Exceeding expectations, Lithuania moves the Trio presidency forward. CEPS Commentary, 22 January 2014

Lithuania assumed its maiden term running the rotating Presidency of the Council in the 2nd half of 2013 under difficult constraints: the country’s modest administrative capacities and the enormous time pressures brought on by the urgency of certain dossiers and the abbreviated term of the current Parliament, which ends in mid-April. Nevertheless, as assessed by Sonia Piedrafita and Vilde Renman in this new CEPS Commentary, substantial progress was made thanks to the perseverance and strenuous efforts by the Lithuanians. In the end, some 137 legal acts were adopted during its six-month term, including several highly sensitive and complex pieces of legislation. The overall success was only slightly marred by the haste with which a few agreements were negotiated.

Cross-country insurance mechanisms in currency unions. Bruegel Working Paper 2014/04, 27 March 2014

Countries in a monetary union can adjust to shocks either through internal or external mechanisms. We quantitatively assess for the European Union a number of relevant mechanisms suggested by Mundell’s optimal currency area theory, and compare them to the United States. For this purpose, we update a number of empirical analyses in the economic literature that identify (1) the size of asymmetries across countries and (2) the magnitude of insurance mechanisms relative to similar mechanisms and compare results for the European Monetary Union (EMU) with those obtained for the US. To study the level of synchronization between EMU countries we follow Alesina et al. (2002) and Barro and Tenreyro (2007). To measure the effect of an employment shock on employment levels, unemployment rates and participation rates we perform an analysis based on Blanchard and Katz (1992) and Decressin and Fatas (1995). We measure consumption smoothing through capital markets, fiscal transfers and savings, using the approach by Asdrubali et al. (1996) and Afonso and Furceri (2007). To analyze risk sharing through a common safety net for banks we perform a rudimentary simulation analysis. |

Labour Market Reforms and Current Account Imbalances: Beggar-thy-neighbour policies in a currency union? CEPS Working Document No. 399/September 2014

Member countries of the Economic and Monetary Union (EMU) initiated wide-ranging labour market reforms in the last decade. This process is ongoing as countries that are faced with serious labour market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbour policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyse the impact of labour market reforms on the transmission of macroeconomic shocks in both non-reforming and reforming countries. By analysing the impact of reforms on foreign debt, we contribute to the debate on whether labour market reforms increase or reduce current account imbalances.