Europe cannot afford people in bad health - Economics of health and care as a guide for investments. EPC Commentary, 4 July 2016

It is widely accepted that a new way of looking at Europe’s health sector is necessary if we are to maintain universal health coverage. Financial resources are limited, and the sustainability of Europe’s health systems is under threat. Economic growth is slow, health expenditures outpace GDP growth, public budgets are under strain and demographics – with a growing aging population – are putting pressure on the younger tax-paying generations. In an effort to ensure the sustainability of Europe’s health systems, reforms, underpinned by a new understanding of the economic value of health for individuals and society is needed.

Institutions and Growth in Europe. CEPS Working Document No. 421, April 2016

This paper provides empirical evidence in support of the view that the quality of institutions is an important determinant of long-term growth of European countries. When also taking into account the initial level of GDP per capita and government debt, cross-country institutional differences can explain to a great extent the relative long-term GDP performance of European countries. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor long-term real growth performance. Interestingly, the detrimental effect of high debt levels on long-term growth seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The quality of national institutions seems to enhance the long-term GDP performance across a large sample of countries, also including OECD countries outside Europe. The paper offers some evidence that, in the presence of good institutions, conditions for catching-up seem generally good also for euro-area and fixed exchange rate countries. Looking at sub-groupings, it seems that sound institutions may be particularly important for long-term growth in the countries where the exchange rate tool is no longer available (and where also sovereign debt is high), and less so in the countries with flexible exchange rate regimes. However, this result is preliminary and requires further research. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

Intra-Euro rebalancing is inevitable, but insufficient. Bruegel Policy Contribution 2012/15, August 2012

Greece, Portugal and Spain face a serious risk of external solvency due to their close to minus 100 percent of GDP net negative international investment positions, which are largely composed of debt. The perceived inability of these countries to rebalance their external positions is a major root of the euro crisis. Intra-euro rebalancing through declines in unit labour costs (ULC) in southern Europe, and ULC increases in northern Europe should continue, but has limits because: The share of intra-euro trade has declined. Intra-euro trade balances have already adjusted to a great extent. The intra-euro real exchange rates of Greece, Portugal and Spain have also either already adjusted or do not indicate significant appreciations since 2000. There are only two main current account surplus countries, Germany and the Netherlands. A purely intra-euro adjustment strategy would require too-significant wage increases in northern countries and wage declines in southern countries, which do not seem to be feasible. Before the crisis, the euro was significantly overvalued despite the close-to balanced current account position. The euro has depreciated recently, but more is needed to support the extra-euro trade of southern euro-area members. A weaker euro would also boost exports, growth, inflation and wage increases in Germany, thereby helping further intra-euro adjustment and the survival of the euro.

Transaction Banking: Respecting its role in the real economy. ECRI Policy Brief No. 6, 6 December 2013

This paper sketches the main features and issues related to recent market developments in global transaction banking (GTB), particularly in trade finance, cash management and correspondent banking. It describes the basic functioning of the GTB, its interaction with global financial markets and related implications of global regulatory developments such as Basel III. The interest in GTB has recently increased, since its low-risk profile, tendency to follow growth rates worldwide and relative independence from other financial instruments became an interesting diversification opportunity both for banks’ business models and for investors. Transaction banking has been a resilient business during the crisis, despite the reduction in world trade figures. In the post crisis period, GTB must cope with new challenges related to increased local and global regulation and the risk of inconsistency in regulatory approaches, which could negatively impact the global network and increased competition by new market entrants. Increased sophistication of corporate clients, as well as the pressure to develop and adopt technological innovations more quickly than other areas of banking continues to impact the business. The future of the industry closely depends on its ability to adjust to complex regulatory developments while at the same time being able to operate a global and efficient network.

The Sovereign Debt Crisis: Placing a curb on growth (updated edition). CEPS Paperbacks. September 2013

This book provides an update to the major 2012 study by the same authors on the dual role of the public sector as the provider of the ultimate riskless asset and, at the same time, the source of a potential major systemic risk. In this second edition, Brender and his colleagues concentrate again on the tension between the need for the public sector to sustain demand in the face of a deleveraging private sector and the longer-term challenges of sustainability for fiscal policy in the major developed economies of the US, Japan and the euro area. In short, their principal thesis is that sovereign debt is in crisis. This crisis is apparent in the euro area, but it is also real, if at present only latent, in the US and Japan. The book shows how this process has evolved in these three big developed economies – and how their policy choices impact on global financial markets.

An economy with unrealistic indicators: an evaluation of the economic situation in Belarus and a forecast for 2013. OSW Commentary No. 103, 2013-02-20

The macroeconomic results achieved by Belarus in 2012 laid bare the weakness and the inefficiency of its economy. Belarus’s GDP and positive trade balance were growing in the first half of last year. However, this trend was reversed when Russia blocked the scheme of extremely lucrative manipulations in the re-export of Russian petroleum products by Belarus and when the demand for potassium fertilisers fell on the global market. It became clear once again that the outdated Belarusian model of a centrally planned economy is unable to generate sustainable growth, and the Belarusian economy needs thorough structural reforms. Nevertheless, President Alyaksandr Lukashenka consistently continues to block any changes in the system and at the same time expects that the economic indicators this year will reach levels far beyond the possibilities of the Belarusian economy. Therefore, there is a risk that the Belarusian government may employ – as they used to do – instruments aimed at artificially stimulating domestic demand, including money creation. This may upset the relative stability of state finances, which the regime managed to achieve last year. The worst case scenario would see a repeat of what happened in 2011, when a serious financial crisis occurred, forcing Minsk to make concessions (including selling the national network of gas pipelines) to Moscow, its only real source of loans. It thus cannot be ruled out that also this time the only way to recover from the slump will be to receive additional loan support and energy subsidies from Russia at the expense of selling further strategic companies to Russian investors.

Freedom of movement of persons - the building block of European growth. CHALLENGE EUROPE Issue 22 - Challenges and new beginnings: Priorities for the EU's new leadership, September 2014.

The European integration project is founded on values and principles which are simple, equal, and advantageous for all. Freedom of movement of persons is one of the main cornerstones of EU success. It is a fundamental, cherished right of EU citizens. Thanks to this liberty, European citizenship is real, concrete and attractive. Moreover, it spurs economic growth and technological development. But because freedom of movement has become an obvious feature of our day-to-day lives, some of us tend to underestimate its consequences. Important recent developments mean that we must renew our commitment to defend this building-block of a Europe whole and free.

What prospects for transport infrastructure and impacts on growth in southern and eastern Mediterranean countries? MEDPRO Report No. 3, February 2013

Lack of adequate infrastructure is a significant inhibitor to increased trade of the countries of the Mediterranean region. Bringing their transport infrastructure to standards comparable with countries of a similar per capita GDP will be costly but worthwhile. We compare the current quantities of six types of transport infrastructure with international benchmarks, and estimate the additional quantities needed to reach the benchmarks. We also estimate the cost of that infrastructure and express it as a percentage of GDP. Finally we make tentative estimates of how much trade might be generated and how this might impact on GDP. All the estimates are made for 11 southern and eastern Mediterranean countries (SEMCs) under four scenarios. The greatest need for additional infrastructure is for airport passenger terminals (between 52% and 56%), whereas the least is for more unpaved roads (between 7% and 13%). The investment (including maintenance) cost would be between 0.9% of GDP and 2.4% of GDP, although the investments in some countries would be between 1.4% and 4.5% of GDP. The impact on non-oil international trade would be substantial, but with differences between imports and exports. The overall trade balance of the 11 countries would be an improvement of between 5.4% and 17.2%, although some countries would continue to have a negative balance. A final assessment is made of the benefit ratio between the increase in GDP and the cost of transport investment. This varies between about 3 and 8, an indication of the high return to be expected from increased investment in transport infrastructure.

The 2005 Reform of the Stability and Growth Pact: Too Little, Too Late? Bruges European Economic Research (BEER) Papers 6/November 2006

This paper analyses the main critiques addressed by the literature and the policymakers to the 1997 Stability and Growth Pact. It further indicates to what extent the 2005 reform of the Pact meets those critics. It finally argues that the 2005 reform may be too little and arrive too late to restore the Pact credibility, ensure its enforceability and correctly set the derogations to the excessive deficit procedure on the nature of the shocks which cause the output gap rather than its size: a 3% of GDP limit on deficit spending may be a too binding constraint in front of a strongly negative demand shock, while it is irrationally large in front of a supply shock. Some empirical evidence is provided to identify in the last years strongly negative demand shocks from other shocks in the 25 EU Member States. Had this identifying method been adopted in November 2003, the European Commission and the Council would have both agreed to stop the excessive deficit procedure against Germany, but they would have both proceeded against France which apparently was not at the time hit by a strongly negative demand shock.

Money, Finance and the Real Economy: What went wrong? CEPS Paperback, 17 March 2015

The functions of the financial system of a developed economy are often badly understood. This can largely be attributed to free-market ideology, which has spread the belief that leaving finance to its own devices would provide the best possible mechanism for allocating savings. The latest financial crisis has sparked the beginnings of a new awareness on this point, but it is far from having led to an improved understanding of the role of the financial institutions. For many people, finance remains more an enemy to be resisted than an instrument to be intelligently exploited. Its institutions, which issue and circulate money, play an important role in the working of the real economy that it would be imprudent to neglect. The allocation of savings, but also the level of activity and the growth rate depend on it. In this book, the authors carefully analyse the close links between money, finance and the real economy. In the process, they show why today the existence of a substantial potential of saving, instead of being an opportunity for the world economy, could threaten it with ‘secular stagnation’.

Growth for Europe – Is the Juncker Plan the answer? EPC Discussion Paper, 20 March 2015

Executive Summary. The euro area is still suffering from low growth and high unemployment. For the recovery to become a reality, there needs to be a balance between fiscal discipline, supply side improvements and actions aimed at stimulating demand and growth. Increasing investment, both private and public, are important components in overcoming the recession. This becomes especially clear when comparing investment dynamics during the crisis with pre-crisis levels. Total investment is still much lower than before the crisis and public investment is well below its pre-crisis peak as well. In late November 2014, European Commission President Jean-Claude Juncker submitted a long-awaited proposal for a European Investment Plan that aims to stimulate private investment. Apart from the creation of the new European Fund for Strategic Investment (EFSI), through which private investors will receive public guarantees, the investment plan also aims to provide project assistance and improve the Single Market by removing sector-specific or other financial barriers to investment. While generally perceived as a first positive step towards increasing private investment, some commentators have expressed reservations about the plan. These include, among others, the lack of fresh money for the initial contributions to EFSI. Since a substantial amount of these contributions is reshuffled from other places in the European budget, the question was raised whether EFSI can fund additional projects or just replicates investment projects that would have happened without the plan. Other criticism relates to the high estimate of the expected leverage ratio of 1:15, and to the risk that the plan will only have a limited impact on stressed economies. The Juncker Plan addresses private investment, but so far there really is no clear strategy to stimulate productive public investment on the European and national level. Countries with fiscal space are reluctant to engage in higher spending, while those willing and in need of it the most are restricted by the rules. Member States and the Commission should therefore discuss options for further improving the euro area's economic governance. In addition to urging countries with fiscal space to increase investing in national public goods, investment could be treated with budget flexibility. One could, for instance, upgrade the importance of public investment in the European Semester. Additional deficit granted for public investment purposes could be attached to certain Country-Specific Recommendations. Another solution would be to allow some form of budget flexibility, such as the formulation of a new Golden Rule for productive public investment becoming part of the Stability and Growth Pact's application. Besides relying on a larger amount of flexibility in the rules, the Financial Transaction Tax (FTT) could be another solution to fund investment in European public goods. It will also be necessary to overcome the mistrust among Member States that is preventing further action. The political bargain of stronger conditionality, such as through contractual arrangements, could improve the situation. Increased trust will also be an important condition for tackling long-reaching economic governance reforms such as the creation of a Fiscal Capacity, which could take the form of a macroeconomic shock insurance. Such a Fiscal Capacity could make a real difference in providing the necessary funding to maintain productive public investment, even in times of deep recessions. The proposals presented do not attempt to be conclusive, but shall rather be an input for a wider debate on how to increase growth and employment in Europe. The paper draws heavily on the discussion of a Workshop on Growth and Investment, which the European Policy Centre (EPC) hosted on 10 December 2014 under Chatham-House Rule, with a group of economists and representatives from the European institutions.

Who profits most from globalization? Policy Brief #2014/01

Globalization, understood as the economic, political and social interconnection of countries, leads to increased economic growth. On average, the more a country proceeds its interconnection with the rest of the world, the greater its economic growth will be. If real per capita gross domestic product (GDP) is chosen as the reference index for the economic benefits of globalization, Finland can point to the largest gain from globalization from 1990 to 2011. Ranked according to this perspective, Germany holds fourth place out of a total of 42 economies evaluated.

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.