A Life Cycle Approach to Investor Protection. ECMI Working Paper No. 1/September 2014

The market for investment products, including both securities and investment funds, is fraught with difficulties for consumers in terms of the ease of comparing products, trust in suppliers and consumer satisfaction. A comprehensive approach to investor protection, developed around the lifecycle of a financial product, may offer the investor greater protection during an investment’s life span. This paper proposes a new approach to investor protection, building on a review of major market failures affecting the origination, distribution and sale of financial products and based on a review of the relevant scientific literature and country experiences. The application of a ‘know-your-product’ principle at origination, a narrower ‘default rule’ for best execution and an ex-ante distinction between advice and ‘information-only’ services are among the options discussed in this paper to enhance the investor protection framework over the lifecycle of a financial product.

The TTIP negotiations: a Pirandello play

Notre Europe – Jacques Delors Institute and the European Policy Centre during which experts, including Pascal Lamy, honorary president of Notre Europe – Jacques Delors Institute and former Director of the WTO explored the key issues of the current Transatlantic Trade and Investment Partnership (TTIP) negotiations. What are the geoeconomic and geostrategic goals of the negotiations? What are the rules of the negotiations? Who are the main players? What impact might TTIP have on world trade?

Chasing globalisation: Germany's economic relations with the BRIC countries. OSW Report, November 2013

The Eurozone crisis has forced German exporters to speed up their expansion onto the emerging markets, in particular Brazil, Russia, India and China. The development observed in those countries has become an important substitute for the consequences of the economic slowdown in Europe.To illustrate the scale of cooperation between Germany and the BRIC countries, it is enough to quote figures concerning Germany’s trade. Between 2000-2011 the share of trade with the BRIC states in the entire German trade exchange rose from 5.5% to 13.3%. In the same period opposite tendencies were observed in the figures relating to trade with the USA, whose share in German trade fell from 9.6% to 6.2%. The report discusses the major tendencies present in Germany’s cooperation with the BRIC countries, and examines how the German state supports German companies in their business activities on these markets. The main method used to investigate these processes is the economic analysis of trade and capital flows between Germany and the BRIC countries, supplemented by conclusions drawn from discussions with German experts. The main issue discussed in the text is the role of the state in stimulating the expansion of German companies onto the BRIC markets. In the context of these activities, political relations and the proper use of export and investment guarantees and development aid are of major importance.

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.

A weak link? Germany in the Euro-Atlantic security system. OSW Point of View Number 47, January 2015

The political, military and economic parameters of German power influence the vision of the international order that Berlin favours. Politically, Germany is a regional power in the EU with considerable diplomatic potential. Economically, it is the world's third largest power with growing global trade and investment links. At the same time, Germany's military potential is limited and the German strategic culture makes the country sceptical about the use of military instruments. Berlin is thus essentially interested in maintaining peace and stability, both in Europe and globally, and in developing diplomatic mechanisms to manage regional and global crises and conflicts. The German preference for dialogue and compromise in conflict situations in the regional and global dimensions may increasingly pose a risk to maintaining the cohesion and credibility of NATO – both from the perspective of the USA and Germany’s allies from Central-Eastern and Northern Europe.

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.

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 EU regime on biofuels in transport: Still in search of sustainability. Egmont Paper No. 68, July 2014

Like other regions of the world, the EU is developing biofuels in the transport sector to reduce oil consumption and mitigate climate change. To promote them, it has adopted favourable legislation since the 2000s. In 2009 it even decided to oblige each Member State to ensure that by 2020 the share of energy coming from renewable sources reached at least 10% of their final consumption of energy in the transport sector. Biofuels are considered the main instrument to reach that percentage since the development of other alternatives (such as hydrogen and electricity) will take much longer than expected. Meanwhile, these various legislative initiatives have driven the production and consumption of biofuels in the EU. Biofuels accounted for 4.7% of EU transport fuel consumption in 2011. They have also led to trade and investment in biofuels on a global scale. This large-scale expansion of biofuels has, however, revealed numerous negative impacts. These stem from the fact that first-generation biofuels (i.e., those produced from food crops), of which the most important types are biodiesel and bioethanol, are used almost exclusively to meet the EU’s renewable 10% target in transport. Their negative impacts are: socioeconomic (food price rises), legal (land-grabbing), environmental (for instance, water stress and water pollution; soil erosion; reduction of biodiversity), climatic (direct and indirect land-use effects resulting in more greenhouse gas emissions) and public finance issues (subsidies and tax relief). The extent of such negative impacts depends on how biofuel feedstocks are produced and processed, the scale of production, and in particular, how they influence direct land use change (DLUC) and indirect land use change (ILUC) and the international trade. These negative impacts have thus provoked mounting debates in recent years, with a particular focus on ILUC. They have forced the EU to re-examine how it deals with biofuels and submit amendments to update its legislation. So far, the EU legislation foresees that only sustainable biofuels (produced in the EU or imported) can be used to meet the 10% target and receive public support; and to that end, mandatory sustainability criteria have been defined. Yet they have a huge flaw. Their measurement of greenhouse gas savings from biofuels does not take into account greenhouse gas emissions resulting from ILUC, which represent a major problem. The Energy Council of June 2014 agreed to set a limit on the extent to which firstgeneration biofuels can count towards the 10% target. But this limit appears to be less stringent than the ones made previously by the European Commission and the European Parliament. It also agreed to introduce incentives for the use of advanced (second- and third-generation) biofuels which would be allowed to count double towards the 10% target. But this again appears extremely modest by comparison with what was previously proposed. Finally, the approach chosen to take into account the greenhouse gas emissions due to ILUC appears more than cautious. The Energy Council agreed that the European Commission will carry out a reporting of ILUC emissions by using provisional estimated factors. A review clause will permit the later adjustment of these ILUC factors. With such legislative orientations made by the Energy Council, one cannot consider yet that there is a major shift in the EU biofuels policy. Bolder changes would have probably meant risking the collapse of the high-emission conventional biodiesel industry which currently makes up the majority of Europe’s biofuel production. The interests of EU farmers would have also been affected. There is nevertheless a tension between these legislative orientations and the new Commission’s proposals beyond 2020. In any case, many uncertainties remain on this issue. As long as solutions have not been found to minimize the important collateral damages provoked by the first generation biofuels, more scientific studies and caution are needed. Meanwhile, it would be wise to improve alternative paths towards a sustainable transport sector, i.e., stringent emission and energy standards for all vehicles, better public transport systems, automobiles that run on renewable energy other than biofuels, or other alternatives beyond the present imagination.

The Geostrategic Implications of TTIP. CEPS Special Report No. 105/April 2015

This paper analyses the strategic considerations that define the perceived need for transatlantic renewal, and examines the geo-economic impact of the Transatlantic Trade and Investment Partnership (TTIP) on both emerging powers and poorer countries. It argues that TTIP has the potential to be a catalyst for trade liberalisation at the global level, as long as the US and the EU are proactive about making the ‘open architecture’ of TTIP a reality.

Towards a balanced contribution of household credit to the economy. CEPS-ECRI Task Force Report, May 2015

While policy-makers are creating conditions to strengthen recovery, the debate on the role that retail finance should play in this respect focuses on corporate loans rather than on household credit. The improvement of financing conditions for firms in order to support further investment spending is certainly essential to ensuring sustainable growth. However, a significant part of EU growth will depend on the behaviour of households and on their ability to secure funding for their consumption and investment. It is therefore essential to place further emphasis on the different options available to stimulate household credit, in particular consumer loans. Nevertheless, in order to avoid past mistakes, regulators should continue to develop a framework where consumer loans (and by extension household credit) contributes to the economy in a balanced way. To achieve this, five main issues need to be addressed further.

The systemic roots of Russia’s recession. Bruegel Policy Contribution ISSUE 2015/15, OCTOBER 2015

The Russian economy grew rapidly between 2000 and 2007, but growth decelerated after the 2008-09 global financial crisis, and since mid-2014 Russia has moved into recession. A number of short-term factors have caused recession: lower oil prices, the conflict with Ukraine, European Union and United States sanctions against Russia and Russian counter-sanctions. However Russia's negative output trends have deeper structural and institutional roots. They can be tracked back about a decade to when previous market-reform policies started to be reversed in favour of dirigisme, leading to further deterioration of the business and investment climate. • Russia must address its short-term problems, but in the medium-to-long term it must deal with its fundamental structural and institutional disadvantages: oil and commodity dependence and an unfriendly business and investment climate underpinned by poor governance. Compared to many other commodity producers, Russia is better placed to diversify its economy, mostly due to its excellent human capital. Ruble depreciation makes this task easier

The role of Central Europe in the German economy. The political consequences. OSW Report June 2016

Recent publications allow us to conclude that the economic relations between Germany and Central Europe have come to the ‘end of history’, and nothing new will happen. However, a deeper analysis of these relationships reveals interesting new trends. Since joining the European Union the states of Central Europe have not settled for maintaining the average level of economic development, but have continued to narrow the distance between them and Western Europe, something which the global financial crisis did not prevent. Their improved economic situation also affected their relations with Germany. The latest results from the Visegrád Group states show them to be Germany’s most important trading partner, and their balance of trade in goods is in a state of equilibrium, while many euro area countries have recorded high trade deficits with Germany. The aim of this report is to display the trends in trade and investment between Germany and Central Europe, based on the example of the Visegrád Group. The author will also attempt to answer the question of whether the advancing economic cooperation between Germany and the V4 countries will lead to the further modernisation of those countries’ economies, or whether it will run the risk of leaving them in the ‘middle income trap’.