Reviewing the EU ETS review? Report of the CEPS TAsk Force on "Does the ETS market produce the 'right' price signal"? CEPS Task Force Report, 12 November 2012

Drawing on discussions within a CEPS Task Force on the revised EU emissions trading system, this report provides a comprehensive assessment of the pros and cons of the various measures put forward by different stakeholders to address the level and stability of the price of carbon in the EU. It argues that the European Commission, the member states, the European Parliament and other stakeholders need to give serious consideration to introducing some kind of ‘dynamic’ adjustment provision to address the relatively inelastic supply. The report also suggests that there is a need to improve communication of market-sensitive information, for example by leaving the management of the ETS to a specialised body.

Monetary policy and banking supervision: coordination instead of separation. CEPS Policy Brief No. 286, 12 December 2012

Introduction. Following the June 2012 European Council decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.

You'd better bet on the ETS. Bruegel Policy Brief 2013/02, April 2013

The issue: The European Union's emissions trading system (ETS), introduced in 2005, is the centerpiece of EU decarbonisation efforts and the biggest emissions trading scheme in the world. After a peak in May 2008, the price of ETS carbon allowances started to collapse, and industry, civil society and policymakers began to think about how to ‘repair the ETS’. However, the ETS is an effective and efficient tool to mitigate greenhouse gas emissions, and although prices have not been stable, it has evolved to cover more sectors and greenhouse gases, and to become more robust and less distorting. Prices are depressed because of an interplay of fundamental factors and a lack of confidence in the system. Policy challenge The ETS must be stabilised by reinforcing the credibility of the system so that the use of existing low-carbon alternatives (for example burning gas instead of coal) is incentivised and investment in low-carbon assets is ensured. Further-more, failure to reinvigorate the ETS might compromise the cost-effective synchronisation of European decarbonisation efforts across sectors and countries. To restore credibility and to ensure long-term commitment to the ETS, the European Investment Bank should auction guarantees on the future emission allowance price.This will reduce the risk for low-carbon investments and enable stabilisation of the ETS until a compromise is found on structural measures to reinforce it in order to achieve the EU's long-term decarbonisation targets.

Central bank cooperation during the great recession. Bruegel Policy Contribution. Bruegel Policy Contribution 2013/08, 20 June 2013

During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability.

The euro area's tightrope walk: debt and competitiveness in Italy and Spain. Bruegel Policy Contribution 2013/11, September 2013

Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe. In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory. The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bank’s Outright Monetary Transactions could reduce borrowing costs.

The European Central Bank in the age of banking union. Bruegel Policy Contribution 2013/13, 1 October 2013

During the crisis the European Central Bank’s roles have been greatly extended beyond its price stability mandate. In addition to the primary objective of price stability and the secondary objective of supporting EU economic policies, we identify ten new tasks related to monetary policy and financial stability. We argue that there are three main constraints on monetary policy: fiscal dominance, financial repercussions and regional divergences. By assessing the ECB’s tasks in light of these constraints, we highlight a number of synergies between these tasks and the ECB’s primary mandate of price stability. But we highlight major conflicts of interest related to the ECB’s participation in financial assistance programmes. We also underline that the ECB’s government bond purchasing programmes have introduced the concept of ‘monetary policy under conditionality’, which involves major dilemmas. A solution would be a major change towards a US-style system, in which state public debts are small, there are no federal bail-outs for states, the central bank does not purchase state debt and banks do not hold state debt. Such a change is unrealistic in the foreseeable future.

Prospects for regulatory convergence under TTIP. Bruegel Policy Contribution 2013/15, October 2013

An ambitious, comprehensive and high-standard trade and investment agreement between the European Union and the United States is feasible, but a key concern is whether the transatlantic trade partners will succeed in creating a meaningful agreement within the tight timeline of the Transatlantic Trade and Investment Partnership (TTIP) negotiations. The target of a ratified pact before a new European Commission takes office in November 2014 is an objective that is likely to conflict with the level of ambition on the substance. Regulatory congruence would require the unilateral and unconditional recognition by the TTIP partners of each other’s standards, procedures and conformity assessment tests. The way forward is to create a ‘living’ (or progressive commitment) agreement on regulatory cooperation with a horizontal template for coherence and conformity assessment and a detailed monitoring mechanism, with implementation starting immediately for a few selected sectors. Regulatory harmonisation under TTIP may not lead to emerging markets automatically upgrading to the higher TTIP standards. Domestic priorities and the high demand from a rising price-sensitive group of consumers will likely result in a dual regulatory regime in emerging markets in the medium-term.

National Visions of EU Defence Policy - Common Denominators and Misunderstandings. CEPS Paperbacks. December 2013

The premise of this study is simple: before discussing what defence strategy the EU should adopt at Brussels-level, member states should clarify what they expect individually from the EU Common Security and Defence Policy (CSDP). Inspired by the confusion about EU defence policy in most European capitals, this authoritative study inverts the usual analytical approach applied to the debate on European strategy. Rather than initiating the enquiry from the perspective of common interests guiding CSDP, it analyses how seven prominent member states see CSDP as a tool to pursue their strictly national interests. Five researchers immersed themselves in the foreign policy worlds of Paris, London, Berlin, Rome, Warsaw, Stockholm and Madrid, looking at CSDP through national lenses and away from the potentially distorting influence of ‘Brussels’ rhetoric.

An Arab Springboard for EU Foreign Policy? CEPS Paperbacks. January 2012

The EU has not been perceived as reacting very rapidly or effectively to the so-called Arab Spring. Events do appear to validate the idea underpinning the European Security Strategy (ESS) and the European Neighbourhood Policy (ENP): only where governments guarantee to their citizens security, prosperity, freedom and equality, can peace and stability last – otherwise, people will revolt. But in practice, in its southern neighbourhood the EU has acted in precisely the opposite manner, so the Arab Spring is occurring in spite of rather than thanks to EU policy. The ENP stands at a crossroads therefore: Can a new start be made? Which instruments and, in times of austerity, which means can the EU apply to consolidate democratization? And, finally, can the EU continue to wage an ENP without addressing the hard security dimension, especially as the US seem to be withdrawing from crisis management in the region – or shall it continue to leave that to others?

Addressing weak inflation: The European Central Bank's shopping list. Bruegel Policy Contribution 2014/05, May 2014

There are clear benefits to price stability. High inflation can distort corporate investment decisions and the consumption behaviour of households. Changes to inflation redistribute real wealth and income between different segments of society, such as savers and borrowers, or young and old. Price stability is therefore a fundamental public good and it became a fundamental principle of European Economic and Monetary Union. But the European Treaties do not define price stability. It was left to the Governing Council of the European Central Bank (ECB) to quantify it: "Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%"[1]. The Governing Council has also clarified that it aims to maintain inflation below, but close to, two percent over the medium term, though it has not quantified what 'closeness' means, nor has it given a precise definition of the 'medium term'[2]. The clarification has been widely interpreted to mean that the actual target of the ECB is close to, but below, two percent inflation in the medium term.

So far apart and yet so close: Should the ECB care about inflation differentials? Bruegel Policy Contribution, Issue 2014/10 September 2014

Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates. In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences. It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.

Trudny "Sojusznik" Bialorus w polityce Rosji. Prace OSW 2008. = Difficult "ally." Belarus in Russia's foreign policy. OSW Study 28/2008

Belarus holds a special position in Russian policy due to its geopolitical, military and transit significance. Russia's influence and position in the entire Eastern European region largely depend on how strong Russian influence in Belarus is. The process of Russian-Belarusian integration began in 1994, when Alyaksandr Lukashenka came to power in Minsk. At the time, Russia's policy towards Belarus was based on twomain assumptions. Firstly, the Kremlin supported Lukashenka's authoritarian regime. This allowed Russia to keep Belarus within its orbit of political influence and prevent other states from getting involved, since an undemocratic Belarus could not count on closer contacts with the West. Secondly, Russia heavily subsidised Belarus with cheap energy resources (way below the market price) and allowed the duty-free access of Belarusian goods to its market. Thus Belarus became a kind of 'sponsored authoritarianism' with a specific economic model, owing its existence to Russia's economic and political support. At the same time, Moscow's key objective in its policy towards Belarus was to make Minsk accept the Russian conditions concerning integration, which would in fact lead to Belarus' incorporation by the Russian Federation. However, Belarus managed to maintain its sovereignty, while Alyaksandr Lukashenka bandied the term 'integration' about in order to maintain the preferential model of his state's relations with Russia. Russia's intention to alter the nature of these bilateral relations became evident when Vladimir Putin took power in 2000. However, Moscow faced Minsk's refusal to accept the Russian integration plan (which, among other measures, provided for the takeover of Belarusian economic assets by Russian companies). This forced Russia to use its main tool against Minsk: the supplies of cheap gas and oil that had been sustaining Belarus' archaic economy. The most serious crisis in Russian-Belarusian relations broke out at the beginning of 2007, following Moscow's decision to raise the energy resource prices. This decision marked the beginning of the application of market principles to settlements between Moscow and Minsk. The key question this study is meant to answer concerns the consequences of the aforementioned decision by Russia for future Russian-Belarusian relations. Are they at a turning point? What are Russia's policy objectives? What results can come from the process of moving mutual relations onto an economic footing? What policy will replace Russia's 'sponsoring of Belarusian authoritarianism', which it has been implementing since 1994? Finally, what further measures will Russia undertake towards Belarus? The current study consists of five chapters. The first chapter offers a brief presentation of Belarus' significance and position in Russian policy. The second analyses the development of Russian-Belarusian political relations, first of all the establishment of the Union State, Belarus' position in Russian domestic policy and Russia's influence on Belarusian policy. The third chapter presents bilateral economic relations, primarily energy issues. The fourth chapter describes the state and perspectives of military cooperation between the two states. The fifth chapter presents conclusions, where the author attempts to define the essence of the ongoing re-evaluation in Russian-Belarusian relations and to project their future model.

At any price: Russia is embarking on the construction of South Stream. OSW Commentary No. 98, 2012-12-07

Gazprom is determined to continue its efforts to build the South Stream gas pipeline regardless of the slump on the European gas market and the fact that there is sufficient capacity already in the existing transport infrastructure. The official inauguration of the maritime section of South Stream was held on 7 December this year, but the construction itself will commence in 2014. The agreements concluded so far, both intergovernmental and between corporations, are necessary for the launch of the construction of the new pipeline, but still do not guarantee that the project will be completed on time. First of all, some legal problems have yet to be resolved, such as the evaluation of the compliance of the planned actions with the ‘third energy package’ or the fact that ecological surveys required under European law need to be carried out. Secondly, given the present situation on the European gas market and medium-term forecasts, the high cost of implementation of this project and the maintenance expenses of existing pipelines – which are not being used to full capacity – the new project seems to be unfeasible. However, Gazprom’s determination in its efforts to build the pipeline proves that Russia is ready to take a high economic risk to maintain its dominant position on the European gas supply market; it will restrict the possibilities of alternative infrastructural projects being implemented (above all, the EU’s Southern Corridor) and use the construction of new pipelines as an instrument of political pressure on the present transit countries (especially Ukraine).

Support as a means of subordination. Russia's policy on Belarus. OSW Point of View Number 34, May 2013

Despite the conflicts and frictions in their bilateral relations, Russia has for years regularly invested in Belarus. Moscow’s support has become an important factor allowing the Belarusian economic model to continue, which in turn helps maintain the stability of the Belarusian political system. Russia's continued readiness to offer assistance to its neighbour reflects the importance Moscow attaches to Belarus.Belarus also features prominently in Moscow’s current policy objectives – especially with regard to the expansion of the Customs Union. The implementation of this project is seen as crucial in Russia, particularly in relation to Ukraine. For this reason, since 2011 we have been witnessing a rise in Russian aid for Belarus. In 2012, the support intensified and moved beyond purely financial help to include political assistance also. Russia’s support, however, has come at a price. Moscow’s long-term goal is to establish control over the Belarusian economy, which would also, in effect, allow the Kremlin to influence the way other areas of the Belarusian state are governed. As Minsk’s dependence on Russian support deepens, Alexander Lukashenko will ultimately have no choice but to gradually accede to Russia’s demands.

The Economics of EU Railway Reform. Bruges European Economic Policy (BEEP) Briefing 8/2004

The EU began railway reform in earnest around the turn of the century. Two ‘railway packages’ have meanwhile been adopted amounting to a series of directives and a third package has been proposed. A range of complementary initiatives has been undertaken or is underway. This BEEP Briefing inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 7 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, a combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs might be superior in terms of competition, market growth and regulatory oversight. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform.