Ukrainian economy on the verge of recession. OSW Commentary No. 96, 2012-11-21

In the third quarter of 2012, Ukraine’s economy recorded negative growth (-1.3%) for the first time since its 2009 economic crisis. Q4 GDP is projected to suffer a further decline, bringing Ukraine into formal recession. In addition to the worsening macroeconomic indicators, Ukraine is also facing a series of concomitant economic problems: a growing trade deficit, industrial decline, shrinking foreign exchange reserves, and the weakening of the hryvnia. Poor economic growth is expected to result in lower than projected budget revenues, which in turn could lead to the sequestration of the budget in December. The decline evident across the key economic indicators in the second half of 2012 brings to a close a period of relative economic stability and two years of economic growth, which had been seen as a significant personal achievement of President Viktor Yanukovych and the ruling Party of Regions. The health of the Ukrainian economy largely depends on the state of the country’s export- -oriented industries. The current economic forecasts for foreign markets are not very optimistic. It is impossible to determine whether the current economic downturn is likely to be merely temporary or whether it heralds the onset of a prolonged economic crisis. The limited capacity to deal with the growing economic problems may mean that Kiev will need to seek financial support from abroad. This is particularly significant with regard to external debt servicing, since in 2013 Ukraine will need to pay back around 9 billion USD, including over 5.5 billion USD to the International Monetary Fund. In order to overcome the recession and stabilise public finances, the government may be forced to take a series of unpopular measures, including raising the price of natural gas and utilities. These measures have been stipulated by the IMF as a condition of further financial assistance and the disbursement of the 12 billion USD stabilisation loan granted to Ukraine in July 2010. The only alternative for Western loans and economic reforms appears to be financial support from Russia. The price for Moscow’s help might however turn out to be very high, and precipitate a turn in Kiev’s foreign policy towards a gradual re-integration of former Soviet republics under Moscow-led geopolitical projects.

Is Independence Possible in an Interdependent World? Scotland vs. the UK's Participation in the European Economy. Bruges European Economic Policy (BEEP) Briefing 30/2013

Many commentators have criticised the strategy used to finance regional governments such as the Scottish Parliament – both the block grant system and the limited amount of fiscal autonomy devised in the Scotland Act of 2012. This lecture sets out to identify what level of autonomy or independence would best suit a regional economy in a currency union, and also the institutional changes needed to sustain those arrangements. Our argument is developed along three lines. First, we set out the advantages of a fiscal federalism framework and the institutions needed to support it, but which the Euro-zone currently lacks. The second is to elaborate a model of fiscal federalism where comprehensive powers of taxation and spending are devolved (an independent Scotland and the UK remain constituent members of the EU and European economy). Third, we evaluate the main arguments for the breakup of nations or economic unions with Scotland and the UK as leading examples. We note that greater autonomy may not result in increases in long run economic growth rate, but it does imply that enhancing the fiscal competence and responsibility of regional governments would result in productivity gains and hence higher levels of GDP per head. That means the population is permanently richer than before, even if ultimately their incomes continue to grow at the same rate. It turns out that these improvements can be achieved through devolved tax powers, but not through devolved spending powers or shared taxes.

EU Enlargement: external economic implications. Bruges European Economic Policy (BEEP) Briefing 4/2003

Unlike some previous EU enlargements (e.g. with the UK and with Spain/Portugal) the present EU enlargement to Central Europe has not prompted much, let alone a fierce, debate about the external dimension. This BEEP briefing discusses the main economic aspects of the external dimension, in particular whether there is a threat of (how much) trade diversion. Attention is paid to the three main topics of interest for third countries: industrial trade effects, impact on FDI and agricultural trade effects. Agriculture is arguably the most sensitive of the three, given the very high CAP border protection, and although large-scale trade diversion may eventually occur under certain scenarios (such as an unreformed CAP), these fears are greatly exaggerated in the short to medium term (5-7 years): the time frame considered is therefore all-important. This conclusion becomes less surprising if one takes a closer look at the current sorry state of agriculture in the CEECs. Separate sections treat the somewhat sensitive subject of U.S.-CEEC Bilateral Investment Treaties, as well as the longterm development perspective, which addresses the prospects for catch-up growth by the accession countries. In the end, non-European stakeholders in the accession process will greatly benefit from sustained catch-up growth by the CEECs, which are locking-in deep reforms due to EU accession.

20 years of the European single market: growth effects of EU integration. Policy Brief #2014/02

The ongoing European integration has increased the economic growth of participating national economies. Calculating the cumulative gains in the real gross domestic product per capita resulting from the integration of Europe between 1992 and 2012, every national economy under consideration realized income gains from the European integration. Denmark and Germany saw the greatest gains per resident. If the values from only 1992 and 2012 are compared, every country except for Greece has been able to achieve a higher per capita income due to the European integration.

The Global Economy in 2030: Trends and Strategies for Europe. CEPS Paperback, 2 April 2014

This groundbreaking study concentrates on a set of critical economic factors that will shape future economic growth at the global level and offers a description of the possible evolution of their reach and scope. Our goal in pursuing this research is not to make precise predictions about growth rates or the size of individual economies, but to provide a guide for EU policy-makers by presenting an assessment of the possible implications of such trends for the global economy and the policy challenges they raise for Europe. In an attempt to respond to this need, this study concentrates on a set of critical economic factors that will shape future economic growth at the global level and offers a description of the possible evolution of their reach and scope, which often go beyond the purely economic dimension. Our ultimate goal is to provide a guide for policy-makers by presenting an assessment of the possible implications of such trends for the global economy and the policy challenges they raise for Europe.

Asset-backed securities: The key to unlocking Europe's credit markets? Bruegel Policy Contribution 2014/07, 24 July 2014

The European market for asset-backed securities (ABS) has all but closed for business since the start of the economic and financial crisis. ABS (see Box 1) were in fact the first financial assets hit at the onset of the crisis in 2008. The subprime mortgage meltdown caused a deterioration in the quality of collateral in the ABS market in the United States, which in turn dried up overall liquidity because ABS AAA notes were popular collateral for inter-bank lending. The lack of demand for these products, together with the Great Recession in 2009, had a considerable negative impact on the European ABS market. The post-crisis regulatory environment has further undermined the market. The practice of slicing and dicing of loans into ABS packages was blamed for starting and spreading the crisis through the global financial system. Regulation in the post-crisis context has thus been relatively unfavourable to these types of instruments, with heightened capital requirements now necessary for the issuance of new ABS products. And yet policymakers have recently underlined the need to revitalise the ABS market as a tool to improve credit market conditions in the euro area and to enhance transmission of monetary policy. In particular, the European Central Bank and the Bank of England have jointly emphasised that: “a market for prudently designed ABS has the potential to improve the efficiency of resource allocation in the economy and to allow for better risk sharing... by transforming relatively illiquid assets into more liquid securities. These can then be sold to investors thereby allowing originators to obtain funding and, potentially, transfer part of the underlying risk, while investors in such securities can diversify their portfolios... . This can lead to lower costs of capital, higher economic growth and a broader distribution of risk” (ECB and Bank of England, 2014a). In addition, consideration has started to be given to the extent to which ABS products could become the target of explicit monetary policy operations, a line of action proposed by Claeys et al (2014). The ECB has officially announced the start of preparatory work related to possible outright purchases of selected ABS1. In this paper we discuss how a revamped market for corporate loans securitised via ABS products, and how use of ABS as a monetary policy instrument, can indeed play a role in revitalising Europe’s credit market. However, before using this instrument a number of issues should be addressed: First, the European ABS market has significantly contracted since the crisis. Hence it needs to be revamped through appropriate regulation if securitisation is to play a role in improving the efficiency of resource allocation in the economy. Second, even assuming that this market can expand again, the European ABS market is heterogeneous: lending criteria are different in different countries and banking institutions and the rating methodologies to assess the quality of the borrowers have to take these differences into account. One further element of differentiation is default law, which is specific to national jurisdictions in the euro area. Therefore, the pool of loans will not only be different in terms of the macro risks related to each country of origination (which is a ‘positive’ idiosyncratic risk, because it enables a portfolio manager to differentiate), but also in terms of the normative side, in case of default. The latter introduces uncertainties and inefficiencies in the ABS market that could create arbitrage opportunities. It is also unclear to what extent a direct purchase of these securities by the ECB might have an impact on the credit market. This will depend on, for example, the type of securities targeted in terms of the underlying assets that would be considered as eligible for inclusion (such as loans to small and medium-sized companies, car loans, leases, residential and commercial mortgages). The timing of a possible move by the ECB is also an issue; immediate action would take place in the context of relatively limited market volumes, while if the ECB waits, it might have access to a larger market, provided steps are taken in the next few months to revamp the market. We start by discussing the first of these issues – the size of the EU ABS market. We estimate how much this market could be worth if some specific measures are implemented. We then discuss the different options available to the ECB should they decide to intervene in the EU ABS market. We include a preliminary list of regulatory steps that could be taken to homogenise asset-backed securities in the euro area. We conclude with our recommended course of action.

Improving the role of equity crowdfunding in Europe's capital markets. Bruegel Policy Contribution Issue 2014/09, August 2014

Crowdfunding is a growing phenomenon that encompasses several different models of financing for business or other ventures. Despite the hype, equity crowdfunding is still the smallest part of the crowdfunding market. Because of its legal framework, Europe has been at the forefront of equity crowdfunding market development. Equity crowdfunding is more complex than other forms of crowdfunding and requires proper checks and balances if it is to provide a viable channel for financial intermediation in the seed and early-stage market in Europe. It is important to explore this new channel of funding for young and innovative firms given the critical role these start-ups can play job creation and economic growth in Europe. We assess the potential role of equity crowdfunding in the overall seed and early-stage financing market and highlight the potential risks of equity crowdfunding. We describe the current state of play in this nascent industry, considering both the innovations introduced by market operators and existing regulation. Currently in Europe there is a patchwork of national legal frameworks related to equity crowdfunding and this should be addressed in a harmonised way.

Review of the Economic Development in the Western Balkan States. OSW STUDIES No. 19, 2005-08-10

Foreword. Ten years after the end of the armed conflict, the Western Balkans1 are still being considered as the “land of the unsuccessful policies”. Enormous financial and technical assistance transferred by the International Community has not managed to meet the goals of integrating the region within itself as well as within the European markets. Explanation for this can be found in the consequences of the war and the remnants of the socialist state. The complexity of current institutional/ political arrangements combined with the limited willingness of the regional actors to introduce and implement much of the needed reforms have additionally contributed to the current state of affairs. The economy and politics in the region intertwine to an extent as probably in none of the other post-communist states. Therefore, the paper presents the recent economic performance of the Western Balkan countries in the light of their limited institutional development and lack of efficient regional cooperation. The paper discusses the importance of foreign direct investments’ inflow for the economic growth of the “latecomer” states and presents major drawbacks which limit the influx of the foreign capital to the region. It presents private sector activity and regional cooperation programmes. It discusses the role of the International Community with the main focus on the activities of the European Union. The EU is examined not only as the main aid donor but more importantly as a foreign trade partner. Furthermore, it analyses the impact of the presence of the International Community and their strategies towards the region with the special attention to the EU. Finally, it presents recommendations for the improvement of the economic performance in light of the enhanced political cooperation between the EU and the region.

Services in European Policies. Bruges European Economic Policy (BEEP) Briefing 16/2007

This paper’s objective is twofold. Firstly, it presents the case for services-related policies in the current European Union (EU). The services economy is frequently misunderstood, due to old and new myths that stem from the classic economic tradition. These myths obscure the role of the services economy in economic development. Nonetheless, the European services economy faces specific problems, such as lack of market integration, which amplifies arguments that justify policy actions toward services within a framework where market and systemic failures do apply. Secondly, this paper focuses on existing services-policies at the EU level, paying special attention to the internal market for services policies and to the complementary role of primarily non-regulatory policies. Within a comprehensive policy framework, each individual policy will have a higher impact, improved implementation and easier acceptance. Synergies among services-related policies should be promoted; the internal market policies, enterprise and industrial policies, competition policies and regional policies may take the lead in such a framework. Since the Lisbon Strategy, services have begun to gain recognition in EU policy agendas. This paper attempts to increase their visibility and to highlight their crucial role in European integration and in economic growth and social welfare.

Technology diffusion, services, and endogenous growth in Europe. Is the Lisbon Strategy still alive? Bruges European Economic Research (BEER) Papers 2/May 2005

We explore the role of business services in knowledge accumulation and growth and the determinants of knowledge diffusion including the role of distance. A continuous time model is estimated on several European countries, Japan, and the US. Policy simulations illustrate the benefits for EU growth of the deepening of the single market, the reduction of regulatory barriers, and the accumulation of technology and human capital. Our results support the basic insights of the Lisbon Agenda. Economic growth in Europe is enhanced to the extent that: trade in services increases, technology accumulation and diffusion increase, regulation becomes both less intensive and more uniform across countries, and human capital accumulation increases in all countries.

Economic Approaches of the Internal Market. Bruges European Economic Research (BEER) Papers 13/April 2008

What is ‘the’ EU internal market, as economists see it? The present BEER paper attempts to survey and help readers understand various ‘economic’ approaches to the internal market idea. The paper starts with a conceptual discussion of what ‘the’ internal market is (in an economic perspective). Six different economic meanings of the internal market are presented, with the sixth one being the economic benchmark in an ideal setting. Subsequently, the question is asked what the internal market (i.e. its proper functioning) is good for. Put differently, the internal market in the EU Treaty is a means, but a means to what? Beyond the typical economic growth objectives of the Rome Treaty (still valid today, with some qualifications), other Treaty objectives have emerged. Economists typically think in means-end relationships and the instrumental role of the internal market for Treaty objectives is far from clear. The ‘new’ Commission internal market strategy of 2007 proposes a more goal-oriented internal market policy. Such a vision is more selective in picking intermediate objectives to which ‘the’ internal market should be instrumental, but it risks to ignore the major deficits in today’s internal market: services and labour! The means-end relationships get even more problematic once one begins to scrutinise all the socio-economic objectives of the current (Amsterdam/Nice) Treaty or still other intermediate objectives. The internal market (explicitly including the relevant common regulation) then becomes a ‘jack of all trades’ for the environment, a high level of social protection, innovation or ‘Social Europe’. These means/ends relationships often are ill-specified. The final section considers the future of the internal market, by distinguishing three strategies: incremental strategies (including the new internal market strategy of November 2007); the internal market as the core of the Economic Union serving the ‘proper functioning of the monetary union’; and deepening and widening of the internal market as justified by the functional subsidiarity test. Even though the latter two would seem to be preferable from an economic point of view, they currently lack political legitimacy and are therefore unlikely to be pursued in the near future.

EU Policies and Cluster Developments of Hydrogen Communities. Bruges European Economic Research (BEER) Papers 14/December 2008

This study takes on the issue of political and socio-economic conditions for the hydrogen economy as part of a future low carbon society in Europe. It is subdivided into two parts. A first part reviews the current EU policy framework in view of its impact on hydrogen and fuel cell development. In the second part an analysis of the regional dynamics and possible hydrogen and fuel cell clusters is carried out. The current EU policy framework does not hinder hydrogen development. Yet it does not constitute a strong push factor either. EU energy policies have the strongest impact on hydrogen and fuel cell development even though their potential is still underexploited. Regulatory policies have a weak but positive impact on hydrogen. EU spending policies show some inconsistencies. Regions with a high activity level in HFC also are generally innovative regions. Moreover, the article points out certain industrial clusters that favours some regions' conditions for taking part in the HFC development. However, existing hydrogen infrastructure seems to play a minor role for region's engagement. An overall well-functioning regional innovation system is important in the formative phase of an HFC innovation system, but that further research is needed before qualified policy implications can be drawn. Looking ahead the current policy framework at EU level does not set clear long term signals and lacks incentives that are strong enough to facilitate high investment in and deployment of sustainable energy technologies. The likely overall effect thus seems to be too weak to enable the EU hydrogen and fuel cell deployment strategy. According to our analysis an enhanced EU policy framework pushing for sustainability in general and the development of hydrogen and fuel cells in particular requires the following: 1) A strong EU energy policy with credible long term targets; 2) better coordination of EU policies: Europe needs a common understanding of key taxation concepts (green taxation, internalisation of externalities) and a common approach for the market introduction of new energy technologies; 3) an EU cluster policy as an attempt to better coordinate and support of European regions in their efforts to further develop HFC and to set up the respective infrastructure.

Measuring firm innovativeness: towards a composite innovation index built on firm innovative posture, propensity and performance attributes. ACES Working Paper No. 12, 2008

The ability to innovate is generally accepted as a critical success factor to growth and future performance of firms. Yet, this acceptance obscures a comprehensive perspective on how firms can influence their innovation capacity and resulting performance. This paper proposes a '3P' construct of innovation measurement that simultaneously considers the Posture, Propensity and Performance related to a firm's innovation capabilities. We propose and provide empirical support showing that robust measurement of the performance implications of innovation requires the consideration of input, throughput and output factors simultaneously. Single or more limited indicators do not offer the degree of fine-tuning to a firm's innovation system that managers require. Thus, we propose the development, and future research into contingent variations, of a Composite Innovation Index (CII). We further demonstrate its use in comparing innovators and allowing managers to design a firm's innovation system.

Is the "Dubai model" a new paradigm for growth and investment strategies for oil-based economies? Case study: Eurasia. ACES Working Papers No. 8, 2008

The first part of the paper addresses the theoretical background of economic growth and competitive advantage models. Although there is a whole set of research on a relationship between foreign direct investments and economic growth, little has been said on foreign direct investments and national competitive advantage with respect to economic growth of oil and gas abundant countries of Middle East and Central Asia. The second part of our paper introduces the framework of the so-called "Dubai Model" in detail and outlines the key components necessary to develop sustainable comparative advantage for the oil-rich economies. The third part proceeds with the methodology employed to measure the success of the "Dubai Model" in the UAE and in application to other regions. The last part brings the results and investigates the degree to which other oil and gas countries in the region (i.e. Saudi Arabia, Kuwait, Qatar, Iran) have adopted the so-called "Dubai Model". It also examines if the Dubai Model is being employed in the Eurasian (Central Asian) oil and gas regions of Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan. The objective is to gauge if the Eurasian economies are employing the traditional growth strategies of oil-rich non-OECD countries in managing their natural resources or are they adopting the newer non-traditional model of economic growth, such as the "Dubai Model."

European Energy and Industrial Policy Realigned: Risk or Opportunity for EU Eco-Innovation Strategy? IES Policy Brief Issue 2014/03/February 2014

Summary. Europe’s eco-innovation strategy fuses industrial, energy and environmental policy together in a concept for sustainable economic growth in the 21st century. The latest debate about high energy prices and their impact on energy-intensive industry shows, however, that the emphasis among the three policies has shifted over the years. Some adjustments are therefore necessary in order to reduce evolving inconsistencies. This Policy Brief describes the different dimensions of the EU’s industrial policy, and assesses the options available to policy-makers to increase the competitiveness of energy-intensive sectors without compromising the eco-innovation and sustainability agenda. If several key principles of the European sustainability agenda remain unchanged, strategic development is possible.