Designing a Genuine EMU: Which "Unions" for EU and Eurozone? Bruges European Economic Policy (BEEP) Briefing 34/2014

The initial ‘framing’ (in the summer of 2012) of the ‘genuine EMU’ for the wider public suggested to design an entire series of ‘unions’. So many ‘unions’ are neither necessary nor desirable – only some are and their design matters. The paper critically discusses first the negative fall-out of the crisis for EMU, and subsequently assesses the fiscal and the banking unions as accomplished so far, without going into highly specific technical details. The assessment is moderately positive, although there is ample scope for further improvement and a risk for short-term turbulence once the ECB has finished its tests and reviews. What about the parade of other ’unions’ such as economic union, social union and political union? The macro-economic imbalances procedure (MIP) and possibly the ESRB have overcome the pre-crisis disregard of macro competitiveness. The three components of ‘economic union’ (single market, economic policy coordination and budgetary disciplines) have all been strengthened. The last two ‘unions’, on the other hand, would imply a fundamental change in the conferral of powers to the EU/ Eurozone, with drastic and possibly very serious long-run implications, including a break-up of the Union, if such proposals would be pushed through. The cure is worse than the disease. Whereas social union is perhaps easier to dismiss as a ‘misfit’ in the EU, the recent popularity of suggesting a ‘political union’ is seen as worrisome. Probably, nobody knows what a ‘political union’ is, or, at best, it is a highly elastic notion: it might be thought necessary for reasons of domestic economic reforms in EU countries, for a larger common budget, for some EU tax power, for (greater) risk pooling, for ‘symmetric’ macro-economic adjustment and for some ultimate control of the ECB in times of crisis. Taking each one of these arguments separately, a range of more typical EU solutions might be found without suggesting a ‘political union’. Just as ‘fiscal capacity’ was long an all-or-nothing taboo for shifting bank resolution to the EU level, now solved with a modest common Fund and carefully confined but centralised powers, the author suggests that other carefully targeted responses can be designed for the various aspects where seen as indispensable, including the political say of a lender-of-last-resort function of the ECB. Hence, neither a social nor a political union worthy of the name ought to be pursued. Yet, political legitimacy matters, both with national parliaments and the grassroots. National parliaments will have to play a larger role.

The eurozone in bad need of a psychiatrist. EuropEos Commentary No. 6, 9 December 2010

Stefano Micossi, Director General of Assonime and member of the CEPS Board of Directors, observes in a new EuropEos Commentary that there is something surreal to the unfolding financial crisis of the eurozone, as the leaders grudgingly do what is needed to prevent disaster just minutes before it’s too late, and then in the next minute revert to the same behaviour that had brought them against the wall in the first place. He cites rising sovereign spreads within the area as the visible result of this strategy: they signal investors’ expectation that the future can only bring more of the same, a series of ever-larger sovereign debt crises, under Damocles’ sword that at some stage Germany, the paymaster of last resort, will close its purse and let Armageddon start.

Returns from Income Strategies in Rural Poland. Factor Markets Working Document No. 64, August 2013

In order to stabilise and improve their income situation, rural households are strongly encouraged to diversify their activities both within and outside the agricultural sector. Often, however, this advice is only moderately pursued. This paper addresses issues of rural household income diversification in the case of Poland. It investigates returns from rural household income strategies using propensity score matching methods and extensive datasets spanning 1998-2008. Results suggest that returns from combining farm and off-farm activities were lower than returns from concentrating on farming or on self-employment outside agriculture. This differential is stable over time although returns from diversification have relatively improved after Poland’s accession to the EU. This is also visible in the fact that since 2006 returns from combining farm and off-farm activities have evened with returns from relying solely on hired off-farm labour, thus smoothing the difference observed before the accession. Further, over the analysed period, households pursuing the diversification strategy performed better than those relying solely on unearned income. Finally, in general, the income in households combining farm and off-farm activities was higher than in those combining two off-farm income sources.

Tackling barriers to trade in the Single Market. ACES Cases No. 2014.2

This paper focuses on the challenges operating in the single market due to continued persistence of regulatory barriers to trade, despite being considered one of the most integrated and successful areas of market integration. We use a unique data set on infringements to the free movement of goods to assess the types of barriers that firms encounter, their impact and variation across states and sectors, and their resolution method - through Court decisions or the pre-litigation, administrative means available within the infringement proceedings mechanism to restore compliance. We also resort to the Solvit dataset provided to the authors by the Commission to analyse some features and the effectiveness of this informal mechanism in dealing with discriminatory domestic trade and regulatory practices. We examine four key questions: What are the most problematic policy areas in terms of barriers to trade that undermine the single market? What different dispute resolution mechanisms are utilized to address trade barriers and thus improve the functioning of the single market? Under what conditions are different enforcement mechanisms and strategies more likely to be used to resolve barriers for businesses operating in the single market? How important and effective are the more informal strategies in improving market access? In doing so, our goal is to link the research on trade barriers to that of implementation and compliance to assess the diverse strategies undertaken to reduce regulatory barriers to trade.

The economic and financial crisis in Russia – background, symptoms and prospects for the future. OSW Report 02/2015

The crisis in Russia’s financial market, which started in mid-December 2014, has exposed the real scale of the economic problems that have been growing in Russia for several years. Over the course of the last year, Russia’s basic macroeconomic indicators deteriorated considerably, the confidence of its citizens in the state and in institutions in charge of economic stability declined, the government and business elites became increasingly dissatisfied with the policy direction adopted by the Kremlin, and fighting started over the shrinking resources. According to forecasts obtained from both governmental and expert communities, Russia will fall into recession in 2015. The present situation is the result of the simultaneous occurrence of three unfavourable trends: the fact that the Russian economy’s resource-based development model has reached the limits of its potential due to structural weaknesses, the dramatic decline in oil prices in the second half of 2014, and the impact of Western economic sanctions. Given the inefficiency of existing systemic mechanisms, in the coming years the Russian leadership will likely resort to ad hoc solutions such as switching to a more interventionist “manual override” mode in governing the state. In the short term, this will allow them to neutralise the most urgent problems, although an effective development policy will be impossible without a fundamental change of the political and economic system in Russia.

Will this time be different for Greece? How to assess its ability to deliver on the reform agenda. CEPS Commentary, 13 March 2015

Taking its inspiration from the ongoing debate on whether this time will be different for Greece and whether Syriza will deliver on its reform promises to the European partners, this Commentary expresses bemusement that the public debate on such an important issue as well as internal discussions among senior policy-makers frequently resort to ‘gut feelings’ or simple stereotypes. To counteract this tendency, the author presents a simple analytical framework that can be used to assess the likelihood that a government will deliver on its reform agenda. Its purpose is not to allow for a precise probabilistic calculation, but to enable better structuring of the knowledge we have. It emphasises that the change depends NOT only on the capacity of the state to design and deliver policies, but even more crucially on state autonomy from both illegitimate and legitimate interests and cognitive models used by policy-makers to make sense of the world.

The Baltic states’ Territorial Defence Forces in the face of hybrid threats. OSW Commentary Number 165, 19.03.2015

From the Introduction. Russia’s annexation of Crimea and its aggression in eastern Ukraine have triggered a debate about the main directions of defence policy in the Nordic and Baltic region. In the Baltic states, but also in the Nordic countries and Poland, much attention is being paid to questions of Territorial Defence Forces (TDF). TDF are viewed as one of the elements in the national defence systems’ response during the early stages of a hybrid conflict. The Baltic states have decided to adapt their Territorial Defence Forces to new threats by making a number of changes to their functioning, depending on the local conditions in each case. Given the growing uncertainty in the region, they have opted not to undertake any in-depth reforms of TDF at this stage, as that could entail a temporary disorganisation in the armed forces. In the coming years Estonia, Latvia and Lithuania will invest in increasing the size and combat readiness of their Territorial Defence Forces, providing them with better training and equipment, and creating a system of incentives to encourage more people to serve in volunteer formations.

What if the Next Financial Crisis Hits the Banking Union? A Call for an “If All Else Fails” Clause. European Policy Brief No. 16, September 2013

This Policy Brief argues that the envisaged design of the Banking Union risks not being sufficient to deal with the next large-scale financial crisis. Therefore, an “if all else fails” clause should be approved, stating that the Banking Union members can provide joint last resort financing to deal with a future crisis. An agreement on the clause should be feasible because it is beneficial to all Member States.

The New European Commission Presidency and the Advent of European Democracy. Jean Monnet/Robert Schuman Paper Series Vol. 14 No. 17, August 2014

On June 15, 2014, Jean-Claude Juncker, the lead candidate of the European People’s Party, was elected President of the European Commission, with the support of the Alliance of Liberals and Democrats for Europe, and some of the European Socialists and Greens. Amid unprecedented Euroscepticism, the media and many pundits predicted a record-low voter turnout and record-high results for Europhobic parties. The aforementioned parties then decided that the political outcome of these 2014 European elections would also be unprecedented. For the first time in EU history, the European political parties agreed to nominate candidates to chair the institution, which they justified by putting forward Article 17 of the Lisbon Treaty. The European Parliament has often characteristically used political discourse - the logos, to influence the EU’s institutional framework, even though it entails grappling with Member States. It took the form of reports and resolutions, like the official use of the phrase “European Parliament” in 1962, direct universal suffrage elections in 1975 and a European Union in 1984. Nominating contenders to chair the European Commission is no exception. It requires a specific political discourse whose origins can be traced back to the early years of the European Parliament, when it was still the “Common Assembly”. This political discourse is one of the elements thanks to which the European Parliament acquired visibility and new prerogatives, in pursuit of its legitimacy. However, the executive branch in all member states is not intent on yielding such prerogatives to the European Parliament. As a matter of fact, the European Parliament has often ended up strengthening the heads of state and governments, since MEPs are forced to resort to self-discipline. The symbolic significance of its logos and, consequently, its own politicisation as a source of legitimacy, is thus undermined. For instance, in 2014, Jean-Claude Juncker’s election actually strengthened German Chancellor Angela Merkel. First she questioned the fact that the candidate whose party holds the parliamentary majority after the election should be appointed President of the Commission. Then she seemed strongly intent on democratising the Union, when she confronted David Cameron, who openly opposed Juncker, believed to be too federalist and old-fashioned a candidate. By doing so, she eventually reduced the symbolic dimension of the European Parliament’s initiative, and Juncker’s election. She also unquestionably embodied EU leadership. This paper aims at analysing Juncker’s election to the Presidency of the European Commission, as well as other questions it raises. In the first part, I lay out some thoughts about the sociohistorical context of voting in European elections in order to make the readers understand why the European Parliament should be bolder. Secondly, I try to explain how the European Parliament has used the logos as a weapon to grapple with member states for more power, as was the case during the 2014 European elections. Last but not least, I seek to show how Angela Merkel got hold of that weapon and took advantage of it, thus proving that despite MEPs’ best efforts, Juncker’s task will be all the more complicated as he was not the consensual candidate of all the governments.

The Politics of Budget Consolidation in Britain and Germany: the Impact of Blame-Avoidance Opportunities. CES Germany & Europe Working Papers, No. 05.2, 2005

According to parts of the literature, blame avoidance opportunities, i.e. the necessity and applicability of blame avoidance strategies, may differ among countries according to the respective institutional set-ups and between governing parties according to their programmatic orientation. In countries with many veto actors, a strategy of "Institutional Cooperation" among these actors is expected to diffuse blame sufficiently to render other blame avoidance strategies obsolete. In contrast, governments in Westminster democracies should resort to the more unilateral strategies of presentation, policy design and timing. At the same time, parties of the left are expected to have an easier time implementing spending cuts while right parties are less vulnerable when proposing tax increases. Evidence from the politics of budget consolidation in Britain and Germany does not corroborate these hypotheses. Instead, it seems that party competition conditions the effects institutions and the partisan complexion of governments have on the politics of blame avoidance.

The Monetary Policy of the European Central Bank (2002-2015). CEPS Special Report No. 109/May 2015

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

Banks and the political economy of the sovereign debt crisis in Italy and Spain. CES Papers - Open Forum #18, 2013-2014

This paper sets out to explain why Spain experienced a full-fledged sovereign debt crisis and had to resort to euroarea financial assistance for its banks, whereas Italy did not. It undertakes a structured comparison, dissecting the sovereign debt crisis into a banking crisis and a balance of payments crisis. It argues that the distinctive features of bank business models and of national banking systems in Italy and Spain have considerable analytical leverage in explaining the different scenarios of the crises in each country. This ‘bank-based’ analysis contributes to the flourishing literature that examines changes in banking with a view to account for the differentiated impact of the global banking crisis first and the sovereign debt crisis in the euroarea later.

The Monetary Policy of the European Central Bank (2002-2015). Bruges European Economic Policy Briefings (BEEP) 35/2015.

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

Firmer foundations for a stronger European Banking Union. Bruegel Working Paper 2015/13, November 2015

The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking.The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries.While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out.To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.

Between continuation and adaptation: The Baltic states’ security policy and armed forces. OSW COMMENTARY 190/23.11.2015

The Baltic states have responded to the annexation of Crimea and the increased Russian military activity in the Nordic and Baltic region by taking measures to strengthen their own military potential. At the same time, they have intensified efforts to have the USA and NATO step up their military presence on their respective territories. Changes concerning the security policies and the armed forces of Lithuania, Latvia and Estonia have included increases in defence spending, the number of soldiers and members of volunteer Territorial Defence Forces, speeding up modernisation programmes, and – in the case of Lithuania – the reintroduction of conscription. In the coming years the Baltic states will focus on developing those of their military capabilities directly related to the defence of the country’s territory. However, Lithuania, Latvia and Estonia will not stop participating in the foreign missions of NATO, which is the guarantor of their security. The extent to which these plans can be implemented will depend primarily on the economic and demographic situations of Lithuania, Latvia and Estonia.