Does the European Semester deliver the right policy advice? Bruegel Policy Contribution 2013/12, 20 September 2013

The July 2013 European Council recommendations to the euro area recognise a number of fiscal and macrostructural challenges, but do not fully exploit the options made possible by the European economic governance framework. There are particular problems with the Council's suggestions for the euro area as whole, which are not (or not adequately) reflected by the country-specific recommendations. A major drawback is that the Council recommendations do not give sufficient importance to symmetric intra-euro area adjustments. Reference to the euro area's ‘aggregate fiscal stance’ is empty rhetoric. Insufficient attention is paid to demand management. The most comprehensive recommendations are made on structural reforms. The July/August 2013 Article IV IMF recommendations on macroeconomic policies could also have been more ambitious, but they correspond better to the economic situation of the euro area than the Council’s recommendations. The President of the Eurogroup should continue discussions on the completion of the economic governance framework, including completion of the banking union and the setting-up of a euro-area institution responsible for managing the euro area’s aggregate fiscal stance.

Macedonia - A country in crisis. CEPS Policy Brief No. 299, 13 September 2013

Macedonia is a country in deep trouble. There is a climate of mistrust between all the political parties; intolerance of minority groups is increasing and fear is also generated by the all-pervasive control of the main governing party. In 2009 the European Commission recommended that a date be set for accession negotiations to start, but since then the country's efforts to join the EU (and NATO) have been blocked. Author Erwan Fouéré sets out ten clear recommendations for both Macedonia and the EU on the way forward.

Fiscal policy, banks and the financial crisis. National Bank of Belgium Working Paper No. 234, October 2012

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macroeconomics literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.

Who decides? Resolving failed banks in a European framework. Bruegel Policy Contribution 2013/16, 29 November 2013

As the basis for a European regime for resolving failing and failed banks, the European Commission has proposed the Bank Resolution and Recovery Directive (BRRD) and a regulation establishing a European Single Resolution Mechanism (SRM) and a Single Bank Resolution Fund (SBRF). There is a debate about which parts of the proposed SRM-SBRF to add to the BRRD. The BRRD sets out a resolution toolkit that can be used by national resolution authorities. The SRM would involve European institutions more at the expense of national resolution authorities. This change could affect resolution outcomes. Domestic resolution authorities might be more generous than supranational authorities in providing assistance to banks. A supranational approach might be more effective in minimising costs for taxpayers. But regardless of the final design, more attention is needed to ensure that resolution authorities are politically independent from governments. When public support is provided to failed institutions it should come from a bankfunded resolution fund. This would reduce taxpayers’ direct costs, and would make banks less likely to take risks and advocate for bailouts.

The new European framework for managing bank crises. CEPS Policy Brief No. 304, 21 November 2013

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

European banking disunion. CEPS Commentary, 14 November 2013

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

A Proper Yield Curve for Greece to Kick-Start Financial Intermediation. ECMI Policy Brief No. 21, 10 December 2013

At present, the market is severely mispricing Greece’s sovereign risk relative to the country’s fundamentals. As a result of the mispricing, financial intermediation in Greece has become dysfunctional and the privatisation of state-owned assets has stalled. This mispricing is partially due to an illiquid and fragmented government yield curve. A well-designed public liability management exercise can lead to a more efficient pricing of Greece’s government bonds and thereby help restore stable and affordable financing for the country’s private sector, which is imperative in order to overcome Greece’s deep recession. This paper proposes three measures to enhance the functioning of the Greek government debt market: i) Greece should issue a new five-year bond, ii) it should consolidate the 20 individual series of government bonds into four liquid securities and iii) it should offer investors a swap of these newly created bonds into dollar-denominated securities. Each of these measures would be beneficial to the Hellenic Republic, since the government would be able to reduce the face value and the net present value of its debt stock. Furthermore, this exercise would facilitate the resumption of market access, which is a necessary condition for continuous multilateral disbursements to Greece.

The Judicial ‘Bail Out’ of the European Stability Mechanism: Comment on the Pringle Case. Research Paper in Law 09/2013

Since the beginning of the crisis, many responses have been taken to stabilise the European markets. Pringle is the awaited judicial response of the European Court of Justice on the creation of the European Stability Mechanism (ESM), a crisis-related intergovernmental international institution which provides financial assistance to Member States in distress in the Eurozone. The judgment adopts a welcome and satisfactory approach on the establishment of the ESM. This article examines the feasibility of the ESM under the Treaty rules and in light of the Pringle judgment. For the first time, the Court was called to appraise the use of the simplified revision procedure under article 48 TEU with the introduction of a new paragraph to article 136 TFEU as well as to interpret the no bail out clause under article 125 TFEU. The final result is rather positive as the Court endorses the establishment of a stability mechanism of the ESM-kind beyond a strict reading of the Treaty rules. Pringle is the first landmark ECJ decision in which the Court has endorsed the use of new and flexible measures to guarantee financial assistance between Member States. This judgment could act as a springboard for more economic, financial and, possibly, political interconnections between Member States.

The EU’s online gambling regulatory approach and the crisis of legal modernity. EU Centre Singapore Working Paper No. 19, January 2014

Online gambling is a fast growing service activity in the world - its economic significance is clearly shown by the high level of innovation by gambling operators all over the world, as well as by the increasing amount of tax revenues generated in those States that allow this activity. Nevertheless, states face many difficulties in controlling and regulating online gambling, given the specific nature of the Internet, and the never-ending quest by gamblers for new gaming websites that offer superior odds, a wider gaming variety, and greater bets combination. In this working paper, Dr Salvatore Casabona examines the legality of online gambling in the context of the European Union (EU), and discusses the Union's regulatory approach to online gambling, the lack of harmonisation and the issue of member state sovereignty at the crossroad of European Law on online gambling, and the potential for a new regulatory paradigm to emerge.

Macroeconomic and Financial Crisis Management in the Southern and Eastern Mediterranean: Diagnosis and Prospects. CEPS Paperbacks. December 2013

The global financial crisis, which started in the summer of 2007 and deepened in the aftermath of the Lehman failure in September 2008, has led to a virtual collapse in economic activity and increased financial volatility worldwide. For the developing countries, the main channel of transmission has been a drop in external transactions, such as trade, financial and capital flows, and remittances. The emerging economies in the southern and eastern Mediterranean have also faced declining economic activity, although there seems to be considerable variation in the relative magnitude and timing. Most of these economies have shown a delayed but more lasting response to the crisis, driven mostly by their close trade and investment ties with the EU and the Gulf Cooperation Council (GCC) countries. This book explores the fiscal, monetary and financial effects of the crisis in the region and provides an in-depth analysis of the fiscal, monetary and banking policies in the post-crisis era, the viability of their exit strategies and the future of reforms in the region. These analyses not only provide a comprehensive comparison between the countries but also provide a solid basis for assessing future economic and financial developments and reforms in the region.

Austerity: European democracies against the wall. CEPS Paperbacks. July 2013

The crisis in the eurozone has had a dramatic impact on the economic and social fabric of European countries. However important it may be, the economic dimension is only the symptom of a broader problem. The crisis is primarily political in nature. Lorenzo Bini Smaghi argues in this book that the crisis reflects the inability of western democracies to solve problems that have been building for over two decades. He finds that democratically elected officials are loathe to take unpopular decisions that could jeopardise their re-election. Emergency thus becomes the engine of political action, and the justification for corrective measures vis-à-vis the voters. As a consequence, the cure in the form of austerity, administered belatedly and under pressure from the markets, becomes even more painful and unpopular, giving rise to populist movements and endangering democracy itself.

The long haul: managing exit from financial assistance. Bruegel Policy Contribution Issue 2014/03, 20 February 2014

Countries can make a clean exit from financial assistance, or enter a new programme or a precautionary programme, depending on the sustainability of their public debt and their vulnerability to shocks. Ireland made a clean exit in December 2013, supported by significant budgetary and current-account adjustment and signs of economic recovery. But Irish debt sustainability is not guaranteed and prudence will be needed to avoid future difficulties. A clean exit for Portugal is not recommended when its programme ends in May 2014, because compared to Ireland it faces higher interest rates, has poorer growth prospects and has probably less ability to generate a consistently high primary surplus. A precautionary arrangement would be advisable. In case debt sustainability proves difficult to achieve later, some form of debt restructuring may prove necessary. It is unlikely that Greece will be able to exit its programme in December 2014. A third programme should be put in place to take Greece out of the market until 2030, accompanied by enhanced budgetary and structural reform commitments by Greece, a European boost to economic growth in the euro-area periphery and willingness on the part of lenders to reduce loan charges below their borrowing costs, should public debt levels prove unsustainable despite Greece meeting the loan conditions. Even assuming all goes well, the three countries will be subject to enhanced post-pro-gramme surveillance for decades. Managing such long-term relationships will be a key challenge.

spotlight europe # 2014/01 — February 2014: North Africa - Crisis and Consensus

The Arabellion is now in its fourth year. There is more freedom today, but less security. There are far more opportunities, but fewer jobs. And there is a patchwork of conflicts. In many places though the Arab world is tentatively moving towards democracy and the social market economy. Although there have been some difficulties along the way, European assistance for the transformation process is moving in the right direction. Still, the EU could certainly do more on the political level.