Options for a Euro-area fiscal capacity. Bruegel Policy Brief 2013/01, January 2013

Europe has responded to the crisis with strengthened budgetary and macroeconomic surveillance, the creation of the European Stability Mechanism, liquidity provisioning by resilient economies and the European Central Bank and a process towards a banking union. However, a monetary union requires some form of budget for fiscal stabilisation in case of shocks, and as a backstop to the banking union. This paper compares four quantitatively different schemes of fiscal stabilisation and proposes a new scheme based on GDP-indexed bonds. The options considered are: (i) A federal budget with unemployment and corporate taxes shifted to euro-area level; (ii) a support scheme based on deviations from potential output;(iii) an insurance scheme via which governments would issue bonds indexed to GDP, and (iv) a scheme in which access to jointly guaranteed borrowing is combined with gradual withdrawal of fiscal sovereignty. Our comparison is based on strong assumptions. We carry out a preliminary, limited simulation of how the debt-to-GDP ratio would have developed between 2008-14 under the four schemes for Greece, Ireland, Portugal, Spain and an ‘average’ country.The schemes have varying implications in each case for debt sustainability

A stronger, growth-oriented surveillance for EMU. EuropEos Commentary No. 1, 19 April 2010

This Commentary finds that the recent adjustment measures taken by the Greek government in combination with the financial support proffered by the Eurogroup may not be sufficient to deal with the risk of instability in EMU in the longer term. The author argues that other imbalances, most notably the current account imbalances within EMU, need to be addressed to avoid a deflation spiral that would aggravate sustainability problems in highly indebted countries. The Greek crisis highlights the need to take steps to strengthen the economic governance of the euro area. A key component of these steps would be a stronger, growth-oriented, surveillance.

Whose Mare? Rule of law challenges in the field of European border surveillance in the Mediterranean. CEPS Liberty and Security in Europe No. 79/January 2015

This paper examines key developments in the field of European border surveillance in the Mediterranean. By asking, ‘Whose Mare?’, we focus on rule of law challenges stemming from these developments in a post-Lisbon EU. The developments examined are the Italian Navy-led Mare Nostrum operation, the debates over European ‘exit strategies’ for this operation and the ensuing launch of the Frontex Triton joint operation (JO). The recently adopted Regulation on Frontex sea border surveillance operations is also presented as a key development to understand the rule of law challenges. Moreover, the adoption of the European Union Maritime Security Strategy (MSS) and the development of several maritime surveillance systems in the EU highlight that a wide range of actors seeks authority over this field.

Euro-area governance: what to reform and how to do it. Bruegel Policy Brief 2015/01 February 2015

The Issue Reform of the governance of the euro area is being held back by disagreement on what is at the root of the euro area’s woes. Pre-crisis, the euro area suffered from the built-up of financial imbalances, price and wage divergence and an insufficient focus on debt sustainability. During the crisis, the main problems were slow resolution of banking problems, an inadequate fiscal policy stance in 2011-13 for the area as a whole, insufficient domestic demand in surplus countries and slow progress with structural reforms to overcome past divergences. Policy Challenge Euro-area governance needs to move beyond the improvements brought about by banking union and should establish institutions to prevent divergences of wages from productivity. We propose the creation of a European Competitiveness Council composed of national competitiveness councils, and the creation of a Eurosystem of Fiscal Policy (EFP) with two goals: fiscal debt sustainability and an adequate area-wide fiscal position. The EFP should have the right in exceptional circumstances to declare national deficits unlawful and to be able to force parliaments to borrow more so that the euro-area fiscal stance is appropriate. A euro-area chamber of the European Parliament would have to approve such decisions. No additional risk-sharing would be introduced. In the short term, domestic demand needs to be increased in surplus countries, while in deficit countries, structural reform needs to reduce past divergences.

The Impact of the ECB’s Asset Purchase Programmes on Sovereign Bond Spreads in the Euro Area. Bruges European Economic Research Papers 35/2015

This paper estimates the immediate impact of the European Central Bank’s asset purchase programmes on sovereign bond spreads in the euro area between 2008 and 2015 using a country-by-country GARCH model. The baseline estimates are rigorously diagnosed for misspecification and subjected to a wide range of sensitivity tests. Among others, changes in the dependent variable, the independent variables and the number of (G)ARCH terms are tested. Moreover, the model is applied to subsamples and dynamic conditional correlations are analyzed to estimate the effects of the asset purchases on the contagion of spread movements. Generally, it is found that the asset purchase programmes triggered an reduction of sovereign bond spreads. More specifically, the Securities Markets Programme (SMP) had the most significant immediate effects on sovereign bond spreads across the euro area. The announcements related to the Outright Monetary Transactions (OMT) programme also yielded substantial spread compression in the periphery. In contrast to that, the most recent Public Sector Purchase Programme (PSPP) announced in January 2015 and implemented since March 2015 had no significant immediate effects on sovereign bond spreads, except for Irish spreads. Hence, immediate effects seem to be dependent upon the size of the programme, the extent to which it targets distressed sovereigns and the way in which it is communicated.