The G20 financial reform agenda. Bruegel Policy Contribution Issue 2014/11, September 2014

Five years ago, the declarations of the G20 in landmark leaders’ summits in London and Pittsburgh listed specific commitments on financial regulatory reform. When measured against these declarations, as opposed to the surrounding rhetorical hype, most (though not all) commitments have been met to a substantial degree. However, the effectiveness of these reforms in making global finance more stable is not so far proven. This uncertainty on impact mirrors the absence of an analytical consensus on the 2007-08 financial crisis itself. In addition, unintended consequences of the reforms are appearing gradually, even as their initial implementation is still unfinished. At a broader level, the G20 has established neither an adequate institutional infrastructure nor a consistent policy vision for a globally integrated financial system. This shortcoming justifies increasing concerns about economically harmful market fragmentation. One key aim should be to make international regulatory bodies more representative of the rapidly-changing geography of global finance, not only in terms of their membership but also of their leadership and location.

Internationalising the currency while leveraging massively: the case of China. Bruegel Working Paper 2015/12, October 2015

This paper reviews the steps that China has taken towards financial reform with a particular focus on capital account liberalisation and internationalisation of the use of the renminbi. • After a slowdown in reform momentum during the global financial crisis, there is a clear push towards reform, especially in terms of RMB internationalisation. • During the same period, though, China’s debt has doubled, reaching levels that are clearly above those of most emerging markets. This increases the risks embedded in financial reform and, in particular, capital account liberalisation. • At this juncture, however, China has no option but to press for reform since the current growth model is no longer working and China urgently needs to better allocate its savings.

International financial regulation: A role for the Eurozone? EU Diplomacy Paper 08/2012, October 2012

The deepest financial crisis to strike the global economy since the Great Depression has unceremoniously called into question the very foundations of the Western economic model. The liberalisation of capital flows and the growing internationalisation of financial markets outpaced global regulatory and supervisory efforts. The repercussions of the financial crisis have given new dynamism to the reform of financial regulation both globally and within the European Union (EU). The Eurozone, by way of its own failings, has emerged as a stronger conceptual and legitimate entity since the onset of the crisis, but to what extent does this equate to a greater external role, in particular in the reform of international financial regulation? This paper argues that the Eurozone is currently not in a position to play an important role in the reform of international financial regulation, as it is a weak actor in the context of the EU financial architecture, which is still largely characterised by differing national regimes, a prevailing influence from the UK and fragmented external representation. The key finding from this study is that internal tensions in the EU are at the very heart of the Eurozone’s difficulties in playing a role in the reform of international financial regulation. Surmounting these tensions is a pre-requisite for the Eurozone if it is to overcome its structural weakness in international financial politics. However, the implications of such evolutions to the Eurozone, as an entity, and to European integration are far-reaching.

The Discursive double game of EMU reform: the clash of titans between French White Knight and German Iron Lady. Paper presented at the 9th Biennial Conference European Community Studies Association–Canada (ECSA-C), Ottawa, Ontario, April 27-28, 2012

From the Introduction. In the aftermath of the EU’s enlargement towards Central and Eastern Europe, many scholars and observers of European integration were proclaiming that the French-German “engine” of Europe had come to an end. The political legitimacy of French-German initiatives was contested by coalitions of smaller member states and the ‘new Europe’ was calling for new leadership dynamics. However, the experience of the Eurozone debt crisis provided dramatic evidence that no alternative to the Franco-German partnership has yet to emerge in the enlarged EU. In a time of existential crisis, Franco-German initiatives appear to have remained the basic dynamic of integration. However, unlike in the past, agreements on steps forward have proven to be particularly difficult. This is largely due to these countries’ contrasting political economic policy ideas, cultures, and practices....the paper analyses the ideational ‘frames’ of the two leaders while tracing their discursive interactions against changing background conditions since the European debt crisis was triggered by Greece in October 2009 until the last measures taken in 2012 before the French Presidential elections. The empirical analysis is based on a systematic corpus of press conferences and media interviews by Nicolas Sarkozy and Angela Merkel after European summits. It is complemented by a number of press interviews including some given by their respective Finance Ministers) and important speeches in that same period of time.

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.

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 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.

British Balance of Competence Reviews, Part III: More reform than renegotiation or repatriation. EPIN [Working] Paper No. 42/December 2014. [see Abstract for I and II]

This paper, the third in a series for a CEPS project on the ‘The British Question’, is pegged on an ambitious exercise by the British government to review all the competences of the European Union on the basis of evidence submitted by independent stakeholders. The reviews considered in this paper cover the following EU policies: the single market for services, financial markets, the free movement of people, cohesion, energy, agriculture, fisheries, competition, social and employment policies, and fundamental rights. The declared objective of Prime Minister Cameron is to secure a ‘new settlement’ between the UK and the EU. From political speeches in the UK one can identify three different types of possible demand: reform of EU policies, renegotiation of the UK’s specific terms of membership, and repatriation of competences from the EU back to the member states. As most of the reviews are now complete, three points are becoming increasingly clear: i) The reform agenda – past, present or future - concerns virtually every branch of EU policy, including several cases reviewed here that are central to stated UK economic interests. The argument that the EU is ‘unreformable’ is shown to be a myth. ii) The highly sensitive cases of immigration from the EU and social policies may translate into requests for renegotiation of specific conditions for the UK, but further large-scale opt-outs, as in the case of the euro and justice and home affairs, are implausible. iii) While demands for repatriation of EU competences are voiced in general terms in public debate in the UK, no specific proposals emerge from the evidence as regards competences at the level at which they are identified in the treaties, and there is no chance of achieving consensus for such ideas among member states. Michael Emerson and Steven Blockmans, “British Balance of Competence Reviews, Part I: ‘Competences about right, so far’”, CEPS/EPIN Working Paper No. 35, October 2013 (www.ceps.eu/book/british-balance-competence-reviews-part-i-%E2%80%98competences-about-right-so-far%E2%80%99)(http://aei.pitt.edu/45599/); Michael Emerson, Steven Blockmans, Steve Peers and Michael Wriglesworth, “British Balance of Competence Reviews, Part II: Again, a huge contradiction between the evidence and Eurosceptic populism”, CEPS/EPIN Working Paper No. 40, June 2014 (www.ceps.eu/book/british-balance-competence-reviews-part-ii-again-huge-contradiction-between-evidence-and-eurosc)(http://aei.pitt.edu/52452/).

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.

Will this time be different for Greece? How to assess its ability to deliver on the reform agenda. CEPS Commentary, 13 March 2015

Taking its inspiration from the ongoing debate on whether this time will be different for Greece and whether Syriza will deliver on its reform promises to the European partners, this Commentary expresses bemusement that the public debate on such an important issue as well as internal discussions among senior policy-makers frequently resort to ‘gut feelings’ or simple stereotypes. To counteract this tendency, the author presents a simple analytical framework that can be used to assess the likelihood that a government will deliver on its reform agenda. Its purpose is not to allow for a precise probabilistic calculation, but to enable better structuring of the knowledge we have. It emphasises that the change depends NOT only on the capacity of the state to design and deliver policies, but even more crucially on state autonomy from both illegitimate and legitimate interests and cognitive models used by policy-makers to make sense of the world.

The Emission Trading Scheme reform: will the Commission's proposal save the system? EPC Policy Brief, 29 May 2015

The European Union’s Emission Trading Scheme (ETS), proposed by the Commission in 2001, entered into force in 2005. It was the flagship instrument of an ambitious policy aiming to reduce the emission of greenhouse gasses in the EU by making emission allowances a freely tradable ‘financial commodity’. However, in recent years, the cracks in the system have begun to show as the price of these CO2 emission allowances has dropped. In this Policy Brief, Jørgen Knud Henningsen argues that the envisaged ETS reform may not be enough to address the system’s shortcomings, and that there should be a more open discussion about its potential if it is to contribute to the EU’s goal of a largely de-carbonised economy by 2050.

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.

What do Eurozone academics think about EMU reform? On broad support and German exceptionalism. Bruges Political Research Papers 41/2015.

This paper is an empirical contribution to the literature on the formation of policy preferences on Economic and Monetary Union (EMU) reform within its Member States. In the aftermath of the euro crisis, many proposals to ‘complete’ EMU have been tabled. However, discord among Member States has led to a piecemeal restructuring of EMU. For this paper, a survey has been conducted among euro area academic experts, gauging preferences on EMU reform. We find that general consensus masks significant discord among academics from different Member States. Our data indicates the existence of conflicting national epistemic communities, bound by shared causal beliefs on macro-economic policy. Academics within the key creditor Member State, Germany, assume an outlier position. Within the sample of German academics, economists are particularly strongly opposed to all moves in the direction of fiscal or social union. As economists are those academic experts most likely to influence the economic policy beliefs dominant among the German policy elite, these results are highly politically salient. We confront these findings with the literature on the exceptionalism of German economics. We contend that our results substantiate the claim that inadequate EMU reform and, more generally, the EU approach to the Eurozone crisis, can be partially explained by the firm grip these economic doctrines hold over the economics profession and policy-making circles in Germany.