1994 financial market worries about US public spending and debt accumulation – spurred the Clinton administration’s embrace of fiscal rectitude. It also resulted in the last period of US federal budget surplus’, between 1998 and 2001.

    The decades since have fundamentally altered how politicians (and increasingly whole societies) approach economic policy. This is a change driven primarily by a decade of monetary easing on a stupendous scale, negative interest rates, corporate debt bingeing, and ever-expanding mortgage credit.

    The natural corollary to this dawn was the emergence of a supportive economic theory – Modern Monetary Theory (MMT).  Under this model, deficits aren’t necessarily bad and only old-fashioned fiscal conservatism is preventing the birth of what MMT proponents call a true, deficit-backed “people’s economy”.

    From a politician’s perspective, the emergence of free money (from their own central banks) and MMT complemented what many elected officials realised to be the biggest lesson of the 2008 economic crash.

    Namely, that voters don’t tend to reward governments that preach fiscal rectitude and austerity. In fact, regardless of the scale of the crisis or the terrible alternatives (banking sector failure, mass unemployment, even sovereign default) it is those governments that make the hard decisions that are usually looking for new jobs after the following election.

    In this context, cheap money was an easy way out.

    So while the Great Recession starting in 2007 required a monetary stimulus to maintain and then restart economic activity, elected governments consistently failed in the subsequent years to live up to their side of the bargain.

    They failed because monetary support was supposed to be the prelude to economic reform. Real structural reforms that would drive long-term growth.

    Alas, Mario Draghi’s commitment to saving the Eurozone insulated member states (and the European Union itself) from market pressures. As a result, critical reforms were abandoned, ignored, or went unfinished.

    From Italy’s unsustainable pensions to Ireland’s sky-high legal fees, from the failure to complete the last pillar of the EU’s banking union (a common deposit insurance scheme) to its still unfinished capital markets union – cheap liquidity overrode the political will required to attain difficult objectives.

    It allowed politicians to keep riding the supposedly “free” monetary train.

    But this engine was never built on sustainable tracks.

    In reality, the pandemic has only worsened the dependence of the political class on central bank largesse. And while the need for fiscal support was obvious in March 2020, the de facto response – borrow cheap and worry about the consequences later – has now become embedded as a desired political response to every crisis or unforeseen shock.

    What is probably most worrying is that this political reflex to spend, spend, spend has become embedded at both ends of the political spectrum. Where once these policies were centred primarily on the left, recent years have also seen them embraced by those on the right.

    Rassemblement National in France, Fratelli d’Italia and Lega in Italy have all embraced huge increases in public spending as a means of increasing their potential pool of voters. By slamming the orthodoxy and constraints of the “financial markets” they position themselves as “outsiders” determined to “fix” the system.

    On the right, Britain is the most extreme case of how basic economic principles have been laid waste. An entire growth strategy based on “trickle-down economics” requiring hundreds of billions of pounds of additional public borrowing is simply macroeconomics gone loco. Particularly in a state already reeling from almost a decade of political stability and a debt to GDP ratio approaching 100%.

    It’s also completely incompatible with an independent Bank of England attempting to control runaway rising prices. Britain is showing, just as predicted by Mario Draghi in 2018, that When inflation is rising, short-term political considerations still create a certain set of incentives to pressure central banks into prioritising economic growth”.

    Ironically, the markets are already reminding Westminster what real financial constraints actually look like. The Bank of England will likely do the same. A falling sterling and rising bond yields point not to Britain’s national bankruptcy (as correctly noted by the economist Tyler Cowen), but to a serious loss of credibility in Britain’s ability to effectively manage the economic challenges ahead.

    Even high inflation (to which MMT offers no real solution) is no impediment to those who prefer to keep shaking the magic money tree rather than face hard economic realities. Paul Johnson (from the Institute of Fiscal Studies) recently stated the obvious when tweeting thateconomic and fiscal constraints are real. It’s not just “Treasury orthodoxy” or a failure of imagination”.

    In this context, the forthcoming global recession should be viewed as only a starting point. The commencement of a likely bloody battle to reacquaint policymakers today with some basic economic realities.

    Unfortunately for us, the past decade of easy money hasn’t (in general) been invested well, or accompanied by the required structural reforms. Instead, politicians choose the easy way out. Borrowing simply covered rising current costs. As a result, debt levels in major global economies – US, Britain, France, Italy and China have never been higher.

    Easy money has changed how politicians view the economics of being in power. The exceedingly painful readjustment has only just begun.

    Eoin Drea Crisis Economy Macroeconomics

    Eoin Drea

    Easy Money has Warped the Economics of Power


    28 Sep 2022

  • The current European Central Bank (ECB) inflation strategy is predicated on the belief that current inflation levels (5% in the Eurozone) are a temporary occurrence.  A transitionary phase underpinned by what ECB Chief Economist Phillip Lane recently called a “pandemic cycle of inflation”. This narrative assumes that supply side shortages and energy price fluctuations will moderate in 2022, returning the Eurozone to the optimum land of 2% price stability.

    But there is another important factor driving ECB policy. A reasoning that has nothing to do with debatable economic forecasts. That’s because the ECB is determined to atone for past monetary policy mistakes; namely, its ill-timed and growth killing interest rate rises of 2011.

    The legacy of its 2011 actions are now a central underpinning of its current strategy. ECB President Christine Lagarde acknowledged as much in July 2021 when she pledged that Frankfurt had “learned from history” and would facilitate ongoing monetary policy support, regardless of elevated short-term price levels. Now facilitated by a revised strategic framework, the ECB is deliberately running the economy hot in an effort to permanently raise price levels across the single currency area. 

    Unfortunately for Eurozone consumers, Frankfurt seems oblivious to the difference of being informed by history rather than being held prisoner by it. In a sense, the overly restrictive actions of the ECB in 2011 have their mirror image in 2022. Today, the determination to avoid past mistakes has given rise to an overly accommodative monetary policy stance, which is willing to forsake its basic obligation to maintain price stability. The results are starting to look no less catastrophic than the aftermath of the 2011 interest rate rises.

    In seeking to atone for past mistakes, the ECB may unwittingly usher in a new period of permanently higher prices. Prices that look increasingly likely to become embedded in the daily costs facing hundreds of millions of Europeans. The constant refrain from Frankfurt is that the easing of energy prices and supply chain blockages will result in moderating prices in 2022. This may be the case, but such a model also fails to acknowledge two key factors which will contribute significantly to elevated prices levels in the longer term.

    The first are the inflationary impacts of Europe’s investments in its Green Deal. One third of the 1.8 trillion euro in the EU’s Recovery Plan, and the EU’s current seven-year budget will finance the transition to a carbon-neutral economy. Many trillions more of further investment will be required in the coming years. These are trillions of euro of investment that will exacerbate the skills and capacity constraints already existing in many of these areas.

    Yet, the impact of these huge ongoing investments upon inflation are not adequately reflected in the ECB’s current forecasts. This was a point highlighted in January 2022 by ECB Executive Board member Isabel Schnabel, who explicitly noted that the energy transition “poses measurable upside risks to our baseline projection of inflation over the medium-term”.

    So while energy prices may decline as projected over the next 12 months, the ECB remains behind the curve in factoring in the true inflationary effects of the EU’s climate ambitions.

    The second factor undermining the ECB’s strategy is that its inflation estimates, quite remarkably, continue to ignore housing as a driver of rising living costs. This is a Eurozone economy where housing costs remain a critical component of real expenditure patterns. According to Eurostat, an average of 20% of a household’s disposable income is dedicated to housing costs across the EU. Yet, housing costs, as admitted by the ECB itself, are not yet adequately accounted for in its inflation estimates.

    The reality is that the longer term-inflationary impacts of the EU’s Green Deal and housing costs will more than offset any temporary slowdown in price pressures evident in 2022.  By pursuing an agenda driven by history, the ECB is underplaying the longer-term risks.

    One other point should also be considered in addressing the ECB’s current positioning; and that is the importance of personal experience in framing future strategic actions. Here, President Lagarde’s tenure as Economy Minister of France between 2007 and 2011 is relevant. Because “learning from history” can be read as seeking to avoid making the same mistakes twice.

    But repeating past mistakes is exactly what the ECB has sleepwalked into. In 2011, its orthodox zeal was driven by an instinctive Northern European monetary memory; experiences based on the hyperinflations of the 1920s across much of Central Europe. In 2022, its accommodative enthusiasm is driven by a desire to avoid the mistakes of 2011 at all costs.

    Neither strategy took (or is taking) account of broader macroeconomic realities or of the day-to-day experience of millions of Eurozone citizens. Price stability is, at its core, all about maintaining balance.

    Unfortunately, the ECB continues to wobble from one extreme to the other. 

    Eoin Drea Economy Eurozone Macroeconomics

    Eoin Drea

    Atoning for Past Mistakes is not a Monetary Policy Strategy


    18 Jan 2022

  • France Fitzgerald Theo Larue Economy Macroeconomics

    The Week in 7 Questions with Frances Fitzgerald

    Multimedia - Other videos

    10 Dec 2021

  • Eoin Drea Economy Macroeconomics

    Too hot to handle: Will Inflation kill Europe’s Recovery?

    Live-streams - Multimedia

    08 Dec 2021

  • For the European Central Bank (ECB), the inflation outlook seems quite clear. The factors underpinning current price rises – energy, supply bottlenecks and the temporary cut in German VAT rates – will all moderate, or end, in 2022.

    No further action is needed. Although prices are currently rising at a 4.1% annualised rate in the Eurozone, the view from Frankfurt is unequivocal – inflation will decline and interest rates will not rise over the course of the next twelve months. As the ECB recently noted, “We continue to foresee inflation in the medium term remaining below our two per cent target”. 

    Worried? Who’s worried?

    What is clear, however, is that the ECB’s current strategy of tolerating relatively high inflation will not have uniformly positive impacts across all Eurozone members. It will also, if continued in the medium term, result in catastrophic effects for Europe’s centrist political parties.

    Dressed up in the language of its recently completed “Strategy Review”, the ECB is essentially running the economy hot, regardless of all shorter-term implications. This approach will result in many Eurozone economies experiencing an unsustainable economic reality in 2022 – relatively high economic growth, ultra-low interest rates, and a rapidly rising cost of living (underpinned by dramatically rising property prices).

    The latest data highlights that a wide variety of Eurozone states, including Ireland, Germany, Estonia, Lithuania, Slovakia, and Spain are already experiencing annualised inflation levels close to double the EU’s 2% target. Easy and cheap financing is flowing into many European residential property markets as investors seek a broader hedge against uncertain equity market movements. House prices continue to surge across both the Eurozone (6.8%) and the EU27 (7.3%). As in the United States, these are price rises far in excess of wage growth.

    What is also concerning about the ECB’s approach is that while President Lagarde admitted that the ECB Governing Council “talked about inflation, inflation, inflation” at their last meeting in October, their remains no real consideration of how booming property prices are not yet fully accounted for in ECB inflation readings. But, as economists have pointed out, this oversight is already contributing to a significant underestimation of the cost of living.

    The reality is that the ECB’s current policy will cause significant collateral damage to many members of the Eurozone. And that damage won’t be limited to their economies.

    The political implications are potentially catastrophic. As one commentator noted, “if I were a populist politician, inflation would be my best friend”. 

    Because a “cost of living” debate will feed into the narrative of EU and ECB policymakers being completely out of touch with the day-to-day experience of ordinary European citizens, this is manna from heaven for the classical populist political playbook.

    The likely response of more mainstream European governments – as already seen in the additional energy taxes and subsidies proposed in Spain and France – will do little to alter the trajectory of this debate. Rather, it will just reinforce the impression of clueless policymaking washed down with a good dose of financial unsustainability.

    This is the reality President Biden is already facing in the United States. There, the rising cost of living (6.2% annualised and rising) was a key factor in Glenn Youngkin’s surprise victory in claiming the Governorship of Virginia. It will also form a key plank of the Republican economic strategy for the 2022 midterm elections. Far from being the crowning achievement of his time of office, his (still under discussion) 1.75 trillion dollar social spending plan will soon become the focus of a great inflation debate. It’s a debate President Biden is not sure to win.

    For Europe’s centre right, the political implications of the ECB’s current strategy are particularly acute. The cornerstone of all the EU’s grand strategic plans – including the Recovery Fund and the Green Deal – are based on the assumption of price stability. Prolonged higher rates of inflation will render those plans quickly obsolete as more and more investment will be needed to offset declining real values. From there, EU objectives become a hamster wheel from which it’s impossible to escape.

    And while much comment is being made about the ECB learning from its missteps during the Great Recession (notably the precipitous interest rate rise of 2011), this misses a key point. Because being informed by history is fundamentally different than being trapped by it. And in overextending its tolerance of significant price rises, the ECB risks destabilising the entire European political debate.

    In effect, the ECB is repeating the exact same mistakes as a decade ago, only this time in the opposite direction. But the political result will be the same – a populist surge with a very uncertain outcome.

    Eoin Drea Economy Macroeconomics Populism

    Eoin Drea

    Europe’s Monetary Policy Will Lead to a Populist Surge


    23 Nov 2021

  • Eoin Drea Sandra Pasarić Economy Macroeconomics

    #ComeTogether Ep 2 with Sofia Zacharaki and Eoin Drea

    Multimedia - Other videos

    01 Oct 2021

  • European economies are rebounding, annual inflation across the Eurozone is running at 3%. In Europe’s largest economy, Germany, consumer prices are running at multi-year highs of 3.4%. Continued rises in production and import prices point to a broad-based inflationary landscape. 

    But while economists bicker about whether price rises are “transitionary” or “permanent” a key element of the economy remains totally ignored. Namely, roaring house price inflation across Europe is outstripping wage growth, reducing affordability for many working families and beginning to threaten longer term political consequences. 

    Even worse, housing costs aren’t even adequately addressed in the European Central Bank’s (ECB) current inflation readings. And while much attention has been lavished on the ECB’s new monetary policy strategy, the glaring omission of relevant housing data from its index continues. 

    As identified by Angeloni and Gros, the ECB strategy review contains the recognition that “the inclusion of the costs related to owner-occupied housing in the HICP (harmonised index of consumer prices) would better represent the inflation rate that is relevant for households”. But, and this is the important point, such an inclusion is fobbed off into an unspecified future timeframe. 

    All the while housing costs remain a critical component of real expenditure patterns. On average, 20% of a household’s disposable income is dedicated to housing costs across the EU. Nearly 12% of the EU’s population lives in households where over 40% of disposable income is required just to meet housing needs. 

    The reality is that current ECB inflation readings seriously (and continuously) underestimate the level of price rises being experienced by households across the EU. Research suggests that the inclusion of proper housing data in the HICP would increase inflation readings by 0.4%. 

    Even this estimate likely undercounts the situation being experienced by millions of European families. The ECB’s commitment relates only to including data for “owner-occupied housing” which fails to account for price rises in the rental sector. This is important given that the average home ownership rate in the EU is below 70%. Thus, a significant element of property-related inflation will remain unaccounted for.  

    Recent work from the Dallas Fed shows clearly that surging house price growth has, historically, been a useful predictor of further rise of rent and of owners equivalent rent (i.e., the amount of rent equivalent to the cost of ownership), thereby driving inflation rates even higher as property prices and rent inflation will drive increased wage demands; a situation exacerbated by the labour shortages being experienced in many sectors in this (hopefully nearly) post-pandemic environment. 

    The real danger is that the ECB (and other central banks) are already behind the curve when it comes to evaluating the price rises being experienced by ordinary citizens. Such a lag increases the risk that inflation expectations will shift rapidly from the transitionary consensus to that of a more permanent nature.   

    This is a risk magnified by the new strategies of the ECB and the US Federal Reserve. Strategies which allow both economies to experience inflation levels above their 2% targets for longer periods of time. 

    This change may already be happening. In the US, the Conference Board now sees US consumers expecting inflation of 6.8% in 12 months’ time. And this in an economic landscape where the S&P Case-Shiller national home price index is witnessing double digit price increases across all nine US census divisions.   

    The American housing market will probably get more bubble-like in the months ahead. Even Dallas Fed President Eric Rosengren has been directly highlighting the role of housing market instability in driving wider financial market and economic woes. 

    Exuberant housing markets spell all kinds of trouble for European policymakers. Belated action to curb inflation levels (the real kind that includes proper data for housing) leaves the EU vulnerable to losing control of inflation expectations and allowing a wage-price inflationary spiral to embed itself across economies. From that point, a wild price ride, like that which began in the late 1960s when the Fed chair, McChesney Martin, infamously lost control of inflation expectations, will no longer be inconceivable. 

    For the EU, that would spell disaster beyond the obvious effects of prolonged, elevated inflation levels. While more indebted member states – such as Greece and Italy – might instinctively welcome higher inflation rates, an out-of-control inflation spiral would have more than national impacts. 

    The very stability of the Eurozone would, once again, be called into question, as would the credibility of its entire economic governance system. For the centre-right, this would pose fundamental questions about the viability of the European Commission’s wider strategic agenda including, but not limited to, reaching the investment levels required to meet agreed climate change and digitalisation targets. 

    Stable inflation is the bedrock of the EU’s vision for itself as a sea of relative stability in a rapidly changing world. But, as the former German Finance Minister Karl Schiller understood, “Stability is not everything, but without stability, everything is nothing”.

    Eoin Drea Economy Macroeconomics

    Eoin Drea

    Housing Inflation is the Biggest Threat of all


    09 Sep 2021

  • Eoin Drea Economy Eurozone Macroeconomics

    EIF 21 Interview – Paschal Donohoe

    Live-streams - Multimedia

    29 Jun 2021

  • Don’t miss the President of the Eurogroup answer Roland Freudenstein’s questions on the priorities for 2021 & 2022, the EU’s recovery, fiscal rules, a potential increase in inflation, or the taxation of digital companies, among other economic issues.

    Roland Freudenstein COVID-19 Economy Eurozone Macroeconomics

    The Week in 7 Questions with Paschal Donohoe

    Multimedia - Other videos

    02 Apr 2021

  • This week, Dr Drea answered Roland’s questions on the immediate economic future of the EU, including Covid-19 vaccines, tourism, the coming Eurogroup meeting, the Recovery Fund, and even Saint Patrick’s Day.

    Roland Freudenstein Eoin Drea Economy Macroeconomics

    The Week in 7 Questions with Eoin Drea

    Multimedia - Other videos

    19 Mar 2021

  • The recent agreement on the EU budget and Recovery Fund is the latest example of the difficulties in forging pan-­European agreements. Even in the midst of a global pandemic and the urgent need for a secure budgetary framework, the EU’s decision-making process continues to frustrate faster, majority led decision making.

    These disagreements between member states directly risk the ability of the EU to proceed with key policy initiatives such as the Recovery Fund, the Green Deal and working towards a fuller recovery from the ongoing Corona crisis. This, in turn, has the potential to compromise the wider geo-­political role of the EU as a global actor. It also injects uncertainty into how the financial markets view existing commitments made by Brussels regarding Europe’s flagship Recovery Fund. This event will consider if the recent disagreements over the Rule of Law mechanism should provide the catalyst for a wider reform of how important decisions are made at EU level. What other mechanisms, if any, exist for ensuring a more streamlined and efficient decision-making process at EU level? Could agreement on fundamental issues be reached outside the standard approach of achieving unanimity across all member states?

    Roland Freudenstein Economy European Union Macroeconomics

    The Budget, Recovery Fund and Implications for the Future of EU Decision Making

    Live-streams - Multimedia

    17 Dec 2020

  • Tomi Huhtanen Economy Macroeconomics Trade

    EIF 2020 – Panel 2: Global Trade

    Live-streams - Multimedia

    27 Oct 2020

  • Dimitar Lilkov Jyrki Katainen Maria Spyraki Economy Macroeconomics

    EIF 2020 – Panel 1: Europe’s Green Deal

    Live-streams - Multimedia

    27 Oct 2020

  • It is often maintained that the euro debt crisis showed that the Economic and Monetary Union (EMU) was not sustainable without more fiscal integration. However, important causes of the crisis were extraordinary and are highly unlikely to occur again. While the legacy problems of the crisis have been grave, they can be deemed temporary.

    Therefore, these problems should be combated pragmatically, but with temporary instruments only. A systematic analysis shows that the root causes have been tackled with a wide variety of reforms, both to the EMU itself and by way of structural reforms of the member states. In particular, evidence is presented that the adjustment capacities of the EMU countries are better than commonly recognised.

    Additional reforms are suggested, especially in the financial sector. With these reforms in place, future crises would have less serious effects. A reformed EMU should be able to withstand such crises without further fiscal integration.

    Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

    Jürgen Matthes Anna Iara Eurozone Macroeconomics

    Jürgen Matthes

    Anna Iara

    On the future of the EMU: is more fiscal integration indispensable?


    01 Jul 2020

  • With global politics in turmoil, Russia and China have found each other. In 2018, the President of Russia Vladimir Putin and Chinese President Xi Jinping met one another five times. In the same year, Russia and China held their biggest shared military exercises for decades.

    Trade between the two nations increased by over 30% in 2018, and is expected to increase even more. They also seem to be finding synergies when it comes to dealing with the situations in Syria and Venezuela.

    China and Russia both have features that unite them. Both are blatantly autocratic, show a callous disregard for human rights, and share an openness to using military force in their neighbourhoods. They also share a great interest in pushing back the West’s influence in the world.

    Yet, despite these various areas of cooperation, the list of potential conflict points between the two powers is long. Despite the decade-long and successful efforts to ease the potential security conflicts between China and Russia, China’s increasing global ambitions are clashing with Russia’s interests.

    To start with, Russia considers the Arctic region its front yard. In 2018, China – self-identifying as a ‘Near-Arctic State’ – announced its official Arctic policy, promoting Beijing’s ambitions for the region, and raising Russian fears of a potential Chinese takeover of the polar zone through the creation of a ‘Polar Silk Road’.

    Despite efforts to ease the potential security conflicts between China and Russia, China’s increasing global ambitions are clashing with Russia’s interests.

    China’s Belt and Road Initiative also penetrates post-Soviet states in Russia’s backyard. While on the surface level the project underlines economic cooperation, it is clear that China will not make billions worth of investments without making sure that those investments are protected.

    As a consequence, China’s influence in Central Asia is increasing rapidly. In the long run, it is clear that the power balance will shift in China’s favour in Central Asia. This represents a major change for Russia.

    China has been careful not to encroach upon Russia’s security concerns in Central Asia, but at the same time Beijing is strengthening its role in counterterrorism initiatives with Central Asian states, and beefing up its security presence in countries like Tajikistan.  

    As China’s Belt and Road Initiative becomes more established, it could easily come into conflict with Russia’s interests in the Russia-managed Eurasian Economic Union. Conflicts of interest may also arise in setting out the future direction of the Shanghai Cooperation Organization (SCO).

    Over the past couple of years, European countries have become very concerned about the consequences of China’s increasing investments. The exact same thing is taking place in Russia’s far east.

    For example, Chinese capital now accounts for 45 percent of total foreign investment in the second most important regional city in Russia’s far East, Khabarovsk. Meanwhile Vladivostok, Russia’s far east capital, is also being transformed by Chinese investments.

    While this economic boost is being welcomed in this troubled Russian region, the daily deluge of tens of thousands of Chinese holidaymakers and investors has raised concerns among Russian nationalists, who suspect that this could be part of China’s strategic plot to reconquer its lost territories. Indeed, Vladivostok itself was once a part of China known as ‘Haishenwai’ in Chinese.

    Why is Russia not reacting to China’s expansion?

    Despite these numerous threats, why is Russia still choosing a close alliance with China in various areas? To start with, Russia believes it does not have much of a choice; Russia is a fraction of China’s size economically, and its population is just one tenth of China’s. In military terms, comparing active personnel and military equipment, Russia is not as far behind.

    Nevertheless, Russia can ill afford a military confrontation with China along its long land border, given that its military budget is only one third that of China’s. Russia also knows that China could scale up its military rather quickly if needed both in term of men and equipment because of its economic resources.

    Additionally, despite Russia’s nuclear advantage, it cannot employ the same scaremongering tactics with China as Putin does with the European population, due to the fact that in China the media is controlled.

    But the central reason for Russia’s approach is that while the Putin administration is focused on surviving the next few years, China, by contrast, is playing the long game. Putin’s main goal is to secure his immediate future, and in that regard cooperation with China is beneficial.

    While the Putin administration is focused on surviving the next few years, China, by contrast, is playing the long game.

    The likelihood that Putin manages to maintain his grip on power in Russia is high. Nevertheless, the economic situation in Russia is worsening, and increasing popular dissatisfaction is being expressed more openly. The result is growing difficulties for the Kremlin in maintaining the status quo, and controlling different regions and their elections has become more difficult as Putin’s hold on the Russian public loosens.

    Meanwhile, Putin has declared a de-facto war against the West and its set of values. The colour revolutions in Russia’s neighbourhood were interpreted by Putin as an advance of the West’s values, as well as an immediate personal threat. China might become a threat to Russia at some point, but not immediately, and not to Putin himself.

    No doubt Putin understands the long-term risks of China’s growing influence for Russia, but for Putin events in twenty- or thirty-years’ time seem to have less value. China, by contrast knows that Russia is a quickly declining power and it has the patience to wait both for Russia’s power to decay and its own to rise. No doubt Russia will snap out of its sleepwalk with China at some point, but by then it will already be too late.  

    Tomi Huhtanen Defence Economy Foreign Policy Macroeconomics

    Tomi Huhtanen

    Is Russia sleepwalking into Chinese dominance?


    15 Apr 2019

  • Even in polite conversation, the subject of gender equality and women’s rights generally evokes an emotive response that often veers into wider subjective judgements about identity, values and society. Ironically – and there are countless ironies when considering these issues – these discussions generally get mired in fruitless arguments about the end result of gender inequality (such as the gender pay gap) rather than seeking to tackle the underlying causes (education, childcare and work-life balance to name but a few).

    There are three primary misunderstandings which are contributing to the vacuous nature of much contemporary political debate on gender issues. First, and perhaps the most common misconception, is to think that gender equality only concerns women. The fact is that gender equality is often viewed – by both men and society – as a feminist issue only. This is why it is crucial to explain that gender equality concerns us all.

    Recent Martens Centre research illustrates the importance of gender equality in a growing European economy. The paper identifies four strategic policy actions to help tackle the structural rigidities that facilitate gender inequalities. These are:

    • the promotion of better work-life balance
    • embedding equality in national tax systems
    • tackling gender stereotypes through education
    • understanding the benefits of long term investments for long term gains in terms of equality policies

    The paper also clarifies that it should be the EU’s responsibility to focus on setting the overall strategic objectives that need to be attained, but the implementation of specific gender policies should be tailored towards the institutional, economic and cultural framework of each country and should be implemented at national level, in line with the principle of subsidiarity.

    Second, it is important that men take an active part in this debate and are not viewed as the “enemy” by proponents of gender equality principles. The emotive reaction of those experiencing inequalities often seeks to frame the issue as a clash of genders: “us” versus “them”. But actually, the move towards greater equality needs men and women working together and sharing the same goals.

    Equality should not be seen as a victory for women over men’s “predominance”. It should be seen as a crucial achievement of a society that is more reflective of the daily challenges facing tens of millions of European families.

    The third misconception is that gender equality issues are a prerogative of the Left and as a result centre and centre-right political forces should avoid seeking to replicate or support this “progressive” agenda. Yet, such a view places perceived political imperatives before combatting issues impacting most severely upon traditional centre-right voters, namely hard-working Middle-Class families.

    Centre and centre-right political forces can and should mark their distance from the leftist, radical approach by promoting a set of concrete, achievable policies aimed at reducing inequalities for the benefit of our economies and societies.

    To name a few examples: designing a tax system and maternity-paternity measures that encourage both spouses to work, securing access to affordable and good-quality childcare, promoting projects and initiatives in schools aimed at fighting gender stereotypes and, last but not least, enforcing the prevention and sanctions against any discriminations, misconducts and abuses in the workplace and in any other environments.

    It should be remembered that gender equality issues go beyond the partisan/ideological discourse and concerns every political actor which is supposed to give precise answers to people’s needs and demands.

    Gender equality is one of the core principles of the EU. This is set forth in, for example, Article 2 of the Treaty of the European Union. Gender equality is, at its core, concerned with developing a society which rejects discrimination based on gender, without denying or undermining the importance of traditional customs or rules. 

    The European Peoples Party (EPP) is a party based on core Christian-Democratic values of solidarity, respect of human dignity, equality and justice. The challenge, therefore, is not so much to embrace gender equality issues, but rather to transform our political rhetoric into political action. Action that will have a beneficial and lasting impact, not just upon women, but for Middle Class families throughout Europe and for our societies at large.      

    Margherita Movarelli Eoin Drea Centre-Right Jobs Macroeconomics Social Policy Society

    Margherita Movarelli

    Eoin Drea

    Tackling gender equality – one misunderstanding at a time


    19 Feb 2019

  • Successful systemic reforms – reforms that put an entire country on a higher trajectory of development – have become the Holy Grail of modern democratic politics. All politicians of some ambition claim to be pursuing them, but few manage to secure any during their time in office.

    In recent decades, successful reforms have in fact been a rarity and a riddle in western democracies: they seldom happen and we do not exactly know why they succeed. For one country that made it – for example Thatcher’s Britain – one can find several that failed – from France to Italy and Greece.

    Thanks to Nils Karlson’s book Statecraft and Liberal Reform in Advanced Democracies, published by Palgrave Macmillan this year, successful reforms will be less of a riddle and perhaps less of a rarity too.

    Karlson, the Founding President and CEO of the Ratio Institute in Stockholm and an Associate Professor at Uppsala University in Sweden, had first-hand exposure to successful structural transformations in his own country when he served as a public sector manager under Prime Minister Carl Bildt.

    Successful systemic reforms have become the Holy Grail of modern democratic politics.

    This was the period when Sweden transformed from an economy plagued by low productivity, heavy regulation and exorbitant taxes into an open, competitive one with high productivity, deregulated markets and sound public finances.

    From an in-depth comparison between the Swedish experience and the Australian one – another success story of reform – the author develops the best theory yet on how to understand – and pursue – reforms.

    Modern statecraft – the art of governing a country well and of promoting reform – requires that there is an opening for action but most crucially that elites know what to do and how to do it. The opening is usually created by changing economic and social conditions that show the inadequacy of existing arrangements.

    By the 1970s, for example, interventionist policies had created a state of economic sclerosis and social stalemate in Britain and Sweden. Something had to be done, but what exactly? At this juncture, ideas take center stage.

    Jean Claude Juncker’s famous quip that ‘we all know what to do, but we don’t know how to get re-elected once we have done it’ shows way too much confidence in politicians’ skills.

    Politicians are consumers, not producers, of ideas.

    Building on an intuition that had already surfaced in the thinking of Friedrich Hayek – the great liberal economist and social theorist – Karlson explains that novel ideas for policy changes must have been developed and strategically promoted for policy-makers to know what to do when the occasion arises.

    Politicians are consumers, not producers, of ideas. All available examples show that policy entrepreneurs in universities, think tanks and strategically placed institutions play a key role in developing ideas for policy changes and in finding political champions to promote them.

    Without these people, beneficial change does not normally happen. In the British case, a policy entrepreneur such as Anthony Fisher and an organisation such as the Institute of Economic Affairs come to mind.

    This process of elaborating and spreading new ideas can be decades-long – it was in the cases treated in the book. Besides, its success is no guarantee of welfare-enhancing reforms.

    The author explains that policy-makers who have embraced ideas for change need to overcome powerful obstacles on the road to reform, from special interests and public goods traps to public opinion and cognitive biases.

    To be successful, they need to know how to do what they deem necessary, which in practice means mastering and using three major reform strategies: Popperian, Kuhnian and Machiavellian.

    The first are based on rational argumentation, the second on changing the frame of discussions, the third on shrewdness, divide-and-rule and scapegoating. All successful reformers seem to have used some combination of the three, depending on circumstances. 

    The book does a good job explaining why major policy changes succeed in advanced democratic welfare states. It also offers a promising framework to understand why they often fail. In France, Italy and Greece, for example, policy entrepreneurs are mostly absent, and think tanks relatively underdeveloped.

    To be successful means mastering and using three major reform strategies: Popperian, Kuhnian and Machiavellian. 

    Elites are traditionally absorbed by the state bureaucracy, which acts as a bulwark of conservatism and discourages any reform. In order to prove the robustness of his theory, Karlson will have to test it with more countries, most interestingly those who tried and failed to reform. The theory may also benefit from placing higher emphasis on institutional obstacles to reform, which are somewhat neglected.

    When a country has dysfunctional institutions, in addition to ineffective economic and social policies, reforms may be blocked even if all the conditions identified by Karlson are in place. The Italian case comes to mind again here, with successive reformers – most lately Renzi – worn out by failed attempts to modernise an ineffective constitution that makes special interests all-powerful.

    All in all this is an excellent contribution that scholars, practitioners and politicians with reformist ambitions would do well to read carefully. At a time when the future of Europe and EU reform are the talks of the town, it is an essential read for us in the Brussels bubble too.

    It should help think tanks and political foundations better understand how decisive our role in developing and spreading novel ideas for EU reform can be in the current context. And it should induce us to upgrade our ambitions from playing a mostly supporting role to becoming drivers of change that actively shape narratives and policies.  

    Federico Ottavio Reho Economy EU Member States Macroeconomics

    Federico Ottavio Reho

    Even advanced democracies need reforming


    15 Feb 2018

  • Media headlines seem to have given much larger attention to the bailout programme in Greece than to those of most other countries. But Greece’s experience with economic adjustment is in many ways an outlier, complicated by the election of the radical-left government of Tsipras.

    Cyprus offers the interesting example of an economy saved with the help of economic adjustment and responsible reforms. Cyprus under centre-right leadership seems to be a rags-to-riches story after being shut out of financial markets only six years ago.

    During the 2000s Cyprus registered strong growth driven by buoyant domestic demand according to a European Commission report. On average, Cyprus’ real GDP grew at a rate of 2.75% between 2000 and 2010 compared to the 1.4% of the euro area for the same timeframe.

    The country enjoyed high employment rates, low inflation rates and rising real disposable income. This led to real convergence with the stronger economies in the European Union. Apart from domestic demand, Cyprus’ accession to the European Union in 2004 and its joining the euro area in 2008 contributed to this growth by boosting investor confidence.

    While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.

    However, this positive image was underpinned by economic vulnerabilities and imbalances due to the mismanagement of the public finances. Notably, Cyprus ran current account deficits averaging 6.9% of GDP for approximately one decade during EU accession and entry to the euro area. In order to finance its current account deficit, Cyprus relied on foreign direct investment, which provided little added value to the economy.

    Furthermore, the public sector had grown extensively in the 2000s, taxpayer compliance was low, and total government expenditure as a share of GDP increased. Additionally, the banking sector was vulnerable because of inadequate prudential supervision and because of its openness toward Greece.

    When the financial crisis and subsequent euro crisis hit, the Cypriot banking sector was severely impacted. Cyprus reached a 6.3% budget deficit and gross debt rose sharply to 85.8% of GDP and subsequently going over 100%. Cyprus was shut out of financial markets for 18 months starting in mid-2011.

    In order to adjust its economy, Cyprus agreed a bailout programme and undertook comprehensive structural reforms under centre-right President Anastasiades. The implementation of the bailout programme of €10 billion (56% of Cypriot GDP) took place between 2013 and 2016.

    It was one of the largest sovereign bailouts in history. The bailout programme targeted Cypriot banks and involved a severe austerity programme (cuts to public spending, tax increases, and privatisation of semi-government organisations).

    The reform to the banking sector, which saw Cyprus’ second-largest bank shut down, was received negatively by the public as it involved losses to all stakeholders in the banking sector, especially bondholders and depositors.

    The government in Cyprus was determined in its response to the crisis and Cypriots were stoic in their resolve to see the reforms through. Apart from minor unrest toward the beginning of 2013, there were little protests and no riots against the austerity programme.

    While Cyprus resembles other countries in the euro area most affected by the crisis, it represents a success story in crisis management.

    The performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity. 

    The country exited the bailout programme on track in 2016 due to ambitious and consistent implementation of necessary reforms by the centre-right government led by President Anastasiades.

    Statistical data from Eurostat supports the positive contribution government policy since 2013 has made to the country’s recovery. Cyprus ranks among the top ten countries in the European Union on key financial indicators.

    Data for the third quarter of 2017 shows a 0.9% increase in GDP over the previous quarter and a 3.9% increase over 2016. Employment has increased by 0.7% in the third quarter when compared to the second and by 3.5% when compared to 2016.

    Equally, Cyprus registered the fifth largest year-on-year decrease in unemployment in the European Union, from 13.1% in 2016 to 11.0% in the third quarter of 2017.

    Cyprus had the largest year-on-year drop in government debt to GDP ratio (7.4%) in the EU in the third quarter of 2017. According to a European Commission forecast, growth is expected to remain strong in 2018 and 2019 coupled with a strong labour market and modest inflation.

    The economy of Cyprus has outperformed the government’s budgetary targets, and government debt is likely to fall below 100% of GDP in 2019.

    The academic literature on public administration reform often emphasises the difficulty of agreeing to and implementing reforms as well as of deciding whether or not the intended reforms had the intended outcome.

    In this respect, the performance of Cyprus is a clear example of the positive link between a bailout programme for a country in deep crisis and sustainable economic activity. Notably, it is a victory for the centre-right, which has once more shown its ability to deliver results in highly challenging circumstances.

    Even so, the Cypriot economy should not rest on its laurels even if it has registered a significant improvement. A forecast by Oxford Economics warns that reform is still necessary as the ‘legacy of the 2012-2013 crisis can still be seen in the banking sector’.

    Further work on restructuring non-performing loans and improving public finances is required in order for the positive forecasts to become a reality. Rags-to-riches stories are popular, but so are riches-to-rags. 

    Andrei Moraru Centre-Right Crisis Economy EU Member States Macroeconomics

    Andrei Moraru

    Cyprus: from rags to riches?


    01 Jan 2018

  • In a reflection paper intended to generate debate among euro-area governments, the European Commission has put forward ideas on what could be done to deepen the Economic and Monetary Union by 2025. One of the ideas outlined by the Commission is the creation of a euro-area budget.

    This article reviews the key issues that are relevant in the discussion on establishing such a budget; outlines the possible functions of such a budget, such as incentivising structural reforms or ensuring macro-stabilisation; and discusses the issues of size, funding, moral hazard and governance, while touching upon the role of non-euro-area member states.

    The article concludes with the assertion that the answer to this question is essentially political in nature and could constitute an example of how member states are ready to integrate further, while giving non-euro-area member states the opportunity to participate.

    Read the full article in the December 2017 issue of the European View, the Martens Centre policy journal.

    Siegfried Mureşan European Union Eurozone Macroeconomics

    Siegfried Mureşan

    Prospects for a euro-area budget: an analytical outline


    19 Dec 2017

  • Tax policy is central to national democratic policy making, and tax issues feature more and more prominently in EU level discussions too.

    For citizens – who are also taxpayers – taxes are everywhere and ever-increasing, impacting every aspect of their daily lives, including trivial things such as purchasing cigarettes, alcohol or gasoline. In recent years an increasing number of legal instruments have been adopted both at Belgian and European level, in order to strengthen the transparency of citizens’ revenues and thus further increase their future tax burden.

    For states, taxation is deemed to be vital to guarantee the proper functioning of basic public services. However, it should be noted that despite levying increasing taxes, Western European countries are unable to reduce public debt, while often cutting the financial means of key public sectors such as justice, defence and public infrastructures. The real ability of high tax regimes to truly reduce inequality is also questionable.

    In such a context, how is it possible to justify such high taxes to citizens? For many, the easiest way  out is indignation about tax scandals that are revealed on a regular basis – be they ‘Lux Leaks’, ‘Panama Leaks’ or ‘Paradise Papers’. These scandals present an opportunity to take steps to enforce tax transparency both at national and European/international level.

    Few see that they should also represent an opportunity to rethink the purpose and efficiency of current taxes. In Austria, young ÖVP leader Sebastian Kurz  appears to be one of them, as he declared that he wants a ‘lean state’ in Austria, with reduced intervention and taxes.

    Efficiency is a key principle to make tax levies acceptable to the population in future. In a recent book on the ethical aspects of taxation, the German philosopher Peter Sloterdijk reminds us that in Queen Victoria’s time a tax levy of 3,33 % was already seen as problematic.  

    Tax efficiency and tax justice are key to maintaining social cohesion within the population of the European member states. They raise important questions, which need to be scrutinised in relation to the subsidiarity principle. At European level in particular, a crucial question is how to balance a high degree of innovation and competition within the Euro area and tax harmonisation.

    A certain degree of tax coordination – for example with the exchange of information – is welcome and necessary in order to fight against tax fraud and tax evasion. But should tax coordination in specific areas automatically lead to tax harmonisation or even to tax uniformity?

    Unsurprisingly, high-tax countries dislike tax competition. However, the experience of VAT – a tax that is almost completely harmonised at European level – shows that tax harmonisation in Europe automatically leads to higher tax rates. As a general rule, harmonised tax legislation mandates a minimum tax rate, but never a maximum tax rate, which means member states are free to introduce higher tax rates.

    Furthermore, it is doubtful whether imposing harmonised tax rules can be seen as ‘fair’: every European country has its own features and sources of income. In fact, the truth is that tax harmonisation can be regarded as a convenient fig leaf for high-tax jurisdictions, enabling them to hide their need to undertake economic and fiscal reforms. It is designed to hinder the flow of capital and jobs from high-tax countries to low-tax ones. Tax competition, on the contrary, stimulates the efficiency of states that are ready to embrace a reformist agenda.    

    True, both tax competition and tax harmonisation have their own advantages: tax competition is deemed to promote economic growth and efficiency in the public sector, whilst tax harmonisation is expected to reduce firms’ compliance costs and strengthen transparency.

    The best scenario would be a European Union where investment decisions in any country are not merely determined by tax considerations, but also by other criteria such as the country’s social environment (in terms of education, health care, public infrastructure, environmental protection, etc..).

    European countries would compete to offer the best environment to potential investors, not just tax advantages, which in turn will benefit to the local population. Governments should devise policies that put tax competition at the service of the common good, not initiatives that curb it for the advantage of high tax jurisdictions. 

    Gaëtan Zeyen EU Member States Macroeconomics Social Policy

    Gaëtan Zeyen

    European tax policy: focus on efficiency, not harmonisation!


    07 Dec 2017

  • The Economic and Monetary Union remains incomplete and vulnerable. The current economic and political climate offers a window of opportunity to further deepen this Union in 2018. Completing the banking union and creating a roadmap for a capital markets union are both essential.

    One of the missing building blocks is a minister of finance and economic reform for the eurozone. This minister should have the powers and democratic legitimacy to better enforce the rules on budgetary and macroeconomic discipline. He or she should also be responsible for managing a budget line for the eurozone that can act as a countercyclical buffer when monetary policy and national fiscal policy are insufficient.

    This budget line, together with the European Structural Investment Funds, should also act as an instrument for enforcing and supporting structural economic reforms aimed at making the national economies more resilient to external shocks.

    Read the full article in the December 2017 issue of the European View, the Martens Centre policy journal.

    Hans Geeroms European Union Eurozone Macroeconomics

    Hans Geeroms

    Why the eurozone needs a minister of finance and economic reform


    05 Dec 2017

  • President Macron in his sweeping vision of the Future of Europe (delivered on the 26th of September) correctly identifies the centrality of the Euro to the long term economic power of Europe. Through Economic and Monetary Union (EMU) he argues “we can create the heart of an integrated Europe”. His goal is increased economic power to allow Europe better compete on a global scale with China and the United States.

    His overarching plan for the Euro involves the creation of a Eurozone budget overseen by a common Finance Minister under European Parliamentary control.  Such a budget would be used as a stabilising mechanism in the face of economic shocks. 

    This is a vision for the Euro based on increased convergence across all aspects of the economic model – from harmonised corporate taxation to single regulatory frameworks in areas such as the digital economy. It is from an economist’s viewpoint, the traditional view of turning the Eurozone into an Optimum Currency Area (OCA) complete with what many term a “fiscal union”.

    Such a vision for Europe is both welcome and timely, particularly in the absence of a long term political framework from other member states.  However, his proposals for the Eurozone risk repeating two of the biggest mistakes made by European policymakers in the move towards monetary union thirty years ago. 

    Firstly, in the late 1980s, the desire to spur deeper political integration resulted in the construction of a monetary union whose institutional design flaws were painfully exposed from 2007 on. President Macron’s vision – “the German taboo is financial transfers; the French taboo is treaty change. Ultimately, if we want Europe, both will happen” – again assumes that more integration, more harmonisation will drive EMU forward.

    Yet, this vision fails to appreciate that the EU, and in particular the Eurozone, is still dealing with the results of the last decade of economic and financial crises.  While very real progress has been made across a suite of relevant issues (including Banking Union and ECB credibility as an independent actor) further vital work remains to be completed.

    In particular, Banking Union must be completed through the finalisation of a European Deposit Insurance Scheme, the Single Capital Markets programme progressed and the link between sovereign debt and domestic banks further weakened.

    In addition, a sense of economic realism must be brought to the political discussion on legacy debt issues, particularly with regard to Greece.  These are the practical issues that will determine the viability of the Euro over the next decade, not a much broader political vision of Europe as an OCA.

    Second, President Macron’s vision is based on an explicit belief that a fiscal union is required for the long run sustainability of the Eurozone. However, such a view is not based on the operational experience of the largest monetary union currently in operation, the United States. 

    As has been highlighted by many American economists and economic historians the development of the American monetary union was not characterised by automatic stabilisers or significant fiscal transfers. 

    Such characteristics took nearly two centuries to be developed. Rather, the existence of a credible “no bailout” clause underpinned credibility and allowed the monetary system in the U.S. to evolve into the Federal Reserve System which operates today.  A system which even since its establishment in 1913 continues to change and evolve.

    President Macron’s vision for Europe chimes nicely with broader debates on the “Future of Europe” currently being aired in all member states.  However, when it come to the Euro, a more realistic approach will help preserve its stability for us all.

    Eoin Drea EU Member States Eurozone Macroeconomics

    Eoin Drea

    President Macron, politics and a realistic approach to the future of the Euro


    24 Oct 2017

  • This article argues that maintaining the status quo is not an option for the euro area. The euro has functional and existential weaknesses that force us to take drastic action if we want to become resilient enough to withstand the next banking crisis. The article argues that the existential weaknesses of the euro stem from the D/Y ratio (debt-to-GDP). Euro-area members have only limited scope for using traditional mechanisms to deal with D/Y problems.

    What makes this especially worrying for the overall stability of the euro area is the ownership of the debt issued by the euro-area member states. It is absolutely vital to separate banks and sovereigns and to slash debt-to-GDP levels. The question is whether the political decision-making processes in the member states can deliver these structural changes.

    Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

    Juha-Pekka Nurvala Economy EU Member States Eurozone Macroeconomics

    Juha-Pekka Nurvala

    The status quo is not an option: functional and existential weaknesses of the EMU


    04 Jul 2017

  • Events in recent years have put the European economic integration project and the euro under pressure. The main cause of the euro crisis is loss of competitiveness, particularly on the periphery of the Economic and Monetary Union. To reverse this, Union members must promote structural reforms that increase long-term employment, productivity and external competitiveness.

    The successful implementation of reforms, however, requires sufficient public support, which in turn presupposes measures that support demand during the implementation of reforms. To that end, important steps include taking an expenditure-based approach to fiscal adjustment and the introduction of the European Deposit Insurance Scheme.

    And for Greece in particular, the set of necessary steps includes taking ownership of reforms, the downward revision of fiscal targets, and medium- and long-term measures of debt relief conditional upon meeting fiscal/reform targets. Finally, the stability of the euro hinges on the moderation of all fiscal and external imbalances across all member states, regardless of whether these imbalances are apparent or not.

    Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

    Michael G. Arghyrou EU Member States Eurozone Growth Macroeconomics

    Michael G. Arghyrou

    Structural reforms in the euro area: a Greek view


    24 May 2017

  • The need for a fiscal union in the EU is an issue which has been debated many times and about which much has been written. However, the economic and financial crisis we have experienced in recent years has cast doubt on whether we have taken this debate in the right direction. Sometimes we tend to focus the debate on marginal issues and unrealistic proposals. Rather than helping us to move forward, this paralyses the EU and distances us from feasible targets. This article aims to give a general overview of the debate on a fiscal union to find out where we are in the process of fiscal integration and what we can really expect from it.

    Read the full article in the June 2017 issue of the European View, the Martens Centre policy journal.

    Miguel Marín Crisis Eurozone Integration Macroeconomics

    Miguel Marín

    The only feasible fiscal union for the euro area


    17 May 2017

  • The 2010s are becoming a decade of geopolitical paradoxes, even tectonic shifts. Donald Trump’s electoral victory may create a new and outrageous alliance between the US and Russia at the expense of the EU. And Trump may take the US out of the global agreements that Obama government promoted to make banks more resilient to storms on financial markets.

    In the UK, Scottish nationalism that two decades ago could not boast even a weak Scottish assembly, has by mid-2010s contributed to the rise of English nationalism. It was the latter force that ripped the UK out of the EU through the 2016 independence referendum.

    It seems that leaving the EU will not satisfy the mighty centrifugal momentum that is pushing the UK polity away from the continent. The possibility that the UK would stay in the single market is no longer there. Among the West European prime ministers at the time, UK’s Margaret Thatcher took the political lead in the efforts to dismantle barriers to trade inside the common market (see this Thatcher speech from 1988). 

    Theresa May’s historic speech on 17 January 2017 made it clear that the UK would be leaving the single European market, the joint product of British free market ideas and French and German efforts for the unification of (West) European economies. All that as a price for the ability to stop the free movement of people. 

    The Brits are leaving the single market, but all of us will suffer the consequences, economically speaking. It’s a lose-lose situation for everyone, from whichever angle you look at it. A reintroduction of tariffs for trade between the E-27 and the UK is almost inevitable. Tariffs will lead to a decrease in trade. This will leave the average European and UK citizen a little poorer.

    The paradox of paradoxes is that if they want to trade with the EU, the Brits will not only pay tariffs on EU goods (the same will of course also apply to UK goods in the EU) but will also have to abide by EU industrial standards.

    The despised EU-wide regulations in fact allow British firms to trade on equal terms with European companies and maintain supply chains across the continent. Leaving the single market will entail delays on the border, not least due to technical, health and safety inspections of goods, unless enlightened negotiators on both sides agree mutual recognition clauses for one another’s products (the UK government is planning to retain the existing EU regulations en bloc, and abolish individual pieces of EU legislation one by one after it officially leaves the EU, and as needed; this is a good sign and should make such mutual recognition easier).

    London will almost inevitably lose its status as a European banking centre. The City will inevitably lose the ‘passporting rights’ that allow UK financial firms conduct business on the continent without bureaucratic barriers.

    Among the tectonic political shifts, continental Europeans should remember that they need to stay united not only vis-à-vis Putin, but also vis-à-vis the UK government, which remains a crucial security ally. During Brexit negotiations, the UK may try to cut deals with individual member states to gain advantage on the shape of the future EU-UK economic relationship. It is a lose-lose situation for the EU-27 and the UK, but how much each side loses, depends on how unified and clear-sighted that side is.

    We live in strange times.

    Vít Novotný EU Member States Macroeconomics Trade

    Vít Novotný

    Britain is leaving its own creation, the single market


    21 Feb 2017

  • ‘Since the start of my academic career, I have never had a student critical of international trade. Only until recently has this positive opinion changed,’ stated Anu Bradford, Professor of Law and International Organization at Columbia University. The prolonged economic stagnation, she claimed, has played a role in changing attitudes, along with a failure of elites to recognise citizens’ legitimate concerns and promote an inclusive globalisation.

    As a panellist of the event ‘Does global trade have a future?’ hosted by the Martens Centre on 11 January 2017, Prof. Bradford gave her opinion on the current state of play in international trade and the potential ways forward. The Executive Director of the Wilfried Martens Centre, Tomi Huhtanen, invited panellists to reflect on how the current backslide against international trade agreements could be stopped.

    The Transatlantic Trade and Investment Partnership (TTIP) formed an important part of the discussion. Up to this date, no agreement has been reached and the deadline for its conclusion has passed. Christofer Fjellner MEP (EPP, Sweden), however, expressed some hope that it could be finalised at some point in the future, when the new US administration may be open for business again – provided that Europe will solve its internal difficulties.

    At the moment, European leaders should not focus on blaming the new president Donald Trump for the failure of TTIP but show their own willingness to continue negotiations.

    André Sapir, Senior Fellow at Bruegel and Professor at Université Libre de Bruxelles, stated that the economic case for trade and trade liberalisation remains strong and holds the promises of improving allocation of resources globally and nationally.

    It is important, however, to distinguish between trade agreements for which the EU has exclusive competence and mixed agreements that are broader and involve national regulatory issues such as consumer and environmental protection. Citizens should have been more engaged in the process of negotiating TTIP, an agreement of the second type.

    In order for EU trade policy to have a future, Prof. Sapir and Prof. Bradford emphasised the need for more transparency and an unambiguous commitment from the EU towards its trading partners. The recent difficulties with the ratification of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) sent a negative signal and it will be necessary to rectify and learn from the mistakes that the EU made on this occasion.  

    Macroeconomics Trade Transatlantic

    Does global trade have a future?

    Other News

    12 Jan 2017

  • The economic and financial crises evident since 2007 have refocused the debate as to the future structure of the European Economic and Monetary Union (EMU). This article looks at the issue from the perspective of economic history and identifies that current proposals for fiscal union are based on an over-reliance on Optimum Currency Area theory and are not realistic in the current political environment.

    In addition, European fiscal rules have become over-complicated, inefficient and open to widespread manipulation. In the medium term, rather than risk the lessening of political commitment to the EMU through divisive fiscal union proposals, the EU should focus on developing unique governance mechanisms that better reflect the current characteristics of the EMU.

    In this context, this article proposes four actions to complement existing initiatives such as the Banking Union: (1) simplified EU budgetary rules, (2) the creation of an independent European Fiscal Board to assess and enforce national compliance, (3) a commitment to retaining core national fiscal autonomy with a strict ‘no bailout’ rule, and (4) increased levels of investment through an expanded European Fund for Strategic Investments. Only following the successful completion of these measures should fiscal deepening be discussed at a political level.

    Read the full article in the December 2016 issue of the European View, the Martens Centre policy journal.

    Eoin Drea Banking Eurozone Macroeconomics

    Eoin Drea

    ‘Nobody told me we could do this’: why fiscal union is not the answer to eurozone woes


    03 Nov 2016

  • With economic growth not expected to exceed 1.6% up to 2017, a debt to GDP ratio predicted to peak at 106% in 2016, coupled with established labour market challenges, the country remains extremely susceptible to further economic external shocks. This event on 12 October 2016, entitled ‘Belgium: Reforms for Growth?’, was part of a common project with the Wilfried Martens Centre for European Studies and CEDER, aimed at discussing the current state of Belgium’s economy.

    Following attempts to adhere the Commission’s three overarching recommendations relating to fiscal reform, labour market reform and competitiveness, Javier Yaniz Igal of DG ECFIN noted that there is now a risk of significant deviation from the adjustment for 2016’s and 2017’s forecast. Belgium’s tax shift, which Javier emphasised is progressing in the right direction, does not appear to be neutral, further illustrating that there is still considerable scope for improving the designs of the overall tax system.

    Although some improvements have been made in the overall functioning of Belgium’s labour market, said Javier, underutilisation of labour – especially among low-skilled, young and older works and people of migrant backgrounds – continues to undermine the economy. Further measures are therefore needed to ensure compliance; to meet the recommended targets and to get Belgium’s economy back on track.

    Department of Economics Professor of the University of Ghent, Koen Schoors, suggested that in order to understand Belgium’s economy, we need to understand how exactly we ended up here. Globalisation has been mismanaged on a global scale, resulting in significant income disparity not only in Belgium, but across Europe and the rest of the world, including the UK, Spain and Germany.

    Koen agreed with Javier that the tax shift being implemented in Belgium is indeed essential, particularly away from labour and instead on consumption, waste and sugar, etc. as well as capital – which is not being taxed enough, or in some cases at all.

    Ultimately, what is needed for Belgium is a long-term plan, he proposed; a roadmap, with all stakeholders, in order to create incentives and improve competitiveness. Failure to do so will almost certainly result in the killing of investments and prolonged stagnation of the economy.

    The political perspective offered by Belgian Member of European Parliament Tom Vandenkendelaere presented Belgium as an exceptional case, encompassed by the slogan ‘only in Belgium’. Regional disparities and a high level of government instability culminate in a very unique political landscape, he said, something which needs to be addressed in order to improve the confidence of Belgians, expats, investors and entrepreneurs.

    According to Tom, economically Belgium is not doing explicitly bad, referring to the implementation of the Commission’s recommendations on fiscal reform, Belgium’s labour market and chronic stagnation. However, he acknowledged that Belgium frequently faces challenges which need to be addressed, including areas like retail liberalisation, as well as government communication and crisis response, with the latter two being highlighted by the 22 March 2016 attacks in Brussels.

    What is needed for Belgium is a roadmap on how to improve coordination, competitiveness and encourage investment. MEP Tom Vandenkendelaere

    Agreeing with Koen, Tom stressed that what is needed for Belgium is a roadmap on how to improve coordination, competitiveness and encourage investment, adding that investing in education is also essential in order to sow the seeds for future generations. Most of all, Tom advised, what we need in Belgium is to foster trust.

    During the Q&A session several particularly pertinent issues were raised, most notably on how to better regulate/deregulate the various Belgian sectors, how to reduce the constraint of Belgian banks and finally, what can be done to improve the investment environment of Belgium and its and overall competitiveness.

    The panellists were in agreement that a long-term roadmap which responded to such queries, capitalised on Belgium’s strengths while addressing its weaknesses, was indeed the best method moving forward. They concluded that government stability was also imperative for delivering and following through on that roadmap.

    Economy EU Member States Macroeconomics

    Progress made on reforming Belgium’s economy, but long term road map required

    Other News

    14 Oct 2016

  • Professor Lars Jonung warning Sweden’s current economic momentum is unsustainable

    According to economy expert Lars Jonung, the two drivers of the Swedish economy, expansionary monetary policy and the very loose fiscal policies that had led to over 20 years of continuous property price growth are likely to result in a real estate bubble based on credit expansion.

    Jonung, who is a Professor Emeritus with the Knut Wicksell Centre for Financial Studies at Lund University, made his remarks during an event organised on October 11, 2016 in Brussels by the Martens Centre as part of its Food for Thought Country Series.

    Professor Jonung argued that monetary policy cannot correct this trend by itself, but only in combination with fiscal, tax and regulatory policies. The Country Series events are designed to provide a discussion of the economic challenges facing member states in the EU.

    Sweden’s economy grew by 3.6% in 2015 making it one of the fastest growing economies in the EU.  According to European Commission data, in the short to medium term, economic prospects continue to look favourable with growth projected to moderate to 2.9% by 2017. Unemployment is projected to fall under 7% in 2016 with government debt stable at around 44% of Gross Domestic Product (GDP).

    However, the Swedish economy faces a number of downside risks which jeopardise future growth potential. The arrival of over 160,000 refugees in 2015 poses longer term challenges regarding labour market integration.

    To counter the rise of populists, the centre-right in Sweden will have to come up with long-term solutions and alternatives. MEP ​Gunnar Hokmark

    Brexit and the potential for weaker growth among key trading partners also poses external risks. Internally, the dramatic rise in house prices and household debt is complemented by expansionary fiscal and monetary policies at government level, including negative interest rates.

    To the question “Has Sweden reached the point of no return?”,  Jonung cited American economist Robert Aliber, who had in the past stated that a large number of building cranes on a city’s skyline was the sign of an upcoming crisis. “In Stockholm there are too many cranes”, Jonung concluded, “however a number of changes can still be made to give us a soft landing”.

    Swedish Member of the European Parliament Gunnar Hokmark, also a speaker at the event, disagreed with Professor Jonung on the crane phenomenon, arguing that in order to cope with the high demand of housing in Stockholm, both a rise in prices and more construction is necessary.

    According to him, addressing the challenges in the supply side of the economy is what Sweden needs. “Contrary to what many think, we are not a socialist country anymore, we are quite liberal. However, deregulation in the housing and the labour market are still needed”, MEP Hӧkmark stated.

    Fredrik Erixon, Director of the European Centre for International Political Economy, a Brussels-based think tank, shared a rather pessimistic view about the future of Sweden. According to him, the Central Bank is the main source of monetary distortion. “Free money leads to a misallocation of resources, which will come back at some point and bite Sweden in the back”, according to Erixon.

    During the Q&A session, several other points were raised such as managing the current levels of growth in a more sustainable way, investment and deregulation, as well as lessons learned from Ireland, Spain or Greece over the past decade.

    The political consequences of any future economic slowdown were also raised, specifically how such a slowdown could strengthen populist political parties. A key issue raised by the panellists was that traditional centre-right political parties need to propose new solutions to combat the current economic imbalances.

    Household debt in relation to disposable income in Sweden, the UK and the US, 1995–2014, with the Riksbank’s forecast for Sweden until 2019
    Business Crisis EU Member States Macroeconomics

    Finance expert: Sweden’s booming economy not what it seems

    Other News

    13 Oct 2016

  • The gurus of the economic left are at it again: in ‘a plea for economic sanity and humanity’, a group of progressive economists led by Joseph Stiglitz and Thomas Piketty published yet another letter to condemn the austerity allegedly practiced on Greece. The initiative follows an earlier plea published in January against ‘the dogmatic insistence on debt repayment in full regardless of the social and political consequences’.

    The distinguished signatories insist that ‘to condemn austerity does not entail being anti-reform’, and that ‘austerity’ actually undermines Syriza’s key reforms, namely its efforts to overcome tax evasion and corruption: ‘Austerity’, they explain, ‘restricts the space for change to make public administration accountable and socially efficient’. This is surely a scientifically and politically respectable perspective. But let me make some points from a different one. 

    First of all, let me contest the appropriateness of the term ‘austerity’ for what we have witnessed in the last years in the periphery of Europe. One would think that a person is austere when she is thrifty and saves part of her income, namely she spends less than she earns. Under this common sense definition, austerity is a virtue (yes, a virtue!) virtually unknown to all European governments. They all spend way more than they receive in revenues, and most of them have been consistently doing so for decades!

    The fact that public opinions can seriously regard the attempt to curb overblown fiscal deficits and to slow down an accumulation of public debt unprecedented in the history of modern economics as ‘austerity’ is a clear sign of the dismal progressive spell which we’ve all been living under since WWII.

    Second of all, the claims of the anti-austerity crowd are even more dubious when we move from Europe in general to Greece in particular. The idea that EU-inspired adjustment programmes forced Greece to adopt an otherwise unnecessary ‘austerity’ policy is a gross misrepresentation of what actually happened. Nobody said it better than CEPS Director Daniel Gros in a commentary last February:

    ‘it is disingenuous to claim that the troika forced Greece into excessive austerity. Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately. By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity’.

    Exactly, from more than 10% of GDP to zero IMMEDIATELY. As explained in this post by IMF Chief Economist Olivier Blanchard, what is being consistently rejected by the Syriza government now is a primary budget surplus target of 1% in 2015, not exactly the ‘fiscal waterboarding’ one may expect when reading the recurrent progressive pleas for forbearance and debt relief.

    Third of all, I would argue – together with many conservative economists – that the much decried austerity is nothing less than an instrument of economic liberation. Contrary to the fallacy constantly spread by progressives, austerity is not primarily about cutting, but about transferring. Specifically, it is about transferring control over productive resources from bureaucrats to individuals and companies.

    Austerity does not simply mean balancing the budget by doing ‘whatever it takes’. It means balancing the budget as part of an overall reduction of public expenditure that allows people to keep more of their income and to freely decide how to spend it, instead of having government bureaucrats decide on their behalf.In other words, true austerity returns to people what rightly belongs to them and was unduly appropriated by the state in the last century of progressive drunkenness. It enlarges the scope of individual freedom and choice in our society.

    Furthermore, far from restricting ‘the space for change to make public administration accountable and socially efficient’, austerity forces public administrations to limit their notorious wastes, to optimise their utilisation of scarce resources and to become more efficient. 

    In conclusion, the most legitimate criticism against austerity in Europe is probably that it has not really happened. Although the emphasis of ‘the institutions’, as they are now amusingly called, on balanced budgets was sound, the need for a radical restructuring of the social model that has generated Europe’s over-indebtedness was never recognised.

    As we know, spending on education and health consumes 10-15% of the national income of developed countries, while replacement incomes and other transfer payments account for another 15-20%. Compared to the resources that could be freed by reorganising the provision of these services along more competitive lines, the savings imposed by the most draconian European programmes of adjustment are just cosmetics.

    As long as the need for a profound paradigm change is not understood in Europe, progressives will keep attacking conservatives for imaginary misdeeds, conservatives will take the blame for policies they have never dreamt of, and common citizens will continue to suffer under the oppressive weight of a wasteful and bureaucratic social model.

    Federico Ottavio Reho Centre-Right Economy Growth Macroeconomics Political Parties

    Federico Ottavio Reho

    Austerity never happened


    17 Jun 2015

  • Acemoglu and Robinson have produced a book that has attracted a lot of interest and discussion amongst the ranks of political scientists, institutional theorists and development economists. They attempt to answer a fundamental question that has occupied some of the greatest minds of our age and that has produced a number of illustrative theories.

    It is no mistake that the writers choose to address all these theories in the second chapter of the book (titled under the provocative label “Theories that don’t work”). First, they criticise Jeffry Sachs’s approach of economic geography and move on to tackle the vast bibliography that attempts to associate cultural characteristics with economic prosperity (here they point to Max Weber and his monumental work on the Protestant ethic and the spirit of Capitalism).

    They try to deconstruct what they call the ‘ignorance hypothesis’:  the theory that political leaders simply do not know the way to lead nations towards prosperity and sustainability. The two authors point out that all these theories fail to explain long-term trends of inequality. They also fail to account for the contributions and the effects of cultural exchanges; of political horse-trading and of the numerous financial aid programmes that have been offered in order to tackle global inequality.

    The two renowned professors articulate at length their main argument which is easy to understand and supported by strong historical and modern empirical evidence. 

    For Acemoglu and Robinson, the main reason that nations prosper or collapse has to do with the structure and the functioning of their central institutions. Concretely they go further than other theorists (see North, Wallis and Weingast in ‘Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History’, 2012) saying that  having the effective monopoly of violence or even the ability to form ruling dominant coalitions is not enough. They argue that it is necessary for the majority of the population to be included inside the governing structures. Inclusiveness here is not strictly limited to the input side of the political process. It also refers to the equal (or at least to the fair) apportioning of economic benefits.

    In fact, the notion of inclusiveness, as used in ‘Why Nations Fail”,   implies that having people participating at the input phase of policymaking, would inevitably lead to the creation of rules, norms and conventions that will also promote fairer output sharing. Thus the book argues that the fate of nations is closely correlated to whether they are ruled by extractive (that disseminate benefits to limited privileged groups) or inclusive institutions.

    A quite significant part of the book is dedicated on listing and explaining cases that are meant to confirm the original hypothesis. The most telling and characteristic example supporting this hypothesis regards the city of Nogales- which lies right on the border between the US and Mexico. The city is administrationally split in half- the southern part is governed by the Mexican national and regional authorities, while the north forms part of the US. Unsurprisingly, despite their common geographical location and their regular cultural exchanges, the US part is far more prosperous rather than the Mexican one.

    For the writers it is obvious that this is because of the different respective national and regional institutions that are operating in the two parts of the city. US institutions are far more inclusive and  prosperous as opposed to the Mexican extractive state. ‘Why nations fail’ is a compelling book that attempts to explain and interpret the mechanics of history by adopting a macroscopic method to it. The approach used in the book was heavily influenced both by institutional theory (as developed by Douglas North) and by Lipset’s theses on democracy and economic development.

    However, the book is not bereft of imbalance.

    The argumentation about inclusiveness as the central factor in whether nations fail or prosper does not acknowledge other important exogenous factors that shape the status of nations. For example, the book fails to point out that violence between states is also a major variable that can decide the emergence or the destruction of nations. Carthage was raised to the ground not because its institutions were not inclusive enough but because it faced a powerful enemy (Rome) that, at a certain point, had focused all its efforts and resources on destroying the city.  Similarly,  global economic imbalances  can lead nations with inclusive democratic institutions into chaos and disorder. For example it is undeniable that the global economic turmoil that erupted in the 1920acontributed to the fall of numerous European democracies and thto the rise of fascism.

    Further, the causality between inclusiveness and success is not sufficiently demonstrated. There are several examples of nations that had inclusive and functional institutions but still failed. Inclusive democratic institutions do not guarantee the establishment of governments that are responsible and prudent. It is even possible that the electorate will give power to a government that will fgovern destructively. Such governments may lead nations into druin and the margins of history. Collective rationality does not necessarily lead nations to the best decisions.

    In today’s globalised world exogenous variables such as technological trends; international dynamics; security and economic risks can prove to be as decisive for the fate of a nation as its institutions. Acemoglu’s and Robinson’s argument is far from wrong but it is not the whole story of modern governance and nation-building.  “Why Nations Fail” is without a doubt an insightful book but it is also clear that its authors would prefer it to be a magnum opus regarding the study of institutions and statecraft.  Me thinks this is not the case.

    Development Economy Leadership Macroeconomics Society

    Why nations fail: A book review


    18 Mar 2015

  • Book review: European Spring: Why Our Economies and Politics are in a Mess and How to Put Them Right, by Philippe Legrain

    The efficiency of Europe’s reaction to the post-2008 economic crisis continues to fuel a vibrant debate. Was austerity the best solution to the problem or did it make things worse by creating a vicious circle of underdevelopment? Did European leaders respond effectively to the challenge or did they get carried away by developments which they just couldn’t control? And what about the European Union itself? Was the crisis a positive test for its coherence or did it prove that it was ill-equipped and badly prepared to deal with extraordinary conditions?

    This debate lays the background of Michael Legrain’s analysis which can be found in his much discussed book, European Spring. Legrain argues that Europe has made a series of mistakes, the most important of which is the obsession with fiscal austerity. For Legrain austerity measures not only did not cure the illness of public debts, but on the contrary plunged the members of the European Union into a much deeper recession. The ‘medicine’ had exactly the opposite results than the ones expected. It drained economies of valuable resources without dealing with the deeper underlying causes of the problem: Europe’s low productivity and low competitiveness in comparison with the United States, China, India, Brazil, as well as other emerging economies. He even suggests that the German example, which is presented as the model that other European countries should follow, is nothing more than an illusion.

    Apart from describing the grim picture, Legrain makes suggestions on how to build a brighter future for Europe. He seeks the answer in a combination of economic and political renewal. European economies should try to become more adaptable to rapidly changing conditions: openness and flexibility seem to be the key words here. From a political point of view, he argues that Europe should not hesitate to experiment with new forms of democracy (including direct democracy) which will make citizens more actively involved. Economy and politics are seen as the two sides of the same coin. Despite the great obstacles, the author remains optimistic. On condition that European countries make the necessary reforms, he believes that they still stand a good chance of overcoming these obstacles and that the European Union will continue to remain a focus for development in the long term.

    Legrain’s book is crisply and obviously benefits from its firsthand knowledge of EU decision making at the highest level based on his period as an Economic advisor to then Commission President Barroso.  His arguments are very well articulated and can be easily understood by the average reader. He appears to have an answer to every question. However, one cannot refrain from thinking that many of the things he proposes are easier said than done. Innovative ideas often seem too good to become reality. But that’s exactly what makes them ever more appealing!

    Antonis Klapsis Crisis Development Economy European Union Macroeconomics

    Antonis Klapsis

    Easier said than done


    16 Dec 2014

  • Marcin Piatkowski is a Senior Economist at the World Bank in Warsaw specializing in central Europe. He speaks about the historically unprecedented success of Central Europe in the last 25 years, especially that of Poland, argues for the need to adopt a new growth model called “The Warsaw Consensus” and offers insights on introducing the Euro in Poland and the surrounding region.

    What are the prospects for central European economies? 

    In general, the new EU member states in central Europe have performed extremely well during the last 20 years. They have grown much faster than their western European counterparts. Poland, Slovakia and Estonia have developed much faster than most emerging markets. Poland, the most successful economy in Europe over the last quarter of a century, has grown even faster than the so-called Asian Tigers such as Singapore or Korea.

    As a result of this historically unprecedented growth—central Europe has never grown so fast in the past—the average income across the region increased from about forty per cent of the average western European level twenty years ago to around sixty per cent now. Countries like Poland, Slovakia and Estonia have shortened the distance to the West to an extent never experienced before.

    Quality of life is even higher than suggested by the level of income, as reflected in the relatively high life expectancy, easy access to modern technology and low levels of crime. In terms of technology, the region has even leapfrogged the West. For instance, in Poland there are more touchless credit cards users than in Germany. In most of Central Europe, citizens have never had life so good. Poland, Estonia and Slovakia have entered their new golden ages.

    However, while prospects for continued growth and catching up are generally positive (according to the IMF, Poland, for instance, is projected to grow more than twice as fast as Germany at least until 2019) past performance cannot guarantee future success.

    What reforms and policies are required in central Europe?

    Central Europe will have to continually readjust its growth model to continue to catch up. Given the inherent economic potential, most of central Europe should be growing at four per cent or more a year rather than the current two or three per cent. The speed of growth will decide whether central Europe will catch up with western Europe within a single generation or if it will take much longer. In the worst case scenario, the convergence process could stop altogether.

    Central Europe needs to base its growth on a re-adjusted economic model which I call ‘The Warsaw Consensus’. It is based on ten policy pillars including inter alia domestic savings; high employment; labour markets open to immigration; strict supervision of the banking sector and a new focus on well-being rather than only GDP. Among other policies, central Europe has to continue to focus on employment, education, and innovation.

    First, central Europe needs to substantially raise the employment rate: today only two out of three people work, while in the West it is three out of four. Raising the employment rate to the western European level would help accelerate growth; reduce inequality and improve the long term fiscal situation. Labour markets have to offer jobs to every one capable of working. 

    Second, the quality of education needs to increase further. While many countries in the region have achieved a remarkable improvement in primary and secondary education, the quality of tertiary education still leaves scope for improvement. There are no central European universities that belong to the global elite. This needs to change if the region wants to start to compete with the best global minds.

    Finally, central Europe needs to enhance innovation. This is a significant challenge, as technological innovation has never been a strong part of the region’s DNA. There are only few examples of global innovations developed by central Europeans, however, most of them have not been commercialised, as in the case of Copernicus or Marie Curie-Sklodowska. Central Europe, now, has possibly the last chance to use another fifteen billion euro of EU funds available to support innovation until 2020 to adjust its economic DNA to move from imitation to innovation. From quantity to quality. From importing to exporting ideas.

    How will the ageing population affect future economic development? 

    The challenge is that we may grow old before we grow rich. That being said, increasing life expectancy is the best outcome we could desire because the ultimate goal of economic growth is to allow us to live longer and healthier lives not the other way around. However, when talking about demographic changes we are missing one very important variable which tends to be pushed aside: immigration. The fertility rate across the whole region is low, below 1.5 children per woman. We would need a fertility rate of 2.1 for the generations to simply replicate themselves. We thus need to enhance our pro-family policies to make sure that the fertility rate increases.

    However, due to cultural changes and a new family model, I am convinced that pro-family policies alone will not be sufficient to achieve the replacement fertility rate. Germany, which spends over ten times more on pro-family policies than Poland, has a similarly low fertility rate. More money will not solve the problem. It will thus be inevitable to fill the demographic gap by opening up to immigration. Central Europe should invite young people from all around the world to fill the increasing gaps in labor supply.

    This could start from eastern Europe, whose citizens could integrate into our labor markets and societies with relative ease. The same passion with which we attract foreign direct investment, FDI, we should also deploy to attract foreign human investment: FHI.  Highly-educated, young, entrepreneurial and energetic people should be our targets. An optimal way to attract young immigrants would be to open central European universities to foreign students.

    Why Poland seems to be now more successful than other countries in the region? 

    It is likely due to a couple of factors. Poland, unlike all the other countries in the region, is a large economy, representing 40 per cent of the region’s GDP. It’s more than twice as big as the Czech Republic and three times as big as Hungary. Such a large economy has allowed Poland to base its growth largely on domestic rather than external demand, insulating the economy from external shocks.

    Second, Poland started from a much lower income level. Back in 1989, it was one of the poorest countries in the region, behind Hungary or the then Czechoslovakia. It’s easier to grow when you start low, as in seen also with China.

    Third, Poland witnessed a truly historical expansion of tertiary education. In 1989, Poland had 400,000 students. Today it has 1,600,000 students. Almost sixty per cent of young Poles are now taught at a university level. The quality of education is close to the European average. Poland has also done a lot to improve primary and secondary education.

    When you look at the OECD Pisa study that looks at the quality of education of 15 year olds around the world, Poland is doing extremely well: Polish 15 year olds are better educated that most of western Europe and the US even though Poland spends less than half on a student than in the West. If I were to exaggerate a little bit, I would say that Poland is producing geniuses on the cheap.

    Finally, from the very beginning Poland was lucky with the quality of its economic policy makers, who were competent, committed and honest. They also knew where they were going: towards Europe and joining the EU. They knew that Poland needed to become more open, more liberal, more entrepreneurial and more Western. Throughout the last 25 years there was an implicit consensus among all the parties both in power and in the opposition that Poland needed to become “European” again. And it has worked well.

    Were you never challenged by Euroscepticism as seen in Hungary or the Czech Republic?

    Poles are quite supportive of the EU. 80 percent of Poles support the EU. They have seen the benefits of EU accession and how the European convergence machine continues to work, taking in poor countries and making them rich. They have become the most European among all the Europeans. Had it not been for the institutions, values, norms and funds that Poland has received from the EU in the last twenty five years, it would have never achieved such remarkable success and never entered its new Golden Age. Poles are supportive of the EU also for geopolitical reasons.

    Do you still believe in the big bang introduction of Euro as you wrote in an article for the Financial Times in 2008?

    What I meant in this article was that at that time there was an opportunity to introduce the Euro to more countries on the condition of strengthened fiscal rules. I also argued that the exchange rate criterion for euro zone entry, i.e. the ERM II mechanism that requires countries to keep their currencies within a  +/-15% band relative to the Euro, could be a challenge, especially for countries with floating exchange rates such as Poland.  This is because entering ERM II would expose them to potentially destabilizing currency attacks.

    The vast fluctuations of the Euro itself against the dollar show how hard it is to keep the exchange rate stable in the context of globalized currency markets driven by portfolio flows. The risks are particularly high for the Polish Zloty, which is the most liquid currency in Central Europe and a currency of choice for global speculators. Successful passage through ERM II would then require very careful planning and strong support of the ECB. 

    But do you still think that the best way is: “Euro as soon as possible”?

    The introduction of the Euro cannot take place overnight but it is still the way to go. The euro would help to further enhance macroeconomic stability in the region, expand trade and increase private investment. It would thus help accelerate growth and allow Poland to catch up with the West faster, the current situation in the Eurozone notwithstanding. Central European countries that have already adopted the euro are on the whole doing well.

    However, before entering the euro zone, countries like Poland first need to do their homework. This includes sustainably reducing budgets deficits to below 3 per cent, keeping public and private debts in check and reforming the economy so that its competitiveness is increasingly based on quality rather than quantity. Fewer potato chips, more micro-chips.

    Interview by Vladka Vojtiskova. The interview presents personal views only. 

    Dr. Marcin Piatkowski was a speaker during the fifth annual Economic Ideas Forum that took place in Bratislava on 16-17 october 2014. He is a Senior Economist at the World Bank in Warsaw, former Chief Economist of PKO BP, the largest bank in Poland, economist in the European Department and Advisor to Executive Director at the International Monetary Fund in Washington D.C. He is an Assistant Professor of Economics at Kozminski University in Warsaw. He also served as Advisor to Poland’s Deputy Premier and Minister of Finance. He has recently published papers on “Poland’s New Golden Age: Shifting from Europe’s Periphery to Its Centre” and on “The Warsaw Consensus: The New European Growth Model” He tweets using @mmpiatkowski and can be reached at mpiatkowski@worldbank.org

    Economy EU Member States Eurozone Growth Macroeconomics

    Central Europe: move from imitating the West to innovating!

    Other News

    19 Nov 2014

  • The European Union is a union of sovereign states, who are sovereign in that they are entirely free to leave the EU. This freedom to leave means that the EU is not a “super state”. There is no coercive force, no EU army, to force Britain or any other country to remain in the EU. Britain enjoys a freedom, within the EU, that colonies did not enjoy within the British or other European Empires.

    Britain is thus entirely within its rights in considering the option of leaving the EU, although that does not mean that such a course would be wise.

    The EU does not exist on the basis of coercion. It exists on the basis of common rules, or Treaties, applicable to all, interpreted independently by the European Commission and the European Court of Justice,  that EU countries have so far  freely abided by, even when particular decisions were not  to their liking. If countries started systematically ignoring EU decisions, the EU would soon disappear.

    One set of particularly important set of EU rules are the ones that apply to budget deficits and debts of EU countries within the euro zone. These rules have been incorporated in EU Treaties and in Treaties between Euro area states. One of the provisions is that if a country has an excessive deficit, it must reduce that deficit by an amount equivalent to 0.5% of GDP each year until it gets its deficit below 3%.

    France and Italy, big states that were founder members of the EU, have both produced budgets for   2015 that do not comply with the rules. Previous commitment they gave to get their budget in line have not been kept. Initially the European Commission objected to their 2015 budgets, and both countries have adjusted their budgets a little.  But, even after these revisions, the budgets are still in breach of the EU rules.

    Some will argue that it is the rules that are at fault, not France and Italy. If inflation is negative,  debts increase in value, while prices are falling. Countries are then caught in a debt deflation trap of a kind that was not envisaged when the rules were drawn up.  But that is an argument for changing the rules, not an argument for ignoring them, or pretending they have been complied with when they have not been.

    Neither France nor Italy have taken the sort of steps that Ireland, Greece, Spain and Portugal have taken to bring their fiscal situation into line. Nor have they implemented structural reforms that would release growth potential , as Spain and Greece have done. Thanks to reforms it undertook under pressure, Greece is set to have one of the fastest growth rates in the EU in 2015 and 2016, along with Ireland. French and Italian laws have rigid protections for insiders in the job market, but leave a choice of temporary low paid contracts, or unemployment, for the rest of their people. Their administrative, legal, and tax systems need urgent reform.

    Obviously, the European Commission will try to be politically realistic with both countries, but a single currency cannot work for several countries unless there is either a single government, which we do not and will not have in the euro zone, or rules that are transparently and uniformly applied to all countries, big and small.

    Some would argue that the rules should be changed to take account of the problem of the debt trap caused by deflation, which is Italy’s problem (but not that of France). There is a good case for this. But changing the rules would require EU Treaty change, and nobody wants to change the Treaties, because a Treaty change would have to be unanimously agreed among all 28 EU states.

    Other states fear that proposing any Treaty change now  would be an opportunity for Britain to use the lever of blocking  a Treaty change unless British demands for
                   – a restriction of free movement of people within the EU, 
                   – vetoes for a minority of national parliaments on EU legislation and
                   – the  scrapping the goal of “ever closer union” within the EU,
    are conceded.

    This is a form of blackmail, but it has happened before in EU affairs. But British domestic politics should not be allowed to prevent Treaty reform for the euro zone, of which Britain is not even a member!

    If the EU is unable to change its Treaties, because of blockages like this, the EU will eventually die. A state would cease to work if it cannot change its constitution. It is the same with the EU. Necessary EU Treaty change cannot be dodged indefinitely.

    In a recent commentary, Daniel Gros of the Centre for European Policy Studies has criticised the European Commission of Jean Claude Juncker for failing so far to either

            a. Insist that France and Italy stick by the existing fiscal rules or, if not

            b. Call for a revision of the rules to take account of the exceptional deflationary conditions that exist

    He  is right .

    John Bruton Economy EU Member States Macroeconomics

    John Bruton

    The EU is a union of rules, not a union of force


    08 Nov 2014

  • Germany runs a current account (trade) surplus which is almost twice that of China. (The actual figures are USD 278.7 bln USD for Germany and 164.8 bln USD for China according to latest official data). Although this may be viewed as a sign of growth and competitiveness of the German economy, one should go beyond the headline reading and look at both the causes of this performance and its long term implications.

    In very simple terms, a trade surplus is defined as the difference between a country’s exports and imports – in other words, it is the difference between consumption of the country’s goods and services by citizens of other countries less the consumption by citizens of the country of imported goods and services.

    A beautiful summary of this phenomenon had been provided by Martin Wolf in the Financial Times who wrote that “Export surpluses do not reflect merely competitiveness but also an excess of output over spending”. (Martin Wolf, “Germany is a weight on the world”, Financial Times, November 5th, 2013).  At the same time, there is significant room for expanding investment in Germany. At the moment, German government spending as a % of GDP is well below the European average. This is accompanied by limited real earnings growth (salaries and wages) combined with relatively high levels of taxation.  This mix leads to a decline in spending – thus harming consumption – including consumption of imported goods – and increasing further the trade surplus. The latest set of macroeconomic statistics which showed a decline in German industrial production by 4% in August and a decline in GDP by 0.2% in Q22014 are definitely a cause of concern.

    Trade surpluses can be viewed as an example of “beggar thy neighbour” policy. Surplus countries hide their weak domestic demand via strong demand for their products elsewhere in the world, i.e. exports.

    It is common sense that this is not a situation that can be sustainable in the long term. Competitiveness is a relative term. A competitive economy comes hand in hand with a non-competitive economy on the international level.

    As the situation stands, over-reliance in export driven growth renders the German economy vulnerable to external shocks – primarily a decline in global demand. For long term equilibrium, domestic demand has to pick up. Increased domestic demand will insulate the German economy from the risk of external shocks, but will also benefit the Eurozone as part of the increased spending will be spread to goods and services in the rest of the EU.

    Should the picture painted by the last set of macro figures prove to be permanent rather than seasonal, Germany runs the risk of running into a difficult to escape recession spiral. Germany’s “Wirtschaftwunder” of the past decade was based on high investment and productivity growth. A continuing low level of investment in Germany could become a counter factor for the long term competitiveness of the German economy. Most importantly, it could become a counter-factor for the revival of the Eurozone economy.

    Increased government spending combined with incentives for investments is the right policy mix to minimise the risk of running into a recession spiral in the medium-long term.

    Maria Spyraki Economy EU Member States Macroeconomics Trade

    Maria Spyraki

    Is it time to talk about the surplus?


    23 Oct 2014

  • Bond markets are notoriously fickle. They often seem to be driven by sentiment rather than deep analysis. The experience of 2006-2008 shows that they are not infallible. They are not a good guide to long term economic prospects. Rating agencies seem to follow sentiment rather than lead it. They are like a bus driver who is looking out the back window of the bus rather that at the road in front.

    This is the context in which France and Italy should be assessing the wisdom of submitting draft budgets this month to the European Commission, in accordance with the Stability and Growth Pact,  that go back on commitments they had previously given to reduce their budget deficits to below 3% of GDP.

    The low rate of interest at which most European governments can borrow at the moment can be explained by two factors, which are not necessarily permanent:

    1. Sovereign bonds, that is bonds issued to allow governments to borrow, are treated as entirely risk free assets in the balance sheets of banks under the rules the EU has set for calculating the solvency and adequacy of capital of banks.  This is a somewhat artificial assumption, in that it implies that there is a ZERO risk that a European Government will ever default on its bonds i.e. fail to pay all the interest due and repay the bond in full and on time. The scale of debt relative to income of some European countries might lead some to question this assumption, unless of course there is a big surge in either inflation or economic growth

    2. Prevailing interest rates are now so low, the amount of money seeking a home is so great, and high yielding investments are so scarce, that it is not surprising that investors are turning to government bonds, and thus driving down their interest rate. But if the flow of funds slowed, or if the availability alternative better yielding investments were to increase, the demand for government bonds would immediately slow. Then the interest on government bonds would have to increase, if governments were to sustain their borrowing levels.

    It is against this background that the budget plans to be submitted by member governments of the euro  on 15 October will have to be assessed. The European Commission, in assessing the draft budgets of member states, would be unwise to assume that present low interest rates on government bonds are a permanent condition.

    Ironically, while governments may defy the European Commission, they would not be able to defy the bond markets, if, for any reason, bond markets were to change their minds about sovereign bonds, and look for a higher interest rate. Bond markets can be less forgiving and less attentive to rhetoric or political argument
    than the European Commission or Ministerial colleagues in the European Council of Ministers.

    That could happen quickly, leaving little time for adjustment.

    It is less likely to happen if the EU’s system for coordinating the budget policies of the 18 euro area states (the Two Pack and the Six Pack) are seen to be respected, especially by the big countries like France and Italy. This is backed up in a very specific way by Article 126 of the European Treaties.

    If the system is defied, or reinterpreted in a way that removes its meaning, the fickle bond markets could get nervous again.

    Ireland knows, better than most, how difficult that can be for a state that needs to borrow to fund services, or repay maturing debts.

    John Bruton Economy EU Member States Macroeconomics

    John Bruton

    Keep calm and keep the budgets on track


    12 Oct 2014

  • On September 1st, the Italian Premier Matteo Renzi announced an ambitious plan of reforms known as the “1000-day plan” which is to be implemented by May 2017. The government’s reforms are aimed at addressing numerous problems in a plethora of different fields: job market, public service, civil justice, agriculture, energy, and infrastructure, tax schemes, education, and so on.

    During the press conference in Rome, Renzi also praised Germany, stating that German reforms of the early 2000s represent a “model” that Italy should follow in order to increase flexibility in the job market and to relaunch the economy.

    However, the Premier will have to deal with serious obstacles along the way and for this reason the success of the government’s plan is far from guaranteed.

    So far Premier Renzi has had a couple of significant victories: the approval of a significant constitutional reform (ddl Boschi) on the first reading in the Senate, on August 8 and the 80-euro tax bonus on individual income tax (IRPEF) for salaries between €8.000 and €26.000.

    The constitutional reforms are fundamentally intended to bring to an end the power parity between the Chamber of Deputies and the Senate by transforming the Senate into a non-elected chamber and by depriving it of significant powers in order to simplify the legislative process and increase the government’s power. From the government’s point of view, this is a fundamental step which is needed to speed up the reform process. Moreover, the constitutional reform aims at redesigning the institutional architecture so as to strip the regions of some competencies and to return them to the central state – a move that should help to ease the financial burden of regional administrations.

    The battle is far from over: in order to be confirmed, the reform still needs the approval of the Chamber of Deputies and a second round of backing in both chambers. Moreover, there are signs of mounting opposition inside the Premier’s Democratic Party. Only the votes of the opposition party Forza Italia, still headed by Silvio Berlusconi, can guarantee the success of the reform. Furthermore, before being adopted, the constitutional reforms must be confirmed by referendum.

    There are still some doubts as to the effectiveness of the 80-euro tax bonus: the reform, which costs 10 billion euro, had negligible effects on the total aggregate demand because households’ concerns about the future continue to act as a brake on consumer buying.

    Given that the economic decline is mainly due to the country’s loss of competitiveness, more and more economists argue that the entire amount should have been channeled into a consistent reduction of the IRAP tax – Regional Tax on Productive Activities – in order to benefit enterprises (SMEs in particular) and professionals. The IRAP is a real burden on the enterprises as it is levied on the net value of production prior to paying salaries – therefore it penalizes enterprises with a greater number of employees and exacerbates the unemployment problem. The recent IRAP reduction from 3.9% to 3.5% approved in April is considered insufficient to have any real effect on the economy.

    Recent macroeconomic indicators show that Italy has fallen into recession for the third time in six years. Total unemployment is still high at 12.6% (July 2014) while youth unemployment is around 42.9% – industrial production is declining and according to the Bank of Italy public debt rose by about 100 billion in the first six months of 2014 while tax revenues are falling due to the recession.

    There’s still a desperate need for further cuts in public spending in order to free resources that could be used to further reduce taxes and the crippling public debt. It’s still questionable whether the government’s measures to reduce subsidies and to privatize inefficient state-owned enterprises will succeed.

    Carlo Cottarelli, former director of the Fiscal Affairs Department at the IMF and currently in charge of the Italian spending review, is tentatively pushing through a plan to reduce public expenditure by about 34 billion in three years with the aim of further reducing taxation on the real economy. However, he recently accused the government and the parliament of sabotaging his efforts by approving new unauthorized expenses without previous consultation. As a result, he announced his intention to resign from his position in mid-October. 

    The episode shows that the battle for reform is far from over. Despite the promising announcements of the current government, there is still a long way to go on the road to economic recovery – as confirmed by the recent ECB’s warnings on budget deficit.

    Now the responsibility of the reform falls on Renzi’s shoulders. He has to choose whether to appease the leftists inside his party or to confront the numerous entrenched lobbies that resist change so as to protect their own interests.

    Davide Meinero Economy EU Member States Macroeconomics

    Davide Meinero

    Italy and the illusion of reform


    19 Sep 2014

  • I was in the Far East recently doing some work in Singapore on behalf of IFSC Ireland.

    It is a part of the world, like Europe, where a sudden bad political development could easily over turn good economic potential.

    The approach China is taking to oil exploration in the South China Sea, claiming the whole of the sea for itself, is deeply troubling to its neighbours. We see this in the riots in Vietnam in the past few days. There is, unfortunately, no agreement to jointly exploit the resources under the South China Sea, and that is a continuing source of tension, and is leading to an expensive arms race. Internal economic problems can often lead to external aggressiveness, as a means of distraction, as we have seen in the case of Russia.

    Many of the players in Asia, notably China, Japan and South Korea, despite their rapid recent growth, have internal problems arising from rising income expectations, indebtedness, and ageing .Wage inflation in China is running at 18%, which will have a long term effect on its competitiveness. Its banking system has many non performing loans.

    Japanese corporations are heavily in debt. The Japanese Government has a debt/GDP ratio of over 200%. Japan is one of the most elderly societies in the world, but is reluctant to allow immigration.A rise in international interest rate would aggravate all these vulnerabilities. Such a rise will eventually happen.

    Meanwhile North Korea, with its nuclear arsenal, remains an existential threat to all in the region.

    Conflict in East Asia could have disastrous implications for the world economy, because it would disrupt the complex, interdependent, and fragile multinational supply chains on which global manufacturing is now based. Meanwhile, China and the United States are pursuing competing agendas. Each would like to incorporate East Asian countries into rival economic blocs.

    The US sponsored proposed Trans Pacific Partnership does not include China, but China is offering an alternative, less demanding, trade deal to its Asian neighbours. The choice is important.

    If Senate Democrats continue to deny President Obama the authority to negotiate trade deals, on which the Senate agrees to vote on as a single package rather than pick apart, there has to be a possibility than the Chinese approach will win out. This would bring about a significant shift in the global balance of power.

    John Bruton Economy Macroeconomics

    John Bruton

    Strategic rivalries in East Asia have implications for the whole world


    30 May 2014

  • As the eurozone starts to emerge from the deep financial crisis of the last three years we should maintain a sense of economic urgency. The fact that Europe had a growth problem before the financial crisis was common knowledge. This is still the case. The growth trend, in total factor productivity, has been negative for quite some time and the performance of the European Union’s economy relative to the United States’ economy has been deteriorating for at least twenty years.

    This is all the more striking in light of the fact that the EU has undertaken a number of growth initiatives and reforms since 1992, which promised to deliver a significant growth boost, as well as welfare gains. Does this mean that structural reform has not worked in Europe and that some other factor must explain why we still have a growth problem?

    I was recently asked to answer this question. My answer was simple: structural reform must be supported and promoted, otherwise it will fail to deliver. It is this element — the political and institutional framework for reform — that we need to focus on as we return once more to Europe’s growth puzzle. The best example we have of structural reform in Europe, the reform agenda of the last ten new member states, was actively promoted by institutional arrangements whose main goal was to expand the policy range of governments during the reform process.

    In brief, there is an obvious contradiction between affirming the crucial role of structural reform for economic prosperity while doing far from enough to create the right framework and the right instruments to support and encourage it.

    Often structural reform is so difficult because it pits governments against organised interest groups that have a lot to lose from a more open and competitive economic environment. Other times, severe financial constraints force governments to undertake reforms in less than optimal conditions and may even render them entirely unfeasible. Clearly the best way to involve national stakeholders such as social partners and national parliaments is to smooth the rough edges around structural reform and make it much easier to carry out than it is at present.

    The good news is that an increasing number of people in Europe have come to realise that there is a better way. Both the European Commission and Council have put forward proposals that aim to mobilise the public for reform, strengthening the hand of governments against organised interest groups and providing financial support where it is needed.

    In its December meeting the European Council defended the need for a system of mutually agreed arrangements and associated financial support mechanisms designed to support a broad range of growth and job-enhancing policies and measures. This was a good start, but the conclusions did not sufficiently emphasise the structural reform element. This is above all a political issue. Structural reform partnerships are elements of what I would call a political union. They would help countries become politically closer, allowing them to overcome social and political standstill in order to learn from each other and from the policy dialogue going on between them. Political fragmentation (by which I mean complete path dependence, the inability countries have to break from their habitual way of doing things) is just as dangerous as financial fragmentation.

    At the current moment we face a paradoxical situation. Either structural reform is implemented in an emergency, when the right conditions for it are mostly absent, or then it is simply postponed. These structural reform partnerships would introduce a much needed preventive logic into European economic policy making. It makes little sense to wait for structural economic problems to develop into a fully-fledged economic and fiscal crisis before putting together the instruments and political will to address them. At the same time, favourable conditions for reform cannot be wasted if we want to seriously tackle Europe’s growth problem.

    [Note: a previous paper on how to create the right framework for structural reform can be found here: http://ces.tc/1fLa7nJ ]

    Bruno Maçães Crisis Economy European Union Eurozone Macroeconomics

    Bruno Maçães

    The structural reform puzzle


    05 May 2014

  • In 2001 the well-known American economist Rudi Dornbusch summed up the attitudes of U.S. economists to the euro with the phrase “It can’t happen, it’s a bad idea, it won’t last”. For Dornbusch, as for many economists at that time, the euro represented a misplaced political project without the required economic rationale. The outbreak of the global financial crisis in 2008 at first seemed to corroborate Dornbusch’s negative assessment of the euro’s prospects. It has added to populist arguments that the euro is reducing the competitiveness of national economies and is somehow contributing to the difficult economic conditions facing member states.

    However, these arguments fail to recognise the real achievements of the euro since its introduction into public circulation in 2002. In 2014 the euro remains an enlarging global currency with an important role across the financial markets. In the period since the outbreak of the financial crisis in 2008, the euro and European Monetary Union (EMU) have provided a framework for supporting struggling economies while putting in place an institutional framework designed to strengthen the economic co-ordination of member states. Political parties advocating a euro breakup remain in a minority across euro zone members.

    Overall, populist rhetoric against the euro are fuelled by frustration at the slow pace of institutional reform within the European Union (EU) rather than entrenched public opposition to a common currency. The debate on the euro in 2014 needs to be moved from a static, ahistorical analysis of the weaknesses of EMU to a forward looking debate on banking and currency structures in a post-crisis environment.

    The actions of the European Central Bank since 2011 have been vital in convincing the financial markets that the EU will act to establish an institutional architecture capable of strengthening EMU. Although significant achievements have already been made in this context, particularly with regard to budgetary and economic surveillance processes, much more work remains to be completed.

    In the short term it is vital that the first two pillars of a robust banking union – a single European banking supervisor and a single mechanism for dealing with failing banks – are both brought into operation as dual supports to the euro. Any delays beyond the end of 2014 in implementing a mechanism for dealing with failing banks will increase market uncertainty, reduce private sector investment and act as further drag on employment growth. Internal EU disagreements as to the exact structure of a bank resolution mechanism should not be allowed to distract from the imperative of acting speedily to introduce such a mechanism.

    The history of monetary unions, particularly in the United States, highlights that institutional reform (and policy innovation) is a required element of responding to a banking crisis. In this context it is up to the EU itself to meet the challenges of monetary and banking reform. If this is successfully progressed in 2014 Dornbusch’s negative assessment of the euro’s prospects will be long forgotten.

    Eoin Drea Banking Economy Eurozone Macroeconomics

    Eoin Drea

    The Euro in 2014: A Strength not a Weakness


    20 Jan 2014

  • The latest session of the Working Group Economic and Social Policies of the European People’s Party that took part on 4 December 2013 discussed the issues of reforms and economic growth. The book by the CES and its member foundations, “From Reform to Growth: Managing the Economic Crisis in Europe” served as a background to the discussion and provided arguments for the debate.

    The book analyses government responses to the current economic crisis, covering nineteen European countries, and based on this, offers recommendations to policymakers at national, regional and European level. The book argues that lasting economic growth should be restarted by a combination of fiscal consolidation measures and structural reforms, which include creating flexible labour markets, functioning pension systems and efficient public institutions.

    The discussion at the working group focused on the varying experiences that different European countries have had with managing their economies during the crisis. Countries from all corners of Europe have made significant attempts to reform and thus increase the competitiveness of their economies; others have a long journey ahead of them. There is a lot of scope to learn from one another and the participants mentioned inspiring examples. At the same time, it was stressed that economic formulas cannot replace a policy focus on people’s personal development and welfare.

    The European People’s Party operates several working groups in which experts and representatives of member parties take part. The agenda of the Working Group Economic and Social Policies is to debate economic policy challenges and strategies.

    The book has been officially launched earlier this year during the fourth annual Economic Ideas Forum, which was held in Helsinki during 6-7 June 2013 and gathered high level European and national policy-makers together with economy experts. Several other launching events took place in other EU capitals, including Brussels, Berlin (organised by the Konrad Adenauer Foundation) and Tallinn (in cooperation with the Pro Patria Institute).

    Centre-Right Economy EU Member States Growth Macroeconomics

    CES study on economic crisis discussed at Working Group of the European People’s Party

    Other News

    05 Dec 2013

  • At a recent presentation by the Danish Center for Political Studies (CEPOS) on the highly praised Nordic Model of reform, I gained more insight into how this model really works. Along with a paper entitled “The Nordic Way”, a contribution to the World Economic Forum in Davos, this presentation by CEPOS President, Martin Agerup, was a real eye opener and discussed some of the myths behind one of the most successful economic models in the world.

    From the beginning, it was made clear that the Nordic Model is more influenced by individualism rather than community. To quote the authors of the paper, the Nordic Model is ‘less tied down by legal, practical or moral obligations within families’ but is instead based on ‘individuals of both sexes’ becoming ‘more flexible and available for productive work in a market economy.’ This individualism, in combination with a positive view of the state, leads to a higher level of social trust, which in turn benefits economic performance through a subsequent decrease in transaction costs, corruption and a greater respect for the rule of law.

    Much to my surprise, the presentation underlined that the Nordic Model does not exist and highlighted that we should instead speak about ‘continuous socio-economic reform’ as the ‘Model’. These continuous reforms were much more concentrated on strict budget rules, an independent central bank, liberalisation of markets, deregulation of labour legislation and decreasing the ‘security’ component in the flexicurity model. This, in reality, may not have been evident to the many advocates of the Nordic Model. Furthermore, the Danish experience has showed that unemployment figures started to decrease once the duration of the unemployment benefit scheme was reduced from 7 years to 4 years, the pension age was increased and early retirement schemes were lowered financially.

    In the past, the World Economic Forum has released ranking indices on competitiveness, which are essentially productivity indicators, and has always seen the Nordic countries placed in the top 20. However, in this system, labour costs are not taken into account and if they were, it is argued that Nordic countries would appear much lower in the ranking order. This reality has already been acknowledged by a large majority of Nordic businesses and economists for a while already. In Denmark, out of a population of 5.5 million people, 1.2 million benefited from transfer payments or were public sector employees. By 2012, this number had risen to 2.9 million leading to an increase in numerous taxes, including labour, which have helped weaken the Danish economy through an increase in cost of production and by decreasing its competitiveness on the world market. As a consequence, the employment in the sector of industrial production has declined as well as foreign direct investments.

    To summarise, the Nordic Model is a system that includes continuous reforms and is built on individualism and a strong state. The reforms have focused on introducing free market components into the economic model. However, in order to preserve the high standards of living, further reforms will be necessary with a reduction in the high taxation levels.

    Link to the paper: http://www.slideshare.net/abcsjf/davos-the-nordic-way; CEPOS: www.cepos.dk

    Stefaan De Corte Business Economy EU Member States Macroeconomics

    Stefaan De Corte

    The Nordic Model: three myths exposed


    20 Sep 2013

  • Jürgen Matthes, co-author of a new CES study on public finances and growth talks about how to counter the dangers of self-defeating austerity and the four objectives that have to be taken into consideration when implementing smart fiscal consolidation measures.

    Jürgen Matthes Crisis Growth Macroeconomics Social Policy Sustainability

    Jürgen Matthes

    Smart Fiscal Consolidation: Achieving Sustainable Public Finances and Growth


    10 Jul 2013

  • If the eurozone had a facebook page, it would have changed its status last year from single to it’s complicated. European leaders had neither time for a spring fever, nor a summer break. They fell into a spiral of emergency summits adopting immediate decisions to save their economies and the eurozone’s single status. Amid this challenging context, political leaders, leading economists, analysts and businesses met last month to discuss the future of Europe at the Tatra Summit in Bratislava; under the title “Shaping a Genuine Economic and Monetary Union“, the event was the first international conference organized by the new kid on the EU-policy scene, the Center for European Affairs, in cooperation with other like-minded organisations in Europe, including the Centre for European Studies as a main partner.

    I was there and chaired a session on the upcoming edited volume of the CES and its member foundations, entitled ‘From Reform to Growth: Managing the Economic Crisis in Europe.’ This book looks at the financial and economic crisis in Europe, detailing and comparing the different measures taken to handling this crisis in different countries and regions, and providing a centre-right narrative on approaches to the crisis. The volume is due to be published in late May.

    Whoever thought that Slovakia was too small to absorb two big international conferences per year proved to be wrong. The Globsec security conference, which is to take place in Bratislava this April again, has in recent years become one of the leading security conferences in Europe. Without any tradition, the Tatra Summit has also been able to attract a solid number of high-level speakers and participants to Bratislava. Here are my five key takeaway points from the conference:

    1. Europe has not been hit by one crisis but by multiple, intertwined crises: financial and economic crisis, banking and debt crisis, eurozone crisis, with all these resulting in a political crisis. These crises have brought to light the “known unknowns” and the “unknown unknowns”, as one leading speaker explained at the conference. Even prior to the crisis, it was clear to everyone that there was a rather strong economic asymmetry between the individual members of the monetary union. What was however unknown, was the degree of the financial fragility of the Economic and Monetary Union (EMU).

    2. Because of the always existent unknown unknowns, the future crises cannot be prevented. Nevertheless, as Professor Sklias from the University of Peloponnese in Greece underlined, there’s hope that Europe is better prepared today. We not only know that the crisis is a real thing and not a myth, but we have also improved the EU’s financial infrastructure. For example, the steps towards the creation of a banking union among the eurozone members, and possibly other EU countries, are steps in the right direction; however, its functionality has not been tested yet and belongs to the unknown unknowns.

    3. There was a broad consensus among conference participants that “every crisis in Europe always ends with more Europe, never with less Europe.” However, more Europe, according to Harald Waiglein from the Austrian Ministry of Finance, needs better coordination, more flexibility of labour, capital and prices, enhanced capacity, joined liability for debt and a functioning last resort facility. Nevertheless, it remains to be seen whether a genuine EMU is a realistic scenario due to the different economic realities of its members and a general understanding that one size does not fit all.

    4. Unlike widespread consensus on “more Europe”, the conference uncovered different approaches among participants towards fiscal consolidation and growth. Slovakia’s Finance Minister Peter Kažimir has been one of the strongest opponents of the growth-friendly fiscal consolidation. According to him, any fiscal consolidation is always bad for growth. On the other hand, ECB Board Member Jörg Asmussen believes that one has to look beyond a short-term perspective because a responsible fiscal consolidation leads to sustainable growth in the medium and long-term.

    5. Crisis recovery is not a sprint, it is a marathon. Fiscal recovery is just the first part of the story. Only at a later stage will the improvement on the financial front gradually lead to the improvement of the real economy, the social situation and political stability. Moreover, the level of patience and trust of Europeans in their politicians has never been as low as now, so political recovery is very likely to take even longer than one would imagine. To restore people’s confidence, Europe needs to reform. Drastic spending cuts and tax increases will not do the job but the structural reforms in the healthcare, social and pension systems as well as education reform could be a solution.

    A small caveat to these five points: what the conference slightly lacked was a more clear Central European dimension. I would have liked to hear Central European speakers to tell us whether there is something like a common Central European vision on the future of Europe and the economic and monetary union, and to explain whether and if so, what the old Europe can learn from the new Europe.

    Nevertheless, there is no doubt that the first Tatra Summit was an icebreaker in bringing the European debate closer to European citizens by moving it from the usual Brussels’ comfort zone to another EU and eurozone capital. I am positive that the Tatra Summit will become a known brand in Europe and will, the next time and among many other issues, offer a stronger Central European perspective.

    [photo source: Centre for European Affairs]

    Katarina Králiková Crisis EU Member States Eurozone Macroeconomics

    Katarina Králiková

    A genuine Economic and Monetary Union: Five key takeaways from the Tatra Summit


    26 Mar 2013

  • Israel has in the last 20 years achieved some impressive economic results. It was the last country to enter the great recession and the first to come out and its economy grew by 4.8% in 2011. Israel also has the highest number of start-ups per capita in the world and has the highest relative number of people working in R&D. Furthermore, multinationals like Intel, Google, Cisco and AG Siemens all have important research and production facilities in the country.

    So how can Europe learn from Israel’s achievements in order to improve its own economic prospects? The book ‘Start-up Nation: The Story of Israel Economic Miracle’ by Dan Senor and Saul Singer offers some answers.

    Firstly, the State of Israel has been, and still is, a country built by immigrants. Around 90% of Israelis have a migration story in their recent family history. Immigrants are more likely to start from scratch and build something themselves. Israel has also used the potential of educated immigrants to the maximum, with many of them working in the high tech industry or creating start-ups.

    Secondly, the role of venture capital is also very important. Israel attracts around two billion dollars a year in venture capital, the highest per capita in the world and more than Germany and France combined. This flow of capital began in the 1980s with a number of private sector initiatives, but started to increase from 1993 with the introduction of the government initiative ‘Yozma’, which offered co-financing and tax incentives for foreign venture capital investments in Israel.

    Thirdly, Israel is a country with a strong entrepreneurial spirit. While elsewhere mothers may wish for their children to become doctors or lawyers, in Israel mothers hope that their children will start their own business. It is considered normal to take risks and found a start-up.

    The last and perhaps the most important consideration is the cultural factor of ‘chutzpah’. This Hebrew word can be translated as audacity and focusses on the attitude in Israeli society of assertiveness, of informality and of questioning authority and things as they are. This leads to an urge for improvisation and innovation and allowed companies like Intel to make some of their biggest R&D successes is Israel.

    [picture source:theyeshivaworld.com]

    Christophe Christiaens Business Macroeconomics Middle East Neighbourhood Policy

    Christophe Christiaens

    The Israeli economic miracle, lessons for Europe


    25 Mar 2013

  • Much has been written on the economic impacts of Russia’s invasion of Ukraine. For the European Union, the already visible impacts of rising energy and food prices presage more fundamental economic challenges in the longer term. Coupled with the lingering side effects of the COVID-19 pandemic the global economy is facing unprecedented turmoil.

    Unfortunately, the ongoing humanitarian crisis in Ukraine is also being followed by economic consequences which are already impacting both European and global economies. The uncertainty of this war is eroding confidence and will pose a threat to economic stability should it continue in the long term. As European Commissioner for the Economy, Paolo Gentiloni noted, ‘the duration of the war will determine its cost, both humanitarian and economic’.

    This In Brief provides a broad overview of the principal macroeconomic impacts of the Ukraine war on the EU. It also provides a set of recommendations designed to guide the EU’s policy actions in the future. Further publications in this series will deal with specific issues related to the impacts on agriculture, energy prices, European security/defence policy and the longer-term effects on the wider European integration process.

    Crisis Economy EU-Russia Macroeconomics Ukraine

    The Long View: A Centre Right Response to the Economic Fallout of War in Ukraine


    14 Sep 2022

  • Declining bond yields and rising public debts have caused many economists to suggest raising the debt ceiling in the EU’s Stability and Growth Pact. Implicitly, they argue for replacing GDP as the anchor with the bond yield. We discuss the risks of such a shift. While such a change would provide short-term relief to highly indebted EU member states, it is based on the expectation that bond yields will remain low for the foreseeable future. The historical record, however, suggests that prolonged periods of low real bond yields are eventually replaced by periods of high real bond yields. And this phase may have already started. From a long-term sustainability perspective, we conclude that GDP serves as a better long-term anchor for the EU fiscal framework than the bond rate.

    Economy European Union Macroeconomics

    GDP, not the Bond Yield, should Remain the Anchor of the EU Fiscal Framework


    21 Jul 2022

  • Europe and the centre right simply can’t afford to get this recovery wrong. The challenge is to develop a policy approach which balances the unprecedented economic circumstances arising from the pandemic with the societal demand for more inclusive growth. Only in blending these challenges into a “Middle Way’ can the centre right hope to lead the economy recovery.

    This Policy Brief proposes four steps. (1) The unlocking of consumer spending and business investment to drive an initial economic expansion aided by tapering pandemic supports. Growth must become the immediate tool for tackling (and capping) pandemic related debt. (2) A back to basics set of priorities facilitating employment creation, affordable housing and the provision of essential public services. A ‘back to basics’ approach is necessary as it is the only way to deliver the payoffs needed to maintain support across a broad swathe of the middle classes. (3) A renewed commitment to reducing public debt and controlling inflation. Prolonged high inflation erodes purchasing power, particularly for those on fixed incomes or with savings. The optimal strategy for debt reduction is to keep debt levels steady initially, but then focus on slowly reducing it over time. Repairing public finances remains a marathon, not a sprint. (4) The centre right must play the long-term game because institutional reform (at both EU and national level) is about generational change, not soundbites. The European Recovery Fund is a long-term investment tool for achieving structural change, not a short-term mechanism for fiscal expansion. Europe’s fiscal rules also require a more easily understood framework. The ownership of these redesigned rules should rest with member states through a more decentralised Eurozone.

    Centre-Right Economy Macroeconomics Middle Class

    Getting Back to Basics: Four Centre Right Steps to Economic Recovery

    Policy Briefs

    20 May 2021

  • China has paid dearly for its geopolitical rise. The Corona crisis is the latest example of the risks involved with massive investment in the Silk Road. The megaproject, which is also known as the Belt and Road Initiative (BRI), was launched in 2013 to underpin the rapid expansion of China’s economy by outbound investment beyond its own national borders. It encompasses infrastructure investments, development policies, investment and trade relations, and financial cooperation with the BRI partner countries. Moreover, it represents a crucial policy to foster China’s geopolitical rise, i.e., by internationalising China’s financial system and its currency, enabling a strong export-driven economy.

    The recent pandemic has caused substantial economic downturn and led to an outflow of capital in many BRI countries. The outbreak adds a new hurdle to the trade and infrastructure programme by prompting delays and disruptions, e.g., through labour shortages caused by quarantine measures. This amplifies risks attached to financing investment projects in less politically and economically stable developing countries. However, not only are many countries caught in a Chinese debt-trap, but China itself needs a strategy for managing non-performing loans amid the crisis. Loan defaults on the Silk Road could jeopardise the Chinese mega-project.

    China Globalisation Industry Macroeconomics

    The Chinese Nightmare: Debt Risks Along the Silk Road


    19 Nov 2020

  • Coronavirus has fundamentally altered the economic and social environment for billions of people around the world. The tragedy of this immense human loss has been compounded by significant economic dislocation and severe social strains, arising from the required public health restrictions. As a result, the broader economic response of the EU to the pandemic (with the exception of direct healthcare priorities) must now focus on a considerably longer time horizon.

    Economy Eurozone Growth Macroeconomics

    A Marathon, not a Sprint: A Six Point Plan to Build Confidence, Create Jobs and Repair Public Finances


    22 Oct 2020

  • A decade after the crisis that came close to destroying it, the Eurozone remains fragile. Fiscal indiscipline, a key cause of the crisis, remains a relevant issue. Progress has been made to make the banking system safer, but much more is required to contain risk. Eurozone governance remains weak. This paper argues that six key steps are required to refashion the Eurozone into a robust monetary union capable of dealing with unexpected shocks in the future. These steps are:

    • Subsidiarity should be rigorously applied to straighten the existing muddled governance structures
    • Banking Union needs to be completed to break the doom loop between banks and governments
    • Pan-European banks and fully integrated financial markets offer the best solution to absorb national disturbances. Implicit protectionism – through regulations and support for national champions – should not be accepted
    • The responsibility for fiscal discipline must lie where the budget authority is exercised: at the national level
    • The no-bailout clause is the best protection against fiscal indiscipline. It should be formally restored
    • Some countries with large public debts remain vulnerable to market sentiment fluctuations. However, there are ways to reduce these debts without any transfer or mutual guarantees
    EU Institutions EU Member States Eurozone Future of Europe Macroeconomics

    Creating a decentralised Eurozone

    Future of Europe

    29 Nov 2019

  • A restructuring of the global economy towards lower carbon goods and services is under way. The EU’s global competitiveness hinges on consistent investment in the accelerated transformation of its energy sector and industrial base. At the same time, reducing current differences between Eastern and Western Europe in terms of the economic risks and opportunities of the transition is crucial for the  continued  stability  of  the  eurozone.  This  policy  brief  argues  that  the  EU needs to fully align public and private financial flows behind this transformation and to support this by assessing and managing the macroeconomic, fiscal and monetary impacts of the transition.

    Economy Environment Macroeconomics

    Financing a Sustainable and Competitive Economy: Next Steps for the EU

    Policy Briefs

    23 Jul 2019

  • Here we go again. With slowing growth, increasing debt and an uncertain global environment, Italy faces another budgetary crisis in 2019.  Once again Rome will face Brussels in a battle for fiscal sovereignty. The result? Either another political fudge or the end of Europe’s current fiscal rules as a credible policy tool. This In Brief argues that there is an alternative to engaging in repeated political arguments about existing fiscal rules.  Rather, the EU should recognise the fundamental weaknesses in the governance of the eurozone.  A move towards a more decentralised monetary union based on the concepts of national fiscal autonomy and a credible no-bailout rule is now essential.  Only then will the eurozone have a realistic chance of long-term survival.

    Economy EU Member States Eurozone Macroeconomics

    Why Italy should spell the end of Europe’s fiscal rules


    16 May 2019

  • For those seeking to understand the debate in Britain about leaving the EU, it is important to understand that history—or rather a certain Eurosceptic Tory interpretation of British and Imperial history—played a key role in building and sustaining the momentum for Brexit, both during and after the 2016 referendum. In this context, the process of Britain leaving the EU can be seen as the triumph of a misrepresented and selective view of British Imperial history and an unbending view of the primacy of the nation state. This narrative was combined (quite quickly and unpredictably) with a rise in economic nationalism and populism stimulated by the global economic crisis that commenced in 2007. This combination, in turn, challenged long-established political norms such as Britain’s membership of the EU. These were challenges that were largely based on a mutated form of British declinism and a fatalist view of the EU.

    Ultimately, this paper concludes that it is not in the interests of Brussels that Britain should either seek to remain (or gain re-admittance in the future) as a full member of the EU. Rather, Britain’s historical self-conception is more conducive to a looser, yet clearly defined relationship with Brussels, based on shared political, economic and security interests. Such an arrangement—a bespoke Anglo-Continental compact—is more consistent with Britain’s political realities and accepted historical narratives. It will also better preserve the integrity of the EU’s internal cohesiveness, which since 2016 has become unavoidably intertwined with Britain’s search for relevance in this post-colonial age.

    Brexit Economy EU Member States Euroscepticism Macroeconomics

    The Empire Strikes Back: Brexit, History and the Decline of Global Britain

    Research Papers

    12 Mar 2019

  • Under a monetary union, fiscal and monetary discipline have to go hand in hand if macroeconomic stability is to be maintained. The question is how to set up the right institutions to achieve this stability in a credible manner. This policy brief proposes a new institutional arrangement for the euro area to restore fiscal discipline. It places the responsibility for compliance entirely on the shoulders of the member states. It also provides for the mutualisation of 30% of the member states’ debt-to-GDP ratio.

    This would help to maintain a stable currency and to limit the risk of contagion should another crisis occur in the future. However, this comes at a cost. Under the fiscal scheme proposed, member states, which would be fully fiscally sovereign, would need to run long-term sound fiscal policies to benefit from euro membership.

    In addition,  this  brief  proposes  a  reform  of  Target2  under  which  overspending economies would have to pay the financial cost of accessing extra euros, which would deter the accumulation of internal imbalances within the euro area. All this is expected to change the current fragility of the architecture of the euro, provide member states with the right incentives to abide by sounder economic principles and make them fully responsible for the policies they adopt.

    EU Member States Eurozone Macroeconomics

    Rebalancing the Euro Area: A proposal for Future Reform

    Policy Briefs

    19 Dec 2018

  • For the first time in history, more than half of the world’s population belongs to the middle class. Global poverty has declined rapidly due to globalisation and technological development. But the same trends also lead to rapid change and the feeling that society is moving away from its moral core. In this book, the middle class in the Netherlands and Europe is highlighted by several authors and from several points of view. How is the middle class doing? What problems do families experience? What power lies in the civil society? And what does this mean for politics?  

    Economy Macroeconomics Middle Class Social Policy Society

    The Middle: The middle class as the moral core of society


    19 Nov 2018

  • Gender equality is one of the core principles of the EU. This is set forth in, for example,  Article  2  of  the  Treaty  of  the  European  Union.  Equality  between  men and  women  includes  equality  in  the  labour  market.  However,  this  equality  is  far from having been achieved. Building on our forthcoming research for the Martens Centre, we explore in detail four factors that may explain the gender gap in labour force  participation  across  countries.  These  factors  are  education,  taxation,  the provision of childcare, and cultural and historic norms. In discussing these factors, we  focus  on  case-study  countries  which  represent  different  regions  and  feature diverse institutional characteristics: Germany, Italy, Poland and Sweden.

    Through this  analysis  we  propose  four  policy  actions  designed  to  place  gender  equality in the labour market at the heart of a growing European economy. These are (1) the  promotion  of  better  work-life  balance  (2)  embedding  equality  in  national  tax systems (3) tacking gender stereotypes through education and (4) understanding the  benefits  of  long  term  investments  for  long  term  gains  in  terms  of  equality policies. To conclude, we acknowledge that it is preferable to implement policies that are tailored towards the institutional and cultural settings in each country and to specific groups of workers. Thus it is important that gender policies should be established at the national level. Rather than seeking to expand its competencies in the areas of education, taxation or social policy, the EU should focus on setting overall objectives.

    Growth Jobs Macroeconomics Social Policy Society

    Women in a Man’s World: Labour Market Equality Driving Economic Growth

    Policy Briefs

    22 Oct 2018

  • Who doubts that history doesn’t repeat itself? In Brussels, 2018 is the new 1989. Everybody seems to have a “blueprint” or “vision” for the future of the Eurozone. The only problem is that three decades after the Delors report, Eurozone leaders risk the sustainability of the single currency area. The reason? Political goals rather than economic priorities are guiding Eurozone proposals. The possible result? A repeat of the mistakes of the 1990s and a Eurozone still ill-equipped to deal with future crisis.

    Crisis European Union Eurozone Leadership Macroeconomics

    Keeping it Real: Building a Realistic and Inclusive Eurozone


    11 Apr 2018

  • Compared to the 18 months preceding the 2014 elections, the mood music in Brussels could scarcely be more different. But while growth and employment are increasing, vast swathes of the established middle classes have lost faith in their ability to achieve a higher standard of living and to match the social mobility achieved by preceding generations. Increasingly topics such as globalisation, free trade, immigration and even stable political systems are viewed as tools of the “elite” designed to prevent progress for working and middle class families. Politically, this has manifested  itself in a fracturing of the traditional party political system and the rise of a protectionist, combative populism.

    To confront these challenges, this paper identifies five social and economic priorities that should form an important element of centre right policy formation. With the ultimate objective of rejuvenating an aspirational middle class in Europe, we argue that only by bridging the gap between the rhetoric of a digitally driven, flexible economy and the day to day realities confronting middle class families can the centre right hope to increase working and middle class support in the 2019 elections and beyond. Such an approach is based on the core social market economy principle of seeking to conciliate economic freedom with social security, while maintaining a high level of personal responsibility and subsidiarity.

    Centre-Right Economy Macroeconomics Middle Class Social Policy Society

    The Middle Class: Priorities for the 2019 Elections and Beyond


    02 Mar 2018

  • This book explores how the position of the middle class has changed in the past decade. No Robots expresses the perspective of households which are not floating as some kind of atomic particles in a macro economy, but consist of human beings who find meaning in  relationship  to  others.  Analysing  their  perspective  on  the  economic  situation, globalisation, migration and technology is key, we believe, to understanding political trends.  In  this  context,  No  Robots  also  expresses  the  widely-felt  anxiety  about  the replacement of jobs by robots. Households in every country are concerned about the future of work: whether it will be there, whether it will be well-paid and whether their children are receiving the right education to find a job. These are the type of concerns that we uncover for a diverse set of countries from the European Union. 

    Economy EU Member States Macroeconomics Middle Class Social Policy Society

    No Robots: The Position of Middle-Class Households in Nine European Countries


    19 Nov 2017

  • This working paper looks at recent trends in the Russian economy after more than two years of recession. It analyses the fundamental reasons for the current economic crisis and argues against some of the mainstream views on ‘the end of the recession’ and the role of Western financial sanctions. The paper follows up the author’s publication on the same topic which was published by the Wilfried Martens Centre for European Studies in December 2015.

    Crisis Economy EU-Russia Growth Macroeconomics

    The Russian Economy: Recovery Is Further Away than Some Might Think


    12 Feb 2017

  • In December 2014 under the leadership of Mikuláš Dzurinda, president of the Martens Centre, former prime minister of Slovakia and successful country reformer, we launched the  #UkraineReforms programme to bring together the expertise of senior EU decision-makers in support of the reform process in Ukraine. This transfer of experience is organised through public events, town-hall style meetings, TV debates, online articles and interviews held in Kyiv and other major Ukrainian cities. The initiative is supported by local partners including Ukrainian NGOs Reanimation Package for Reforms and Stronger Together, as well as the Kyiv School of Economics. By the end of 2016 the programme presented over 20 activities, 18 high-level visits in Ukraine in 7 different cities, around 70 meetings and lectures and over 40 media interviews. This brochure gives an overview of the project’s milestones and achievements following 2 successful years of expert visits and exchanges. 

    Eastern Europe Economy Leadership Macroeconomics

    Ukraine Reforms: milestones and achievements


    01 Feb 2017

  • In the early 2000s, it appeared that the European Union would continue to lead the world in telecommunications. It accounted for the largest share of private investment in telecommunications infrastructure; it had six handset manufacturers accounting for more than half of the world’s phones; and a continental agreement on 3G/UMTS which became  the  global  mobile  standard.  

    But  the  EU’s  lead  was  short  lived. Instead the US and Asia emerged. Today there are no more European handset  manufacturers. 4G  eclipsed  3G. The  US  is  on  track  to have half of all its mobile broadband subscriptions as 4G by the end of 2016, while  Europe  will  struggle to reach 30 percent. There is over €100 billion of additional investment required to achieve the Commission’s Digital Agenda goals.

    This note examines the reasons behind the EU’s decline in global telecommunications leadership, notably a confused approach to telecom regulation and a regulatory framework which actually deters European enterprises from investment and innovation. 3 solutions are proposed to help close the gap in investment and to strengthen European enterprises so that they can invest/innovate and stimulate the demand for digital services. 

    These solutions are:

    1. Removal of obsolete regulation on specific industries in favour of a general competition approach;

    2. Update the competition framework to recognise the dynamic effect of digitally converged industries

    3. Encourage public sector institutions to digitise as a means to help lagging European nations adopt the internet and achieve Digital Single Market (DSM) goals.

    European Union Innovation Internet Macroeconomics Technology

    Telecoms Investment: 3 Steps to Create a Broadband Infrastructure for a Digital Europe


    07 Sep 2016

  • The 2013–14 Euromaidan revolution in Ukraine created much admiration and hope among Ukrainians and the international audience. Both Ukrainian civil society and international partners have voiced their high expectations of the meaningful changes in the economy, the political system, and public institutions.

    This paper argues that positive changes depend on a clear escape from the Soviet legacy, which provokes political populism and stalls reforms. Despite the immense challenges of the Russian military intervention and the declining economy, Ukraine has made progress with its ambitious reform agenda.

    This paper discusses the achievements and setbacks in four policy areas: decentralisation, energy, the civil service and anti-corruption. It includes firm evidence that proves that the results of many of the reforms are already helping the Ukrainian economy to recover from the crisis.

    In the long run, the success of a new prosperous and democratic Ukraine will depend on several components of the reform process: vision, leadership, communication, political consolidation and Ukrainian ownership.

    The EU can and should help in this endeavour, but the national government must maintain the critical share of responsibility.

    Eastern Europe Economy Macroeconomics

    No Illusions, No Regrets: The Current Struggle to Reform Ukraine


    20 May 2016

  • 2016 has been marked by a return of uncertainty in the financial markets and increased doubts over growth prospects in key global economies such as China, Europe and the U.S. Nearly ten years after the U.S. sub-prime mortgage crisis first erupted, the global financial sector has returned as a key concern of economists and global investors.

    This note identifies four key issues underpinning the current market turbulence. It argues that although these challenges are varied and serious, they are not insurmountable for Europe owing to the reforms undertaken since 2008.

    However, in order to prevent regular cycles of market speculation further economic reforms are necessary which will challenge existing national preferences and change the governance of both the European and global economies.

    Ultimately, for Europeans, the goal of these reforms is to lead to a more cohesive and robust European Union. However, the failure of the EU to act in a timely (and collaborative) manner will result in further periods of speculation. 

    Four policy priorities – increased investment, further global cooperation, the completion of Banking Union and the maintenance of sustainable public finances – are identified as being necessary for the EU to withstand future financial crises.

    Banking Crisis Economy Growth Macroeconomics

    Financial Market Instability: A Four Point Plan to Avoid Economic Catastrophe in Europe


    02 May 2016

  • The recent financial and economic crisis has exacerbated the funding shortfalls of Europe’s public pension systems. However, although the ageing of Europe’s population is a general trend observable in all member states, its scale and timing will impact differently on a national level. By analysing demographic trends and utilising a case study approach, this research highlights the challenges facing national pension systems in the years ahead.

    Politically, it will be on the basis of national preferences that further pension system reform will occur in the future. With this in mind, it is too narrow-minded to take a solely fisc al perspective from which to develop European reform strategies which meet the requirements for both fiscal balance and sustainable public pension systems. Therefore, the EU should support national reform strategies by monitoring public pension reforms as well as improving the single market.

    However, public pension policy should remain a national competence. In addition, the examples of the Italian and British case studies highlight that long term pension reform should be innovative and involve public, occupational and private elements.

    Economy Macroeconomics Social Policy Sustainability

    Live Long and Prosper? Demographic Change and Europe’s Pensions Crisis

    Research Papers

    10 Nov 2015

  • The debate surrounding a potential BREXIT has largely focused on the costs and disadvantages for Britain of making such a move. However, Britain leaving the EU would also alter the strengths and profile of the European Union. Britain is the EU’s second largest economy, a significant net contributor to the EU budget, hosts Europe’s only global financial centre and is an important driver of single market reform on the European stage. 

    In her absence, the EU will lose a key proponent of the market economy and free trade as drivers of economic growth and prosperity.  In this context, while BREXIT would be a catastrophe for Britain, it would also, as this INFOCUS identifies, fundamentally change the profile and focus of the EU. 

    The ongoing debate over BREXIT symbolises Britain’s detachment from Brussels based European affairs, a process hastened by the economic crisis of recent years. From a London perspective, long term doubts over the viability of the Euro have been reinforced by the depth of Britain’s economic recovery (relative to the Euro zone) and by the EU’s rule based approach to furthering economic governance.

    This detachment is physically apparent across the EU’s institutions. Although currently accounting for over 12% of the EU’s total population the proportion of British nationals employed in policy influencing roles in the European Commission has declined to just 5.3% in 2014. Less than 3% of all applicants taking the EU civil service exam (the concours) were British in recent years.2 In a wider context, Britain leaving the EU (and the uncertainty over the exact nature of the future relationship) poses a number of significant challenges for Brussels based policymakers.

    IN FOCUS is a new series of commentaries in which the Martens Centre looks closely at current policy topics, dissects the available evidence and challenges prevailing opinions.

    Brexit Economy EU Member States Macroeconomics

    BREXIT: Six ways it will fundamentally change the EU


    26 Jun 2015

  • The euro is one of the most important projects that the European partners have committed to since the foundation of the European Union. The common currency is a symbol for European integration. It gives Europe a unique opportunity to have a global voice. The global financial crisis and the European sovereign debt crisis gave us a clear lesson: structural problems in individual member states can cause severe economic repercussions across the EU.

    However, the crisis in the eurozone is not a crisis of the euro itself. It is a sovereign debt crisis, a banking crisis and a competitiveness crisis combined. The roots of which lie in a series of inter-related issues starting with unsustainable fiscal policies all over Europe, lack of economic reforms and inadequate regulation of financial and labour markets. These were weaknesses which magnified the consequences of the global financial crisis that started in 2008.

    This leaflet offers an overview of how the euro has transformed the European integration process and the lives of many Europeans since its introduction in 1999. The European member states share rights and duties, opportunities and risks. Each member state has to make its own contribution to the ongoing recovery process. If we succeed in this, the euro offers more opportunities than risks.

    Economy Eurozone Integration Macroeconomics

    The Euro: Basics, Arguments, Perspectives


    12 Mar 2014

  • Due to high government debt levels and the dangers of self-defeating austerity, smart fiscal consolidation measures are needed that foster economic growth. A thorough review of the relevant literature provides many useful insights. To regain credibility, a clearly communicated broad reform program (including structural reforms) is required. Targeting mainly public expenditures, rather than revenues, raises the chances of expansionary effects. The timing of consolidation should focus on adjustment in structural terms to leave room for automatic stabilisers. The main part of the study evaluates the impact of individual consolidation and fiscal reform measures on consolidation success, on economic growth (in the long and short term), and on social fairness.

    Economy Growth Macroeconomics Sustainability

    Smart Fiscal Consolidation: A Strategy for Achieving Sustainable Public Finances and Growth

    Research Papers

    09 Jul 2013

  • The second annual Economic Ideas Forum, EIF11 took place in London on the 25th and 26th of May and brought together high-level government officials, business leaders and other influential stakeholders from across Europe and the United States. Participants included EU officials, parliamentarians and senior British politicians, as well as high-level representatives of major corporations. This unique gathering of speakers and participants provided an ideal opportunity to discuss current economic issues and challenges while offering innovative policy ideas and solutions. Over 200 participants took part in EIF11, which counted on the support of our partners the Stockholm Network and Business for New Europe.

    Business Crisis Economy Growth Macroeconomics

    Economic Ideas Forum London 2011 – Conference Report


    25 Jul 2011