Household Debt in Europe’s Periphery: The dangers of a prolonged recession. ECRI Commentary No. 12, 22 November 2012

The second-dip recession in Europe’s periphery has created a poisonous mix, which risks threatening further the financial system and the economy. Against this background, this ECRI Commentary argues that time matters in the household deleveraging cycle and that a swift recovery is one of its most vital parts. The paper also assesses the extent to which self-feeding phenomena related to household debt have already materialised and evaluates the risks for countries that have so far been spared their full effects. It also offers a theoretical policy response towards a more sustainable household credit sector and overall economic recovery.

Regional business cycles and the emergence of sheltered economies in the southern periphery of Europe. Bruges European Economic Research (BEER) Papers 7/November 2006

Recent research has highlighted that in the last few years the evolution of regional disparities in many European states has become pro-cyclical. This represents a change with respect to the predominantly anti-cyclical pattern of the 1960s and 1970s. This paper addresses the question of whether and when this change has taken place in the southern periphery of Europe, before analyzing the factors that may have played a role in such a change. The analysis relies on a regional database that includes the evolution of the GDP per capita of NUTS II regions in five European countries (France, Greece, Italy, Portugal, and Spain) between 1980 and 2000. The results of the analysis support the hypothesis of a change towards a pro-cyclical evolution of regional disparities in the cases of Italy, Portugal, and Spain, but not in those of Greece and France. A relationship between these pro-cyclical patters and the emergence of less dynamic sheltered economies is also detected in peripheral regions. This lack of dynamism is related to the fact that numerous peripheral areas in southern Europe have become increasingly dependent on factors such as transfers or public investment and employment, and therefore are less exposed to changes in market conditions.

On the periphery of global jihad. The North Caucasus: the illusion of stabilisation. OSW Point of View Number 45, November 2014

The situation in the North Caucasus has stabilised, in comparison with previous years, mainly as regards the activity of the Islamic military underground. This is an effect of ideological changes among the militants which have led to a dilution of the Caucasian armed struggle and its marginalisation in global jihad, since top priority has been granted to the Middle Eastern front. The factors which have contributed to this stabilisation are the organisational crisis in the Caucasus Emirate and the outflux of militants to the Middle East, as well the successful ‘carrot and stick’ policy adopted by Moscow. However, the partial stabilisation in the Caucasus is inherently precarious, being a contingent outcome of the situation rather than the result of systemic change. The region’s pressing problems remain unresolved; and these problems are generating chronic instability and cauing the Caucasus to drift away from Russia in civilisational terms. An economic or political crisis in the Russian Federation may result in the conflicts in the Caucasus unfreezing, including a reactivation of the idea of Chechen independence as well as the idea of the Caucasus Emirate, which is a part of global jihad.

Current Account ‘Core-Periphery Dualism’ in the EMU. CEPS Working Document No. 406/March 2015

Current account dispersion within EU member states has been increasing since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process that is able to stimulate a long-run rebalancing, as neoclassical theory predicts. To shed light on the issue this paper investigates the determinants of eurozone current account imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries; three time horizons corresponding to various steps in European integration; different control variables; and several panel econometric methods. The results suggest that within the OECD and EU groups, financial integration helped to explain CA deterioration in the peripheral countries, especially in the post-EMU period. The business cycle seems to have played a growing role over time, whereas the role of competiveness seems to have diminished.

Imperial legacy? The EU's Developmental Model and the Crisis of the European Periphery. CES Papers - Open Forum #19, 2013-2014

The high hopes for rapid convergence of Eastern and Southern EU member states are increasingly being disappointed. With the onset of the Eurocrisis convergence has given way to divergence in the southern members, and many Eastern members have made little headway in closing the development gap. The EU´s performance compares unfavourably with East Asian success cases as well as with Western Europe´s own rapid catch-up to the USA after 1945. Historical experience indicates that successful catch up requires that less-developed economies to some extent are allowed to free-ride on an open international economic order. However, the EU´s model is based on the principle of a level-playing field, which militates against such a form of economic integration. The EU´s developmental model thus contrasts with the various strategies that have enabled successful catch up of industrial latecomers. Instead the EU´s current approach is more and more reminiscent of the relations between the pre-1945 European empires and their dependent territories. One reason for this unfortunate historical continuity is that the EU appears to have become entangled in its own myths. In the EU´s own interpretation, European integration is a peace project designed to overcome the almost continuous warfare that characterised the Westphalian system. As the sovereign state is identified as the root cause of all evil, any project to curtail its room of manoeuvre must ultimately benefit the common good. Yet, the existence of a Westphalian system of nation states is a myth. Empires and not states were the dominant actors in the international system for at least the last three centuries. If anything, the dawn of the age of the sovereign state in Western Europe occurred after 1945 with the disintegration of the colonial empires and thus historically coincided with the birth of European integration.

Can Spain break the curse of the periphery? The upcoming Spanish election and what it means for Europe. CEPS Essay No. 24, May 2016

In this CEPS Essay, Miroslav Beblavý takes stock of the changing situation in Spanish politics one month before the early elections, which are expected to take place on June 26th in the hope that a new government can finally be formed. He finds that in both in politics and in economics, Spain resides at an immensely important inflection point situated between the European periphery and its core.

How to avoid a double-dip recession in the eurozone. CEPS Commentary, 15 November 2012

This CEPS Commentary argues that the way in which the burden of adjustment to the imbalances in the eurozone is borne almost exclusively by the deficit countries in the periphery produces a deflationary bias in the region as a whole. Against the threat of double-dip recession, Paul De Grauwe asserts that the adjustment could be done differently and calls for implementation of a more symmetric macroeconomic policy that reduces the deflationary bias.

Combating Youth Unemployment: The latest European fad? CEPS Commentary, 14 June 2013

When examining youth unemployment in the broader context of its contribution to total unemployment in Europe, Daniel Gros finds in this new Commentary that the problem reveals a completely different picture from the one usually presented. Extreme figures on youth unemployment in the periphery hide the fact that the number of actually unemployed is rather small given that most youth in countries like Spain or Greece are not even looking for a job.

The emblematic statement of the Nobel Peace Prize. Jean Monnet/Robert Schuman Paper Series Vol. 13 No. 1, January 2013

From the Introduction. On October 12th the Nobel Committee announced that the annual Nobel Peace Prize would be awarded to the European Union for, “promoting peace, democracy and human rights over six decades”.1 This was a bit of good news for the EU who had produced nothing but bad press with the Euro Crisis, the bailouts of struggling countries like Greece, and protests in the southern member states of Spain, Portugal, and Italy. At such a momentous occasion the EU’s next challenge was to figure out who would be the rightful head of the EU to accept the award. The EU has made their decision by opting to send its top three officials Jose Manuel Barroso the President of the European Commission, Herman Van Rompuy the President of the European Council, and Martin Schulz the President of the European Parliament2 as a sign that the EU is not headed by one person but instead is an supranational economic and political bloc that seeks to unify the European continent. Their symbolic acceptance of the award is in response to what Geir Lundestad, the Secretary of the Norwegian Nobel Committee, called, “an accumulated record.”3 This record has ushered the EU into the international spotlight as a beacon for countries in the EU’s periphery to want to join the bloc.

Strong governments, weak banks. CEPS Policy Brief No. 305, 25 November 2013

Banks in the northern eurozone have capital ratios that are, on average, less than half of the capital ratios of banks in the eurozone’s periphery. The authors explain this by the fact that northern eurozone banks profit from the financial solidity of their governments and follow business strategies aimed at issuing too much subsidised debt. In doing so, they weaken their balance sheets and become more fragile – less able to withstand future shocks. Paradoxically, financially strong governments breed fragile banks. The opposite occurs in countries with financially weak governments. In these countries banks are forced to strengthen themselves because they are unable to rely on their governments. As a result they have significantly more capital and reserves than banks in the northern eurozone. Recommendations More than in the south, the governments of northern Europe should stand up and force the banks to issue more equity. This should go much further than what is foreseen in the Basel III accord. If the experience of the southern eurozone countries is any guide, banks in the north of the eurozone should at least double the capital and the reserves as a percentage of their balance sheets. Failure to do so risks destroying the financial solidity of the northern European governments when, in the future, negative shocks force these governments to come to the rescue of their undercapitalised banks. The new responsibilities entrusted to the European Central Bank as the single supervisor in the eurozone create a unique opportunity for that institution to change the regulatory and supervisory culture in the eurozone – one that has allowed the large banks to continue living dangerously, with insufficient capital.

The SRM and the dream to resolve banks without public money. CEPS Commentary, 19 December 2013

In his assessment of the compromise agreement reached on the Single Resolution Mechanisn (SRM), Daniel Gros finds that the popular perception that the periphery has the most to gain from the establishment of a unified resolution regime might have gotten it backwards. In reality, he finds that Germany and other surplus countries have a bigger interest in tying the hands of their national resolution authorities, which have a tendency to be too generous.

Germany as Scapegoat. CEPS Commentary, 10 December 2013

Germany has been an attractive target for external-deficit countries in Europe and beyond, but beating up on Germany alone appears to be the wrong way to get results. This CEPS Commentary by Daniel Gros argues that the discussion of Germany’s surplus confuses the issues in two ways. First, he points out that although the German economy and its surplus loom large in the context of Europe, an adjustment by Germany alone would only modestly benefit the eurozone periphery. Second, in the global context, he finds that adjustment by Germany alone would benefit many countries a little, but other surplus countries including Russia, China and Japan, would benefit disproportionally.

The long haul: managing exit from financial assistance. Bruegel Policy Contribution Issue 2014/03, 20 February 2014

Countries can make a clean exit from financial assistance, or enter a new programme or a precautionary programme, depending on the sustainability of their public debt and their vulnerability to shocks. Ireland made a clean exit in December 2013, supported by significant budgetary and current-account adjustment and signs of economic recovery. But Irish debt sustainability is not guaranteed and prudence will be needed to avoid future difficulties. A clean exit for Portugal is not recommended when its programme ends in May 2014, because compared to Ireland it faces higher interest rates, has poorer growth prospects and has probably less ability to generate a consistently high primary surplus. A precautionary arrangement would be advisable. In case debt sustainability proves difficult to achieve later, some form of debt restructuring may prove necessary. It is unlikely that Greece will be able to exit its programme in December 2014. A third programme should be put in place to take Greece out of the market until 2030, accompanied by enhanced budgetary and structural reform commitments by Greece, a European boost to economic growth in the euro-area periphery and willingness on the part of lenders to reduce loan charges below their borrowing costs, should public debt levels prove unsustainable despite Greece meeting the loan conditions. Even assuming all goes well, the three countries will be subject to enhanced post-pro-gramme surveillance for decades. Managing such long-term relationships will be a key challenge.

Eurosystem collateral policy and framework: Was it unduly changed? Bruegel Policy Contribution 2014/14, 17 November 2014

All Eurosystem credit operations, including the important open market operations, need to be based on adequate collateral. Liquidity is provided to banks against collateral at market prices subject to a haircut. The Eurosystem adapted its collateral framework during the crisis to accept lower-rated assets as collateral. Higher haircuts are applied to insure against liquidity risk as well as the greater volatility of prices of lower-rated assets. The adaptation of the collateral framework was necessary to provide sufficient liquidity to banks in the euro area periphery in particular. In crisis countries, special emergency liquidity assistance was provided. More than 80 percent of the European Central Bank’s liquidity (Main Refinancing Operations and Long Term Refinancing Operations) is provided to banks in five countries (Greece, Ireland, Italy, Portugal and Spain). The changes in the collateral framework were necessary for the ECB to fulfil its treaty-based mandate of providing liquidity to solvent banks and safeguarding financial stability. The ECB did not take on board excessive risks.