Publications

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.

On 27 January 2021 the member governments of the European Stability Mechanism (ESM) signed the Agreement Amending the ESM Treaty, instituting long-awaited reforms to the EU’s crisis management and financial-aid mechanism. The ESM was never perfect. Set up outside the EU treaty framework, it suffered from acute accountability and legitimacy issues and, being directly controlled by eurozone governments, its procedures were subject to cumbersome voting arrangements and conflicts of interest. Finally, with its inception in the throes of the eurozone crisis, it was committed to a single rigid approach based on conditionality.

The European Commission’s attempt to address these shortcomings in December 2017 was categorically rejected by the member states, who instead embarked on a separate reform initiative resulting in the current ESM Reform Treaty. This turn of events has been in part motivated by troubling levels of distrust between EU institutions and member states, and—as a result—between EU institutions and the ESM. The other driving force has been the political refusal to let go of the Maastricht promise of national fiscal sovereignty without shared liabilities. Thus, the ESM Reform Treaty is the culmination of a political campaign to redeem the economic compromise at the core of the Economic and Monetary Union and create an alternative arrangement for member states to avoid surrendering further competences to the EU.

This paper finds that the ESM Reform Treaty not only fails to address the outstanding issues in the original ESM framework, but exacerbates the status quo by further empowering the Mechanism outside the legal framework of the EU treaties. The ESM’s ‘peacetime powers’ represent a consequential novelty in this regard. These ‘powers’ are in fact the ESM’s own analytical capabilities, which have been extended beyond its financial-aid function and are now applicable within the bounds of the European Semester for economic governance. Perhaps worst of all, the ESM remains an extremely limited instrument, legally designed to imagine the single scenario of a sovereign debt crisis which requires disciplinary conditionality in exchange for financial aid. It would be careless to insist on this approach for resolving the multitude of difficulties which might befall the eurozone in the future.

Future reforms are not just advisable, they are a functional necessity. It will become increasingly difficult for the ESM to exercise its new powers or provide suitable crisis management without the efficiency and legitimacy which these adjustments could confer.

A compromise solution could see the ESM become its own independent technocratic institution, equally removed from the political influence of governments and the reach of the Commission. Introducing flexibility in its strict conditionality could be a matter of reinterpreting the meaning of ‘sound budgetary policy’ from the Court of Justice of the European Union’s ruling in Pringle. Lastly, in matters of justiciability and the protection of fundamental rights, nothing prevents ESM governments from committing the activities of the Mechanism to the European Charter on Fundamental Rights or the authority of the European courts, should they wish to do so.

Whatever decisions may be taken on the future of the ESM, they cannot ignore the unfolding of the EU’s fiscal response to the pandemic with Next Generation EU. Should the facility remain an exception, there would be even more pressure on the ESM to undergo another round of far-reaching reforms. However, should Next Generation EU prove a positive exercise, the EU should look to capitalise on the newfound trust by consolidating its economic and crisis governance capacities under a single flag—a certain blue one with 12 gold stars.

Throughout Europe the Covid-19 pandemic has led to lower economic growth and higher unemployment. This has resulted in a surge in public debt and an increase in gender inequalities in the labour markets of many advanced countries. This situation has stimulated interest in policies that can simultaneously boost employment, increase tax revenues and reduce labour market inequalities.

This report investigates whether a move from family-based (i.e. joint) taxation to individual taxation would increase the labour supply of the lower-earning spouse (often the woman). It has often been argued that joint taxation decreases the employment of women because it increases the tax rate for the second earner.

This report focuses on the situation in Germany because work disincentives for women are particularly strong in the country’s tax system. However, it is likely that the conclusions will apply to other EU countries with joint income taxation, for example, France, Poland and Portugal.

According to our simulations, moving to individual taxation would substantially increase the labour supply in Germany and therefore also spur economic growth. Moving to individual taxation and returning the higher tax revenues to married couples (to ensure that there are no additional budgetary costs) would increase the labour supply by more than a half million full-time equivalents. This reform would lead to a measurable increase in GDP, that is, an increase of up to 1.5%.

Such a tax reform might be a way to reduce debt levels and stimulate the economy in the face of the current massive rise in public debt and decline in GDP. It could also help reverse labour market gender inequalities, which have been exacerbated by the pandemic.

However, since the simulated reforms produce results that are not distributed equally, ultimately a political value judgement is needed to decide whether the sizeable efficiency gains would outweigh the losses for those who would lose from the reform. Politically, the negative impact on more financially vulnerable groups may need to be addressed through further targeted tax reforms.

This paper sets out how Brexit is pushing the UK towards aligning more closely with the rest of Europe in its politics, society, economics and international position. This is the result of longrunning trends coupled with the political tumult created by the 2016 referendum and the effects of the negotiations that followed. The emergence of pro-Europeanism as a political force is one of the most important and obvious changes.

Brexit has also confronted the British with several realities about the UK’s economy, society and place in the world that show it to be more European than many will have recognised. In addition, the process of withdrawal has exposed the decentralisation and fragmentation of the formerly exceptionally unitary UK state that began in the 1990s, with tensions emerging from Scotland and Northern Ireland voting to remain while England (with the exception of London) and Wales voted to leave.

However, none of this should be taken to mean that divergence from Europe will not happen or be sought, or that the British people will eventually vote to rejoin.

The term ‘financial technology’ (FinTech) refers to technology-enabled innovation in the financial sector. FinTech could result in new business models, products and services. It has been rapidly developing around the world, offering innovative products and services that are quickly gaining traction with consumers and investors. Different countries and regions around the world are finding themselves caught up in this fast-paced ecosystem, where their competitiveness depends on a variety of factors, including the interaction of different market players, access to funding and talent, and regulatory measures. This paper examines the latest developments in specific financial technologies, major financial services and product providers. It also looks at the conditions which are shaping financial centres’ competitive significance in FinTech on a global scale.

Recent trends suggest that the US and China are emerging as key hubs for unlocking the disruptive potential of financial innovation in terms of the scale of their FinTech businesses and investments compared to Europe. For the comparatively smaller and younger European FinTech companies it would be challenging to compete with them without favourable government initiatives and support. The EU has already undertaken certain measures and initiatives in order to nurture its FinTech firms, but at the moment it lacks a targeted, EU-wide approach to FinTech. The policy landscape remains rather fragmented with different national approaches to legislation and regulation. The paper examines the current EU policies, initiatives and frameworks for the purpose of providing forward-looking policy recommendations for a more competitive and innovative single European market in the financial sector.

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.

Most, if not all, economic transactions are digitized to some degree. Most, although not all, enterprises use digital technology in some part of their business. Many, though still far too few, people use digital technology to make their lives richer and easier in everything from shopping and online banking to online dating or streaming music and films.

Accordingly, it is becoming increasingly hard to separate the digital economy from the non-digital one. Rather, the digital economy is the new economy, and the ambition to establish a European Digital Single Market (DSM) is the aspiration to realize an improved single market that makes use of new technologies. This is what makes fulfilling this goal both extremely complicated and very simple.

Rather than a bombastic revolution, digitization has been a silent, low key integration process moving horizontally through our economy and society. That is, until now. We have now reached a critical point, having realized that digitization has been embedded into most, if not all, parts of our lives.

Accordingly, a lot is changing as new technologies are no longer just being used to do things the way they have always been done, but also to do things in completely new ways. The song has been separated from the CD, bloggers compete with journalists, a mobile gaming company is worth more than a car manufacturer and our cities are being transformed by apps. Times are changing.

Based on our examination of the process of digitization and digital market integration in Europe, we highlight five specific policy issues that are crucial to promoting a lasting digital economy in Europe. 

These areas include the need for harmonized regulation; making data borderless and data flows seamless,  promoting regional, bottom-up, controlled experimental policy initiatives; growing urban digital markets where digitization and density accelerate innovation, and establishing an open, coherent framework for data ownership with regard to privacy, personal data and metadata.

In particular, we highlight urban digital markets as a unique opportunity for the EU (and member states) to improve the policy response to digital and disruptive entrepreneurship.  Used properly, these markets can generate substantial growth and innovation while aiding the transition to a sustainable and world leading European Digital Economy.  A rewired Europe fit and able to compete in the 21st century global economy.

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.

The creation of jobs across Europe remains a key economic and social challenge for the EU. Given the negative impact of the financial crisis on  European citizens, the EU’s ability to promote effective job creation policies will be viewed as a major success of the wider integration process.

In this context, a new approach is required to provide a growth-based strategy for creating employment across Europe. What is required is an achievable strategy based on the realities of modern EU labour markets. This research, based on an analysis of six member states, provides a set of recommendations designed to reflect the current characteristics of the EU labour markets. This research concludes that:

• EU employment policies should be simplified and better coordinated;
• Clearly defined action s should be introduced to further improve labour mobility;
• The focus of policymaking should be switched from combating unemployment to creating jobs;
• It is possible to finance the recovery by bridging the gap between investment and reform.

The period since the outbreak of the financial, economic and social crises in Europe has witnessed a renewed focus on the need to develop a more sustainable and qualitative growth model. A model where the traditional focus on economic growth (i.e. GDP growth) is complemented by an adherence to a wider range of qualitative indicators. Indicators which more broadly characterise the well-being of society as a whole. This paper defines a model for Sustainable and Qualitative Growth (SQG) in the EU and questions if existing EU economic and social governance arrangements are consistent with this wider approach to building a sustainable growth model. This paper identifies a number of key recommendations. First, a more encompassing, balanced and multi-dimensional EU strategy for growth should be adopted. This refined strategy should take into account the broader indicators underpinning the SQG model and should be addressed in key EU documents such as the Annual Growth Survey. Second, a symmetric and ‘time consistent’ macroeconomic strategy, allowing for investments in SQG related domains, should be pursued. These growth-enhancing investments should primarily target relevant policy areas such as education and training, technological innovation and lifelong learning strategies. Third, a common automatic stabiliser in the EU should be set up in order to provide a minimum level of EU investment across all member states.

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.

This report surveys recent works in political economy showing that trust—and civic capital more generally—matter for various aspects of economic well-being and presents new evidence from European countries showing that trust has deteriorated considerably in those European countries that have been affected the most by the ongoing economic downturn. We also discuss policy recommendations. The key message is that because trust and social capital matter crucially for economic and institutional development, countries must both monitor developments closely and pursue policies that cultivate civic social capital. Given strong inertia, changing people’s beliefs and promoting civic engagement will not occur overnight. Targeted policies can increase civicness and promote social capital considerably. First, promoting education seems crucial as, a higher level of education cultivates social capital. Second, countries where primary and secondary education are based on lecturing and memorising, should alter the curriculum towards more group activities, team projects, and critical thinking based on a dialectic method. Third, policymakers should continue promoting the outward orientation of the economy and the removal of administrative barriers to entry that fuel corruption and impede competition.

Current demographic changes are a major factor in the increasing societal interest in the contributions older generations can make to the development and cohesion of society. This Centre for European Studies study argues that the traditional view of ageing is gradually being replaced by a new perspective, one with increased focus on older people’s capabilities, resources and potentials. It suggests that population ageing does not imply inevitable declines in a society’s competitiveness or reduced intergenerational solidarity. Amongst other policy recommendations, the study proposes flexibility in age limits, to prevent exclusion of older people from areas of societal responsibility. The study encourages a stronger focus on the productive participation of older people in political and public discourse, and support for civil engagement of older people through mechanisms such as incentive systems.

This paper presents the case for deepened trade and investment policy cooperation between the European Union and the United States. A trade deal between the two economic powers has become an increasingly popular notion, particularly given increased competition from China. Old arguments against a transatlantic deal have become weaker as the balance of the world’s economies has changed. Such an agreement would generate significant gains if designed properly and would encourage global trade liberalisation. It is time for the EU and US to press ahead with a free trade agreement. The EU and US also need to find a way outside of the WTO system to use their economic power as leverage in their dealings with emerging economies. An ambitious free trade agreement can, therefore, achieve more than the benefits of reducing barriers.

The Multiannual Financial Framework (MFF) is the budget of the European Union and the most important tool to finance common policy areas, actions and strategies. Upon a proposal from the European Commission, it has to be approved by the majority of the members of the European Parliament, before it can be unanimously adopted by the Council. This procedure, as well as the views of the different institutions and two representative Member States are examined in this research paper. All parties agree that the current MFF needs to be changed to respond to new EU priorities. However, reaching an agreement between the three negotiating institutions will not be straightforward, as views on the development of the financial resources of the European Union diverge considerably. Transparency of the decision-making procedure needs be increased to facilitate negotiation. The long-term strategic objectives and interests of European citizens need to be kept in mind when reflecting on an adequate level of funding for policies. However, there are differing views as to whether the budget should be increased or not.

One could view the current crisis as an opportunity to make up for past mistakes or past reluctance to do what was necessary. This was the approach adopted by the European institutions when they came up with their proposals on economic governance. This paper aims to provide an insight into the thinking of French and German policymakers when it comes to the issue of how the economic governance of the European Union should be organised, as well as assessing what has been done so far and providing new ideas for future steps.

World trade is recovering from its sharpest decline since the Great Depression. Europe remains the world’s leading trading entity, despite the crisis. The authors of this paper assert that the EU should not retreat to protectionism, but should rise to the post-crisis challenge. The paper assesses how Europe can do this through strengthening the single market, proposes various objectives for external trade policy and examines the need for greater political advocacy regarding the benefits of open markets.

This paper advocates the introduction of a flat rate income tax in the Netherlands. It also gives some recommendations for lowering the flat tax rate by shifting away from income taxes, increasing value-added taxes and broadening the tax base. It concludes by showing that a marginal tax rate plus social security contributions of 33.25% is possible. The focus of this proposal is the Netherlands, but several aspects of it may be relevant to other EU Member States.

Small and medium sized are the backbone of Europe’s economies and represent the future, driving innovation and change. Therefore, SMEs are important to economic recovery. This paper examines the issues facing SMEs, including the role of SMEs in Europe’s economy in times of recovery and growth and the effects of bureaucracy and punitive taxes on enterprise.

The goal of this paper is to make available to European policymakers a general and consistent framework to design the competition policy of the future, as well as to reform existing competition policy in the EU

As a consequence of the most severe economic crisis in post-war European history, public debt is bound to reach record highs in many EU Member States. Obviously, such scenarios pose an imminent but also ongoing challenge to European policy-makers both at national and at EU levels. Thus paper assesses the extent, consequences and possible solutions to the current public debt crisis in Europe.

It took only several months for Russia and a number of other developing markets that had been experiencing miraculous economic growth to deteriorate to the point of near economic collapse.The financial crisis has been a central issue in Russia’s monetary and credit sphere since September 2008. This paper presents trends and prospects for the development of Russia’s economy in 2009 and beyond.