The implications for the EU and national budgets of the use of EU instruments for macro-financial stability. CEPS Special Report, 4 September 2012

The euro crisis has forced member states and the EU institutions to create a series of new instruments to safeguard macro-financial stability of the Union. This study describes the status of existing instruments, the role of the European Parliament and how the use of the instruments impinges on the EU budget also through their effects on national budgets. In addition, it presents a survey of other possible instruments that have been proposed in recent years (e.g. E-bonds and eurobonds), in order to provide an assessment of how EU macro-financial stability assistance could evolve in the future and what could be its impact on EU public finances.

Bail-in Provisions in State Aid and Resolution Procedures: Are they consistent with systemic stability? CEPS Policy Brief No. 318, 21 May 2014

This CEPS Policy Brief examines the provisions for bail-in in the European Union – that is, the principle whereby any public measure to recapitalise a bank with insufficient prudential capital must be preceded by a write-down or conversion into equity of creditors’ claims – in state aid policies and in the new resolution framework for failing banks, with two aims: i) to assess whether and how they are coordinated and ii) more importantly, whether they address satisfactorily the question of systemic stability that may arise when investors fear that creditors’ claims are likely to be bailed-in in a bank crisis. The issue is especially relevant in the present context, as the comprehensive assessment exercise underway for EU banks falling under the direct supervision of the European Central Bank may lead supervisors to require substantial capital injections simultaneously for many of the banks involved, possibly shaking investors’ confidence across EU banking markets. The authors conclude that the two sets of rules are, broadly speaking, mutually consistent and that they already contain sufficient safeguards to address systemic stability concerns. However, the balance of the elements underpinning the European Commission’s decisions in individual cases may not be clear to bank creditors and potential investors in financial markets. The impression of unneeded rigidity on this very sensitive issue has been heightened by official statements over-emphasising that each case will be assessed individually under competition rules, thus feeding the concern that the systemic dimension of the issue may have been underestimated. Therefore, further clarification by the Commission may be needed on how the various criteria will be applied during the ongoing transition to banking union – perhaps through a new communication completing the state aid framework for banks in view of the adoption of the new resolution rules.

Flexibility clauses in the Stability and Growth Pact: No need for revision. CEPS Policy Brief No. 319, 24 July 2014

This Policy Brief offers an in-depth review of the Stability and Growth Pact (SGP) and looks at whether the margins of flexibility within existing rules are sufficient in the current climate of low growth, or whether there is a need to broaden them. The issue is especially relevant as the changing economic environment is raising fresh questions about whether the EU’s current common economic policies are able to manage dismal growth and low inflation. The fragile state of confidence in financial markets and the unresolved but inevitable questions of moral hazard linked to lax fiscal policies mean that no large-scale fiscal expansion to support the recovery of economic activity is feasible. The discussion may therefore only concern the scope within the SGP to accommodate an unexpected drop in economic activity and to provide room for the implementation of structural reforms. Here, we analyse the flexibility clauses of the Stability and Growth Pact under three headings; namely “exceptional circumstances”, “structural reforms and other relevant factors”, and the “investment clause”. Recommendation: Our main conclusion is that the SGP contains sufficient flexibility to accommodate an unexpected drop in economic activity and has the margins needed to finance structural reforms during the transition to the new regime. We therefore see no need to change the existing rules of the SGP. We believe that the ongoing debate about a fresh growth strategy for the eurozone and the European Union would greatly benefit from removing from the Council table ill-formulated and unnecessary demands for greater flexibility in the SGP.

The Impact of Banking Structural Reform on Household Retail Finance. ECRI Commentary No. 13, 7 October 2014

There are two main objectives behind the EC proposal on banking structural reform: the financial stability objective and the economic efficiency objective. If it is implemented, the reform should reinforce the stability and economic efficiency of household retail activities through lower contagion, better resolvability in the event of failure, more harmonised supervisory practices across the EU and more resilient household demand for retail loans. However, it could also trigger counterproductive effects that could partly undermine the expected benefits. These potential negative effects are not appropriately assessed in the impact study of the proposal published in January 2014 and will require further consideration in the coming months. In particular, the stability of household retail finance could be strengthened by placing more emphasis on bankruptcy risks of retail banks; the transfer of existing systemic activities towards less regulated and supervised markets and reputational risk. A better analysis of the borrowing costs for households (impacted by the potential decreasing diversification of the funding base of banks and scarcer liquidity) and implementation costs could help regulators to achieve the objective of efficient household activities.

Assessment of Socio-Economic and Climate Change Effects on Water Resources and Agriculture in Southern and Eastern Mediterranean countries. MEDPRO Technical Paper No. 28/March 2013

This study aims at assessing the socio-economic and environmental effects of different societal and human development scenarios and climate change in the water-scarce southern and eastern Mediterranean. The study develops a two-stage modelling methodology that includes an econometric analysis for the southern and eastern Mediterranean region as a whole and a detailed, integrated socioecological assessment focusing on Jordan, Syria and Morocco. The results show that water resources will be under increasing stress in future years. In spite of country differences, a future path of sustainable development is possible in the region. Water withdrawals could decrease, preserving renewable water resources and reversing the negative effects on agricultural production and rural society. This, however, requires a combination across the region of technical, managerial, economic, social and institutional changes that together foster a substantive structural change. A balanced implementation of water supply-enhancing and demand-management measures along with improved governance are key to attaining a cost-effective sustainable future in which economic growth, a population increase and trade expansion are compatible with the conservation of water resources.

Scanning the Options for a Structural Reform of the EU Emissions Trading System. CEPS Special Report 107, 19 May 2015

This paper provides a comprehensive overview and analysis of different options to reform the EU Emissions Trading System (ETS). The options discussed include changes to address the rigidity of supply on the auctioning side, as well as reforms to add flexibility to free allocation. Additionally, other options that may enhance the functionality of the EU ETS are covered, drawing on examples and practices in other carbon-pricing mechanisms around the world. It is crucial to note that any reform of the EU ETS must consist of a package of options. Taken separately, the options may very well have beneficial effects, but they would also leave intact clear imperfections in the current design. Specifically where the auctioning supply mechanism and the flexibility in free allocation are concerned, we assess multiple options in each category, and present evidence for each option. Where appropriate, we suggest complementing these reform options with additional elements (presented in section 3.3). The aim of any structural reform should be to arrive at a set of options that forms a consistent and credible package. With this paper, we provide an evidence-based assessment of the various building blocks of such a reform.

Flexibility versus Stability: A difficult trade-off in the eurozone. CEPS Working Document No. 422, 29 April 2016

Optimal currency area (OCA) theory has been influential in pushing eurozone countries towards structural reforms to make product and labour markets more flexible. The underlying assumption of the OCA prescription for structural reform is that asymmetric shocks are permanent. However, when shocks are temporary it does not follow that more flexibility is the answer. When shocks are the result of business-cycle movements, the way to deal with them is by stabilisation efforts. This paper provides empirical evidence that suggests that the biggest shocks in the eurozone were the result of business-cycle movements. These were relatively well synchronised, except for their amplitude. We argue that efforts to stabilise business cycles should be strengthened relative to the efforts that have been made to impose structural reforms, with consideration given to the implications for the governance of the eurozone.