Saving for Retirement and Investing for Growth. Report of the CEPS-RCMI Task Force on Long-term Investing and Retirement Savings. CEPS Task Force Report, September 2013

Europe is facing a double challenge: a significant need for long-term investments – crucial levers for economic growth – and a growing pension gap, both of which call for resolute action. Crucially, at a time when low interest rates and revised prudential standards strain the ability of life insurers and pension funds to offer guaranteed returns, Europe lacks a framework ensuring the quality and accessibility of long-term investment solutions for small retail investors and defined contribution pension plans. This report considers the potential to steer household financial wealth – accounting for over 60% of total financial wealth in Europe – towards long-term investing, which would achieve two goals at once: higher growth and higher pensions. It follows a holistic approach that considers both solution design – how to gear product structuring towards long-term investing – and market structure – how to engineer a competitive market setting that is able to deliver high-quality and cost-efficient solutions. The report also considers prudential rules for insurers and pension funds and the potential to build a single market for less-liquid funds, occupational and personal pensions, with improved investor protection. It urges policy-makers to act aggressively to deliver more inclusive, efficient and resilient retail investment markets that are better equipped and more committed to deliver value over the long-term for beneficiaries.

What kind of European Banking Union? Bruegel Policy Contribution [2012/12?]June 25, 2012

This paper discusses the creation of a European Banking Union. First, we discuss questions of design. We highlight seven fundamental choices that decision makers will need to make: Which EU countries should participate in the banking union? To which categories of banks should it apply? Which institution should be tasked with supervision? Which one should deal with resolution? How centralised should the deposit insurance system be? What kind of fiscal backing would be required? What governance framework and political institutions would be needed? In terms of geographical scope, we see the coverage of the banking union of the euro area as necessary and of additional countries as desirable, even though this would entail important additional economic difficulties. The system should ideally cover all banks within the countries included, in order to prevent major competitive and distributional distortions. Supervisory authority should be granted either to both the ECB and a new agency, or to a new agency alone. National supervisors, acting under the authority of the European supervisor, would be tasked with the supervision of smaller banks in accordance with the subsidiarity principle. A European resolution authority should be established, with the possibility of drawing on ESM resources. A fully centralized deposit insurance system would eventually be desirable, but a system of partial reinsurance may also be envisaged at least in a first phase. A banking union would require at least implicit European fiscal backing, with significant political authority and legitimacy. Thus, banking union cannot be considered entirely separately from fiscal union and political union. The most difficult challenge of creating a European banking union lies with the short-term steps towards its eventual implementation. Many banks in the euro area, and especially in the crisis countries, are currently under stress and the move towards banking union almost certainly has significant distributional implications. Yet it is precisely because banks are under such stress that early and concrete action is needed. An overarching principle for such action is to minimize the cost to the tax payers. The first step should be to create a European supervisor that will anchor the development of the future banking union. In parallel, a capability to quickly assess the true capital position of the system’s most important banks should be created, for which we suggest establishing a temporary European Banking Sector Task Force working together with the European supervisor and other authorities. Ideally, problems identified by this process should be resolved by national authorities; in case fiscal capacities would prove insufficient, the European level would take over in the country concerned with some national financial participation, or in an even less likely adverse scenario, in all participating countries at once. This approach would require the passing of emergency legislation in the concerned countries that would give the Task Force the required access to information and, if necessary, further intervention rights. Thus, the principle of fiscal responsibility of respective member states for legacy costs would be preserved to the maximum extent possible, and at the same time, market participants and the public would be reassured that adequate tools are in place to address any eventuality.

Smart choices for growth. Bruegel Policy Contribution 2012/21, November 2012

Recovery in Greece, Italy, Portugal and Spain is held back in part by structural barriers. Overcoming these requires structural reform and public investment. Given the limited availability of political and financial capital, prioritising reform efforts and spending is important, but difficult. The different success factors for individual sectors are complementary. Using the example of the high-tech industry, we make the case that only investing in one success factor (eg broadband infrastructure) without having a sufficient endowment of others (eg education) is unlikely to make the sector successful. One consequence of the complementarity of the different success factors is that public investment and reform efforts should be fine-tuned in order to match the endowment of other factors. This might imply an increase in efforts to tackle several structural barriers at the same time, but it might also imply reducing investment in less promising fields. This in turn requires strategic thinking about whether it is worthwhile pursuing development strategies that require investment in many success factors but that do not promise much success. Such a strategic approach to public investment and reform efforts might make the allocation of scarce public financial and political capital more efficient.

Ending uncertainty: recapitalisation under European Central Bank supervision. Bruegel Policy Contribution 2013/18, 17 December 2013

Estimates of the recapitalisation needs of the euro-area banking system vary between €50 and €600 billion. The range shows the considerable uncertainty about the quality of banks’ balance sheets and about the parameters of the forthcoming European Central Bank stress tests, including the treatment of sovereign debt and systemic risk. Uncertainty also prevails about the rules and discretion that will applyto bank recapitalisation, bank restructuring and bank resolution in 2014 and beyond. The ECB should communicate the relevant parameters of its exercise early and in detail to give time to the private sector to find solutions. The ECB should establish itself as a tough supervisor and force non-viable banks into restructuring. This could lead to short-term financial volatility, but it should be weighed against the cost of a durably weak banking system and the credibility risk to the ECB. The ECB may need to provide large amounts of liquidity to the financial system. Governments should support the ECB, accept cross-border bank mergers and substantial creditor involvement under clear bail-in rules and should be prepared to recapitalise banks. Governments should agree on the eventual creation of a single resolution mechanism with efficient and fast decision-making procedures, and which can exercise discretion where necessary. A resolution fund, even when fully built-up, needs to have a common fiscal backstop to be credible.

Ukraine: Can meaningful reform come out of conflict? Bruegel Policy Contribution 2014/08, August 2014

Apart from threats to its national security and territorial integrity, Ukraine faces serious economic challenges. These result from the slow pace of economic and institutional reform in the previous two decades, the populist policies of the Yanukovych era and the consequences of the conflict with Russia. The new Ukrainian authorities have made pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. Also, the international financial aid package granted to Ukraine has not been accompanied by sufficiently strong policy conditionality. Ukraine urgently needs a complex programme of far-reaching economic and institutional reform, which will include both short-term fiscal and macroeconomic adjustment measures and medium- to long-term structural and institutional changes. Energy subsidies and the low retirement age are the two critical policy areas that require adjustment to avoid sovereign default and a balance-of-payments crisis.

The financial stability risks of ultra-loose monetary policy. Bruegel Policy Contribution Issue 2015/03

Ultra-loose monetary policies, such as very low or even negative interest rates, large-scale asset purchases, long-maturity lending to banks and forward guidance in central bank communication, aim to increase inflation and output, to the benefit of financial stability. But at the same time, these measures pose various risks and might create challenges for financial institutions. • By assessing the theoretical literature and developments in the United States, United Kingdom and Japan, where very expansionary monetary policies were adopted during the past six years, and by examining the euro-area situation, we conclude that the risks to financial stability of ultra-loose monetary policy in the euro area could be low. However, vigilance is needed. • While monetary policy should focus on its primary mandate of area-wide price stability, other policies should be deployed whenever the financial cycle deviates from the economic cycle or when heterogeneous financial developments in the euro area require financial tightening in some but not all countries. These policies include micro-prudential supervision, macro-prudential oversight, fiscal policy and regulation of sectors that pose risks to financial stability, such as construction.

The UK's EU Vote: The 1975 Precedent and Today's Negotiations. Bruegel Policy Contribution Issue 2015/08, June 2015

Highlights • The United Kingdom's European Union Referendum Bill, introduced in the House of Commons on 28 May 2015, legislates for the holding of a referendum before 31 December 2017 on the UK’s continued EU membership. UK prime minister David Cameron is opening negotiations with other EU member states to try to obtain an EU reform deal that better suits UK interests. Both the negotiations and the outcome of the referendum pose major challenges for the UK and the EU. • It will not be the first time that a UK government has staged a referendum following a renegotiation of its terms of EU membership. The first such referendum took place on 5 June 1975 after nearly a year of renegotiations, and the ‘yes’ won with 67.2 percent of the vote. Notwithstanding obvious differences, the conduct of today’s renegotiations should bear in mind this precedent, and in particular consider (a) how much the UK government can get out of the negotiations, in particular with respect to potential Treaty changes; (b) why political marketing is central to the referendum’s outcome; (c) how the UK administration’s internal divisions risk derailing the negotiations; and (d) why the negotiations risk antagonising even the UK’s best allies.

Reform momentum and its impact on Greek growth. Bruegel Policy Contribution 2015/12, July 2015

Greece has an imperfect track-record of structural reform implementation. However, the poor growth outcome of the Greek programmes is also a consequence of the timing and composition of reforms, which were not optimally geared towards a speedy transition to a new growth model based on the private sector. While the main responsibility for this lies with the Greek authorities, international institutions share the responsibility for the poor growth-enhancing effect of reforms. In the current context, further structural reform efforts should be mainly targeted at supporting Greece's speedy return to solid growth rates. This is not only because poverty and unemployment have reached very high levels, but also for political economy reasons: reforms must quickly be seen to be working in order to buttress the consensus in favour of reform. Further efforts should be made to improve Greece’s business environment and to liberalise product markets, in addition to shifting taxation away from labour and towards consumption. Reforms to improve the quality of institutions should continue and are very much needed in the Greek setting, while taking into account that their demanding implementation might use up administrative capacity and their impact on growth will only be seen over long time horizons.