The CAP post-2013: more equitable, green and market-oriented? Based on the seminar held by Egmont on the 25th of November. European Policy Brief No. 5, December 2011

Following a seminar on the CAP post- 2013 held by Egmont - with the cooperation of the Polish Presidency - on the 25th of November 2011, Egmont commissioned the present policy brief. Three major policy issues were addressed at this occasion, namely; how to make the CAP more equitable, green and market-oriented? The trade-off between these policy issues will require policy choices that are worthy of analysis.

Introducing more equity in the CAP: a difficult challenge. Egmont Paper #55, June 2012

[From the Introduction]. The main question addressed by this paper is how to reach a more equitable distribution of CAP’s payments pragmatically, politically and economically? Pragmatically, the CAP is a multi-functional policy, which has to combine different goals, i.e. to be more equitable, green and market-oriented. However, these objectives are not always compatible and require trade-offs. Politically, regarding the CAP’s significant share (40%) of the EU budget and the current public debt crisis, Member States are most likely to keep their attention on the juste retour calculations rather than the promotion of the European public interest in the EU negotiations. Economically, reaching a more equitable distribution of payments should be achieved without significant disruptive changes that could have serious consequences on the costs and benefits of the agricultural sector in the EU. Considering these elements, it is already clear that reaching a more equitable distribution of CAP’s payments represents a difficult challenge.

Bank bonus compromise bodes ill for the Single Supervisory Mechanism. CEPS Commentary, 8 March 2013

The European Parliament has probably won a Pyrrhic victory with its position on bank bonuses, argues CEPS CEO Karel Lannoo in this new Commentary. In return, EU member states got what they wanted with the new Capital Requirements Directive (CRD IV): no binding leverage ratio; mortgage risk weightings and capital add-ons to be determined by member states; and no obligatory consolidated capital position for bank-insurance companies. In other words, Banking Union will start out with capital rules that are more like Emmental cheese than a single rulebook. This is a huge encumbrance for a well-functioning Single Supervisory Mechanism (SSM), and makes a single resolution mechanism impossible.

Políticas europeas para la competitividad, salarios mìnimos y tutela del poder adquisitivo de las retribuciones en Italia tras el acuerdo de noviembre de 2012 [European Policies for competitiveness, minimum wages and purchasing power protection in Italy after the November 2012 agreement]. WP C.S.D.L.E. “Massimo D’Antona”.INT – 99/2013

On the floor of the Global Wage Report 2012/2013 by ILO, entitled Wages and equitable growth, the A. thinks that the wage regulation has to take into account competitiveness without compressing global aggregate demand. Therefore, International and European rules are necessary to avoid the spiral towards the wages dampen, which is bad for the economic development. The rules in action at the different levels are inadequate. The A. proposes an interpretation of Article 153 and Article 155 TFEU that is more suitable for a European regulation promoting better minimum wages and more coherent with the current legal framework of the right to pay, which can be considered, even if partially, as a social right.

Performance of Long-Term Care Systems in Europe. ENEPRI Research Report No. 117, 21 December 2012

This report evaluates the performance of long-term care (LTC) systems in Europe, with a special emphasis on four countries that were selected in Work Package 1 of the ANCIEN project as representative of different LTC systems: Germany, the Netherlands, Spain and Poland. Based on a performance framework, we use the following four core criteria for the evaluation: the quality of life of LTC users, the quality of care, equity of LTC systems and the total burden of LTC (consisting of the financial burden and the burden of informal caregiving). The quality of life is analysed by studying the experience of LTC users in 13 European countries, using data from the Survey of Health, Ageing and Retirement in Europe (SHARE). Older persons with limitations living at home have the highest probability of receiving help (formal or informal) in Germany and the lowest in Poland. Given that help is available, the sufficiency of the help is best ensured in Switzerland, Italy and the Netherlands. The indirectly observed properties of the LTC system are most favourable in France. An older person who considers all three aspects important might be best off living in Belgium or Switzerland. The horizontal and vertical equity of LTC systems are analysed for the four representative countries. The Dutch system scores highest on overall equity, followed by the German system. The Spanish and Polish systems are both less equitable than the Dutch and German systems. To show how ageing may affect the financial burden of LTC, projections until 2060 are given for LTC expenditures for the four representative countries. Under the base scenario, for all four countries the proportions of GDP spent on public and private LTC are projected to more than double between 2010 and 2060, and even treble in some cases. The projections also highlight the large differences in LTC expenditures between the four countries. The Netherlands spends by far the most on LTC. Furthermore, the report presents information for a number of European countries on quality of care, the burden of informal caregiving and other aspects of performance. The LTC systems for the four representative countries are evaluated using the four core criteria. The Dutch system has the highest scores on all four dimensions except the total burden of care, where it has the second-best score after Poland. The German system has somewhat lower scores than the Dutch on all four dimensions. The relatively large role for informal care lowers the equity of the German system. The Polish system excels in having a low total burden of care, but it scores lowest on quality of care and equity. The Spanish system has few extreme scores. Policy implications are discussed in the last chapter of this report and in the Policy Brief based on this report.

Taking stock after the Warsaw COP. CEPS Commentary, 4 December 2013

Drawing on his direct participation in the latest round of climate talks in Warsaw, Andrei Marcu looks at the results of the 19th COP through the lens of three basic questions, with a view to understanding how much progress was made and where we stand two years ahead of Paris. Are the targets adequate and how do we reach environmentally adequate targets? Can one understand and compare what other Parties are promising to do to ensure that the level of effort is comparable and equitable, and that companies are not asked to do more than their competitors in other jurisdictions? Is there comparability and equity in the eyes of the beholder? Do we understand what tools each country uses (what is available, what one gets as support) to ensure that no one country (and its companies) gets an easier ride or competitive advantage in meeting the commitment/promises that countries make. The author asserts that these questions need to be answered if an agreement is to be reached in 2015. And if they are not, he warns of mistrust, fear of carbon leakage and the temptation to resort to protectionist measures to compensate for competitive disadvantage.

The distribution of debt across euro area countries : The role of individual characteristics, institutions and credit conditions. National Bank of Belgium Working Paper No. 252, December 2013

The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results.

Asset-backed securities: The key to unlocking Europe's credit markets? Bruegel Policy Contribution 2014/07, 24 July 2014

The European market for asset-backed securities (ABS) has all but closed for business since the start of the economic and financial crisis. ABS (see Box 1) were in fact the first financial assets hit at the onset of the crisis in 2008. The subprime mortgage meltdown caused a deterioration in the quality of collateral in the ABS market in the United States, which in turn dried up overall liquidity because ABS AAA notes were popular collateral for inter-bank lending. The lack of demand for these products, together with the Great Recession in 2009, had a considerable negative impact on the European ABS market. The post-crisis regulatory environment has further undermined the market. The practice of slicing and dicing of loans into ABS packages was blamed for starting and spreading the crisis through the global financial system. Regulation in the post-crisis context has thus been relatively unfavourable to these types of instruments, with heightened capital requirements now necessary for the issuance of new ABS products. And yet policymakers have recently underlined the need to revitalise the ABS market as a tool to improve credit market conditions in the euro area and to enhance transmission of monetary policy. In particular, the European Central Bank and the Bank of England have jointly emphasised that: “a market for prudently designed ABS has the potential to improve the efficiency of resource allocation in the economy and to allow for better risk sharing... by transforming relatively illiquid assets into more liquid securities. These can then be sold to investors thereby allowing originators to obtain funding and, potentially, transfer part of the underlying risk, while investors in such securities can diversify their portfolios... . This can lead to lower costs of capital, higher economic growth and a broader distribution of risk” (ECB and Bank of England, 2014a). In addition, consideration has started to be given to the extent to which ABS products could become the target of explicit monetary policy operations, a line of action proposed by Claeys et al (2014). The ECB has officially announced the start of preparatory work related to possible outright purchases of selected ABS1. In this paper we discuss how a revamped market for corporate loans securitised via ABS products, and how use of ABS as a monetary policy instrument, can indeed play a role in revitalising Europe’s credit market. However, before using this instrument a number of issues should be addressed: First, the European ABS market has significantly contracted since the crisis. Hence it needs to be revamped through appropriate regulation if securitisation is to play a role in improving the efficiency of resource allocation in the economy. Second, even assuming that this market can expand again, the European ABS market is heterogeneous: lending criteria are different in different countries and banking institutions and the rating methodologies to assess the quality of the borrowers have to take these differences into account. One further element of differentiation is default law, which is specific to national jurisdictions in the euro area. Therefore, the pool of loans will not only be different in terms of the macro risks related to each country of origination (which is a ‘positive’ idiosyncratic risk, because it enables a portfolio manager to differentiate), but also in terms of the normative side, in case of default. The latter introduces uncertainties and inefficiencies in the ABS market that could create arbitrage opportunities. It is also unclear to what extent a direct purchase of these securities by the ECB might have an impact on the credit market. This will depend on, for example, the type of securities targeted in terms of the underlying assets that would be considered as eligible for inclusion (such as loans to small and medium-sized companies, car loans, leases, residential and commercial mortgages). The timing of a possible move by the ECB is also an issue; immediate action would take place in the context of relatively limited market volumes, while if the ECB waits, it might have access to a larger market, provided steps are taken in the next few months to revamp the market. We start by discussing the first of these issues – the size of the EU ABS market. We estimate how much this market could be worth if some specific measures are implemented. We then discuss the different options available to the ECB should they decide to intervene in the EU ABS market. We include a preliminary list of regulatory steps that could be taken to homogenise asset-backed securities in the euro area. We conclude with our recommended course of action.

Social cohesion in Europe after the crisis

In the last few years, Europe has been forced to re-think its socio-economic model. Social indicators speak for themselves. Real household income declined significantly between 2008 and 2012, employment rates are lower and the number of people in poverty saw a steady rise with a growing divergence between EU countries. In the eurozone, cuts in public spending and internal devaluation have been the main tools to aim at a correction of unsustainable fiscal positions and a strengthening of competitiveness. It has carried a heavy social price tag. Outside of the eurozone, austerity has also been the prevailing policy, seen as inevitable to avoid economic instability. The crisis has not hit everyone equally. The general losses have been high, but there have also been some quite important redistributive effects. With all the difficulties of defining and measuring 'fairness', it is clear that the adjustment has not been equitable. Apart from issues of market failure, there have been direct increases of inequality within each of the member states. Higher poverty rates have been observed, rises in inequalities between higher and lower income earners as well as intergenerational inequalities between age groups. Long-term consequences are only beginning to surface in the public debate as the most immediate pressures of the crisis are slowly overcome. In this report, the authors first of all look at the results of the survey we have carried out in seven European countries and review perceptions of the socio-economic model. Subsequently, they assess the importance of the social dimension in the broader context of the European growth model. The authors discuss the impact of the structural challenges of globalisation, demography and technological change. They then review the EU’s performance in the crisis. Finally, the authors make a number of recommendations on how to bridge the gap between Europeans‘ expectations and reality.

Mixed Public-Private Enterprises in Europe: Economic Theory and an Empirical Analysis of Italian Water Utilities. Bruges European Economic Research (BEER) Papers 4/July 2006

Mixed enterprises, which are entities jointly owned by the public and private sector, are spreading all over Europe in local utilities. Well aware that in the vast majority of cases the preference of local authorities towards such governance structure is determined by practical reasons rather than by the ambition to implement new regulatory designs (an alternative to the typical “external” regulation), our purpose is to confer some scientific value to this phenomenon which has not been sufficiently investigated in the economic literature. This paper aims at proposing an economic analysis of mixed enterprises, especially of the specific configuration in which the public partner acts as controller and the private one (or “industrial” partner) as service provider. We suggest that the public service concession to mixed enterprises could embody, under certain conditions, a noteworthy substitute to the traditional public provision and the concession to totally private enterprises, as it can push regulated operators to outperform and limit the risk of private opportunism. The starting point of the entire analysis is that ownership allows the (public) owner to gather more information about the actual management of the firm, according to property rights theory. Following this stream of research, we conclude that under certain conditions mixed enterprises could significantly reduce asymmetric information between regulators and regulated firms by implementing a sort of “internal” regulation. With more information, in effect, the public authority (as owner/controller of the regulated firm, but also as member of the regulatory agency) can stimulate the private operator to be more efficient and can monitor it more effectively with respect to the fulfilment of contractual obligations (i.e., public service obligations, quality standards, etc.). Moreover, concerning the latter function, the board of directors of the mixed enterprise can be the suitable place where public and private representatives (respectively, welfare and profit maximisers) can meet to solve all disputes arising from incomplete contracts, without recourse to third parties. Finally, taking into account that a disproportionate public intervention in the “private” administration (or an ineffective protection of the general interest) would imply too many drawbacks, we draw some policy implications that make an equitable debate on the board of the firm feasible. Some empirical evidence is taken from the Italian water sector.

No need for walls to equitably distribute the refugees. CEPS Commentary, 25 September 2015

While acknowledging that the recently implemented EU Temporary Relocation System might not be the panacea for addressing the refugee crisis in Europe today, Sergio Carrera and Daniel Gros find in this commentary that it nevertheless constitutes a movement towards the urgent need to go beyond the current EU Dublin regime and ensure more equitable sharing of legal responsibility across all member states.