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.

The Political Logic of Disintegration: Seven Lessons from the Soviet Collapse. CEPS Essay (No. 1), September 2012

In short, the European Union, as we know it, no longer exists. The very foundations on which it was built are eroding. Shared memories of the Second World War have faded away – half the 15- and 16-year-olds in German high schools do not know that Hitler was a dictator, while a third believe that he protected human rights. The collapse of the Soviet Union has stripped away the geopolitical rationale for European unity. The democratic welfare state that was at the heart of the post-war political consensus is under siege by, among other things, sheer demographics. And the prosperity that bolstered the European project’s political legitimacy is vanishing. More than six out of ten Europeans believe that the lives of today’s children will be more difficult than those of people from their own generation. Against this background, how unthinkable is the EU’s disintegration? Should Europeans make the mistake of taking the Union for granted? Should they assume that the Union would not collapse because it should not collapse? Here, Europe’s capacity to learn from the Soviet precedent could play a crucial part. For the very survival of the EU may depend on its leaders’ ability to manage a similar mix of political, economic and psychological factors that were in play in the process of the Soviet collapse. The game of disintegration is primarily a political one driven much more by the perceptions and misperceptions of the political actors than simply by the constellation of the structural factors – institutional and economic.

Supply and Demand Side Limitations Affecting the Structure of Agriculture and the Rural Economy. Factor Markets Working Paper No. 21, February 2012

The paper criticises the neo-classical assumptions of perfect factor markets and of complete information, which constitute central elements in labour market theory. Based on literature review and on economic reports from transition economies, as well as developing countries and more advanced economies, this deliverable focuses on the structural impediments and imperfections which often characterise rural labour markets and which may prevent an efficient allocation of labour. According to empirical studies, transactions costs and rigidities hinder the well-functioning of labour markets and constrain labour adjustments. The paper attempts to classify the various limitations of rural labour markets from both supply and demand side, although the distinction is not always clear-cut as some problems occur on both sides. The identification of these issues is extremely important as it allows us to highlight the inefficiencies and the failures in labour markets and to understand their impact on labour allocation. In this context, market intervention is desirable and the paper provides particular support for rural development policies such as investments in human capital. Lastly, labour institutions can play a key role in promoting the well functioning of labour markets, thus it is fundamental that they are well in place.

Political economy of the Agenda 2010 reforms: How Gerhard Schröder overcame the "blocked republic". ACES Cases No. 2008.3

This essay will show that the Schröder-led government managed to break the political gridlock and introduce the Agenda 2010 because key institutional structures of Germany‟s political economy had lost their obstructive powers. In other words, the formerly semi-sovereign state had reclaimed its sovereignty. To understand how this happened, Peter Katzenstein's concept of the semi-sovereign state is first explored as a framework through which to analyze economic policy continuity and change. Within this framework, the causes for constant reform inertia between 1982 and 2002, in spite of varying political constellations and changes in the country‟s economic structure, are then discussed. This analysis will demonstrate that the Agenda 2010 reforms are predominantly a result of underlying incremental change in the political economy and its effect on the political decision-making process. Finally, the findings of this analysis are summarized and discussed with the aim of better understanding the economic policies of the current grand coalition government of the CDU/CSU and the SPD government under Chancellor Angela Merkel.

Banks at the Service of the Economy? European Policy Brief No. 17, November 2013

This Policy Brief discusses a few simple measures to improve both the commercial and investment banking landscapes, with or without formal separation. Covering deposits with quality collateral would make them safer and would help create an easier guarantee and resolution mechanism at the larger eurozone level. Strong central counterparties and transparency requirements would improve market mechanisms and market discipline in capital markets and investment banking. Specific governance measures would also help improve the financial sector. Finally, a better control of bank solvency, together with improved capital market transparency and accessibility, should encourage the progressive deleveraging of commercial banks, and enhance the long term funding of the economy by capital markets.

The Political Economy of Financial Crisis Policy. Bruegel Working Paper 2015/06, July 2015

Highlights • Government intervention to stabilise financial systems in times of banking crises ultimately involves political decisions. This paper sheds light on how certain political variables influence policy choices during banking crises and hence have an impact on fiscal outlays. • We employ cross-country econometric evidence from all crisis episodes in the period 1970-2011 to examine the impact political and party systems have on the fiscal cost of financial sector intervention. • Governments in presidential systems are associated with lower fiscal costs of crisis management because they are less likely to use costly bank guarantees, thus reducing the exposure of the state to significant contingent and direct fiscal liabilities. Consistent with these findings we find further evidence that these governments are less likely to use bank recapitalisation and more likely to impose losses on depositors.

Energising the TTIP: Political economy of the trade policy rationale. Paper No. 9 in the CEPS-CTR project “TTIP in the Balance’’and CEPS Special Report No. 113/July 2015

Despite accounting for a significant share of global trade and the resulting interdependencies from it, energy governance remains largely fragmented and there is no global framework or agreement defining the rules of energy trade. This paper, after presenting the main global and regional energy market developments, discusses the opportunities to ‘energise the TTIP’, i.e. to include a chapter dedicated to trade and cooperation in the sphere of energy. The shale revolution in the US, the ever-rising interconnectedness of energy markets (recently proven by the disappearance of the ‘Asian gas premium’) and the EU’s quest to diversify its energy supplies generally sets favourable conditions to reinforce energy relations between the EU and the US. The question, as is often the case, is whether there is sufficient political will to tighten relations in a strategic sphere with connotations for national security and sovereignty.

The Political Economy of the 2014-2020 Common Agricultural Policy: An Imperfect Storm. CEPS Paperback, 17 August 2015

After five years of debates, consultations and negotiations, the European institutions reached an agreement in 2013 on the Common Agricultural Policy (CAP) for the 2014-2020 period. The outcome has major implications for the EU’s budget and farmers’ incomes but also for Europe’s environment, its contribution to global climate change and to food security in the EU and in the world. It was decided to spend more than €400 billion during the rest of the decade on the CAP.The official claims are that the new CAP will take better account of society's expectations and lead to far-reaching changes by making subsidies fairer and ‘greener’ and making the CAP more efficient. It is also asserted that the CAP will play a key part in achieving the overall objective of promoting smart, sustainable and inclusive growth. However, there is significant scepticism about these claims and disappointment with the outcome of the decision-making, the first in which the European Parliament was involved under the co-decision procedure. In contrast to earlier reforms where more substantive changes were made to the CAP, the factors that induced the policy discussions in 2008-13 and those that influenced the decision-making did not reinforce each other. On the contrary, they sometimes counteracted one another, yielding an ‘imperfect storm’ as it were, resulting in more status quo and fewer changes. This book discusses the outcome of the decision-making and the factors that influenced the policy choices and decisions. It brings together contributions from leading academics from various disciplines and policy-makers, and key participants in the process from the European Commission and the European Parliament.

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.

Saving the Banks: The Political Economy of Bailouts. CES Papers - Open Forum #8, 2012

How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? This paper analyzes comparatively what explains government responses to banking crises. Why does the type of intervention during financial crises vary to such a great extent across countries? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision-makers. Still, “crony capitalism” accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British and French bank bailout, we show that countries with close one-on-one relationships between policy-makers and bank management tended to develop unbalanced bailout packages, while countries where banks have strong interbank ties and collective negotiation capacity were able to develop solutions with a greater burden sharing from private institutions.

The Importance of Being Earnest: The green economy and sustainable development in China. Asia Policy Brief 2012/02, November 2012

China's past economic development model has not been sustainable, at least in environmental terms. In recent years, the Chinese government has dedicated considerable time, planning energy, policy and rhetoric to "green" issues. However, there is a risk that this trend will be stalled by struggles related to pending economic problems and the upcoming leadership transition. Consequently, the international community should acknowledge China’s achievements in terms of environmental policy and cooperation as one way of serving the global public interest.

The consequences of the Western financial sanctions on the Russian economy. OSW COMMENTARY NUMBER 203/23.03.2016

Although they are not the deciding factor, the Western financial sanctions are nevertheless an important factor affecting the deteriorating economic situation in Russia. They have significantly undermined the opportunities which Russian companies have to attract foreign capital, thus contributing to the deterioration of their financial condition (which is particularly prominent in the case of energy firms subject to sanctions). Therefore, Russian businesses need more support from the state. However, this support is becoming more difficult due to the dramatic fall in oil prices – revenues from oil exports are the main source of budget revenue.