Poor Greeks or lazy Greeks? CEPS Commentary, 13 July 2015

Drawing on a wide array of statistical indicators reflecting economic activity, states of poverty, structural reform and governance in Greece, this Commentary by Ilaria Maselli provides substance to a debate that has become highly inflammatory and superficial in the latest episodes.

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.

Addressing the immediate needs of the Greek banks. CEPS Commentary, 31 July 2015

Based on a detailed calculation of the recapitalisation requirements of the Greek banks, we find that the sector needs an infusion of capital, but that the level largely depends on the stringency of the capital requirements applied. An expedient quick fix to comply with the minimum capital requirements could be achieved by a bail-in of existing creditors under the EU Bank Recovery and Resolution Directive of around €5 billion, leaving only €6 billion needed for re-capitalisation. If the ‘Cypriot’ standard is applied, however, the required re-capitalisation would be €15 billion. A ‘generous’ approach, which takes into account the phasing in of the new more-stringent capital requirements until 2018, would imply a re-capitalisation of €29 billion (or more bailing-in of creditors). The re-capitalisation should be undertaken preferably by the EIB, the EBRD or the new Greek investment fund, rather than via loans from the ESM to the Greek government.

spotlight europe #2015/03 — August 2015: Money or Democracy? Greece and the Euro Dilemma

The negotiations on the third bailout package for Greece are still going on, but the euro area has already paid a high price for it. The compromise on which it is based is clearly very controversial. Some of its critics believe that it does not make sense in economic terms, whereas others point out that it may have an adverse political effect. But what in fact is Greece actually supposed to be doing, and what does all this mean with regard to sovereignty and democracy?

Why Greece declined a euro holiday. CEPS Commentary, 6 August 2015

In a new CEPS Commentary, Daniel Gros speculates on why the Greek government suddenly turned an about-face on July 13th and conceded to terms that not only controverted its own promises, but also closely resembled those that voters had overwhelmingly rejected in a popular referendum barely a week earlier?

The grand divergence: global and European current account surpluses. Bruegel Working Paper 2015/08, 13 August 2015

Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses.

Greece’s poor growth prospects. CEPS Commentary, 21 August 2015

Four years ago – almost to the day – when the question of Greece’s debt sustainability was being intensely debated, these same authors argued that Greece would face strong headwinds in its effort to ‘grow solvent’. With the third rescue package dealing with the immediate liquidity issues in the works, and concerns being voiced by the IMF as well as other actors, they find in this CEPS Commentary that the issue is once again pertinent.

The globalization of angel investments. Bruegel Working Paper 2015/09, 1 September 2015

The last decade has seen a rapid expansion and deepening of the types of vehicles that fund start-up firms in the U.S. and worldwide. In particular, we have seen a growing role of angel groups and other more “individualistic” funding options for start-ups, such as super angels or crowd sourcing platforms. Authors seek to understand the nature and consequences of angel investments across a variety of geographies with varying levels of venture capital markets and other forms of risk capital. They ask whether angel investors improve the outcomes and performance of the start-ups they invest in. Furthermore we want to understand whether and how the types of firms that seek angel funding vary with the overall entrepreneurial ecosystem in a country. Authors examine the records of 13 angel investment groups based in 12 nations and with applicants for financing transactions from 21 nations, examining both the applicants that were considered and rejected and those that were funded. Key findings from the analysis are two-fold. First, angel investors have a positive impact on the growth of the firms they fund, their performance, and survival. Second, they find that the selection of firms that apply for angel funding is different across countries.

Banks and the political economy of the sovereign debt crisis in Italy and Spain. CES Papers - Open Forum #18, 2013-2014

This paper sets out to explain why Spain experienced a full-fledged sovereign debt crisis and had to resort to euroarea financial assistance for its banks, whereas Italy did not. It undertakes a structured comparison, dissecting the sovereign debt crisis into a banking crisis and a balance of payments crisis. It argues that the distinctive features of bank business models and of national banking systems in Italy and Spain have considerable analytical leverage in explaining the different scenarios of the crises in each country. This ‘bank-based’ analysis contributes to the flourishing literature that examines changes in banking with a view to account for the differentiated impact of the global banking crisis first and the sovereign debt crisis in the euroarea later.

Financial regulation in the European Union: A research agenda. CES Papers - Open Forum #10, 2012

Over the past two decades, the European Union (EU) has become a central actor in financial regulation and developed complex institutions to fulfill its roles. Pre-financial crisis scholarship has provided key insights into the functioning of this institutional cobweb and its evolution over time. However, the financial crisis has highlighted four facets of EU financial regulation (EUFR) that deserve more scholarly attention than they have received so far: (1) the permissive pre-crisis consensus on the merits of financial liberalization and integration, (2) the embeddedness of financial regulation in the political economy of EU integration at large, (3) preference formation of public and private stakeholders in EUFR, and (4) the global economic and regulatory context of EUFR. This paper presents the key scholarly challenges across these four areas. Addressing them promises not only academic insights but also promotes the relevance of EUFR research for real-world policy dilemmas.

Saving the Banks: The Political Economy of Bailouts. CES Papers - Open Forum #8, 2012

How much leeway did governments have in designing bank bailouts and deciding on the height of intervention during the 2007-2009 financial crisis? This paper analyzes comparatively what explains government responses to banking crises. Why does the type of intervention during financial crises vary to such a great extent across countries? By analyzing the variety of bailouts in Europe and North America, we will show that the strategies governments use to cope with the instability of financial markets does not depend on economic conditions alone. Rather, they take root in the institutional and political setting of each country and vary in particular according to the different types of business-government relations banks were able to entertain with public decision-makers. Still, “crony capitalism” accounts overstate the role of bank lobbying. With four case studies of the Irish, Danish, British and French bank bailout, we show that countries with close one-on-one relationships between policy-makers and bank management tended to develop unbalanced bailout packages, while countries where banks have strong interbank ties and collective negotiation capacity were able to develop solutions with a greater burden sharing from private institutions.

Flashlight Europe N°3–April 2015. Greece – What else?

The first hundred days in office have become a benchmark for every new government. Early in May, the Tsipras coalition government will reach this date. Given the difficult financial, economic and social situation in Greece, there was no such thing as a closed season for Alexis Tsipras from day one on, and he himself could not have expected one. After all, his new government acceded office with a political agenda demanding nothing less than an end to austerity and the submission to a reform programme seen as unduly imposed on Greece by its creditors, the EU and the IMF.

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.

The Drivers of Current Account Surplus in Germany and the Politics of Rebalancing in the Eurozone. EU Centre, Singapore Working Paper No. 24, April 2015

Current account deficits have caught the public’s attention as they have contributed to the European debt crisis. However, surpluses also constitute an issue as a deficit in any country must be financed through a surplus in another country. In 2013, Germany, now the world’s largest surplus economy, registered a record high US$273 billion surplus. This paper looks at what accounts for Germany’s surplus, revealing that the major driving factors include strong global demand for quality German exports, domestic wage restraint, an undervalued single currency, high domestic savings rate and interest rate convergence in the euro area. This paper echoes the US Treasury’s view that a persistent German surplus makes it harder for the eurozone as a whole and the southern peripheral economies in particular to recover from the current financial crisis by imposing a Europe-wide “deflationary bias” through pushing up the exchange rate of the euro, exporting feeble German inflation and projecting its ultra-tight macroeconomic policies onto crisis economies. This paper contends that Germany’s trade surplus is likely to endure as Germany and other eurozone countries uphold diverging views on the nature of the surplus engage in a blame-game amidst a sluggish rebalancing process. Prizing the surplus as a reflection of hard work and economic competitiveness, German authorities urge their southern eurozone colleagues to undertake bold structural reforms to correct the imbalance, while the hand-tied governments in crisis-stricken economies call on Germany to do its “homework” by boosting German demands for European goods and services.

Cameron’s ‘renegotiations’ (or Russian roulette) with the EU: An interim assessment. CEPS Working Document No. 413/September 2015

Since the May 2015 general election when the Tory Party gained an absolute majority in the House of Commons, Prime Minister Cameron has put his campaign into high gear to get a ‘new settlement’ with the EU and invested much personal diplomacy to try to advance his objective. “What does he really want?” is still heard from other EU leaders, yet his agenda is taking rough shape with calls for results under four headings: “competitiveness, sovereignty, social security and economic governance”. These are only code words, however, for a mixed bag of more specific desiderata, which overall seem to be moderate. Impossible demands have been quietly dropped. Some items will still be tricky to negotiate while others can be placed on the agenda for ongoing EU ‘reform’ that can be widely supported. The Brussels side of the affair thus seems manageable, but the wild cards at home in the UK remain or are becoming even wilder. The standard hazards of the referendum instrument are now exacerbated by the unknown quantity of the new Labour leadership alongside the aggressively Eurosceptic majority of Tory MPs and the great migration crisis, which is translating now into a negative factor for the EU in UK opinion polls. This ostensibly very democratic process is looking more and more like a deadly serious game of Russian roulette.