Disappearing government bond spreads in the eurozone - Back to normal? CEPS Working Document No. 396, May 2014

Since the announcement of the Outright Monetary Transactions (OMT) programme by Mario Draghi, President of the ECB, in 2012, the government bond spreads began a strong decline. This paper finds that most of this decline is due to the positive market sentiments that the OMT programme has triggered and is not related to underlying fundamentals, such as the debt-to-GDP ratios or the external debt position that have continued to increase in most countries. The authors even argue that the market’s euphoria may have gone too far in taking into account the same market fundamentals. They conclude with some thoughts about the future governance of the OMT programme.

Self-Fulfilling Crises in the Eurozone: An Empirical Test. CEPS Working Document No. 366, 22 June 2012

This paper tests the hypothesis that government bond markets in the eurozone are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We find evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios and fiscal space variables, and was the result of negative self-fulfilling market sentiments that became very strong since the end of 2010. We argue that this can drive member countries of the eurozone into bad equilibria. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt-to-GDP ratios and fiscal space variables were equally high and increasing in these countries.

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.

Population Scenarios and Policy Implications for Southern Mediterranean Countries, 2010-2050. MEDPRO Policy Paper No. 5, March 2013

Four population scenarios were derived that describe indicators of demographic behaviour for people living in different future political-economic contexts. This policy paper explores future trends in i) population growth at regional and national levels, ii) working age populations, in view of demographic dividend potential, and iii) elderly populations, in view of the financial burden they place on economies. Results show that different scenarios do not have large effects on population growth, at least up to 2030. This is due to the in-built ‘population momentum’ effect in the relatively young age-structures of most southern and eastern Mediterranean countries (SEMCs). In the short term, up to 2030, and depending on which economic-political scenario unfolds, SEMCs are expected to grow from 280 million people to a figure of between 362 and 349 million people. Thus, in a period of about 20 years SEMCs are expected to grow by between 69 and 83 million people. In the same period, EU27 populations will grow by 21 million; only from about 500 to 521 million people. Between 2030 and 2050, additional population growth is foreseen in SEMCs, between 48 and 62 million people, while EU27 populations are expected to grow by 4 million only. SEMCs vary widely regarding demographic transition profiles so that demographic dividend potentials also vary. Old-age dependency ratios – the share of elderly people in relation to the working age population – are still low compared to EU27 ratios, but will increase after 2035. Should SEMCs’ economies remain politically, economically and environmentally precarious in the coming decades, their relatively low dependency ratios may impose an even higher social and financial burden on economies than the EU countries’ high dependency ratios impose on their economies.

The growing intergenerational divide in Europe. Bruegel Policy Contribution Issue 2015/17, November 2015

During the economic and financial crisis, the divide between young and old in the European Union increased in terms of economic well-being and allocation of resources by governments. As youth unemployment and youth poverty rates increased, government spending shifted away from education, families and children towards pensioners. To address the sustainability of pension systems, some countries implemented pension reforms. We analysed changes to benefit ratios, meaning the ratio of the income of pensioners to the income of the active working population, and found that reforms often favoured current over future pensioners, increasing the intergenerational divide. We recommend reforms in three areas to address the intergenerational divide: improving European macroeconomic management, restoring fairness in government spending so the young are not disadvantaged, and pension reforms that share the burden fairly between generations.