The Legacy of Austerity in the Eurozone. CEPS Commentary, 4 October 2013

The recent slight improvement in the GDP growth rates in the eurozone has led European policy-makers to proclaim victory and assert that the austerity programmes imposed within the eurozone are paying off. But is this really the case? In this Commentary Paul De Grauwe and Yuemei Ji argue that the improvement in the eurozone business cycle is the result of the ECB’s announcement of its Outright Monetary Transaction (OMT) programme, and that austerity has left a legacy of unsustainable debt that will test the political resilience of the debtor countries.

Proposal for a Stabilisation Fund for the EMU. CEPS Working Document No. 385, 14 October 2013

This paper argues that it should be possible to complement Europe’s Economic and Monetary Union with an insurance-type shock absorption mechanism to increase the resilience of member countries to economic shocks and reduce output volatility. Such a mechanism would neither require the establishment of a central authority, nor would it lead to permanent transfers between countries. For this mechanism to become a reality, however, it would be necessary to overcome certain technical problems linked to the difficulty of anticipating correctly the position of an economy in the business cycle.

Modularisation épistatique des loci à trait quantitatif associés à la pression artérielle et identification de gènes candidats pour l’hypertension

Problématique: L’hypertension artérielle essentielle, facteur de risque majeur dans le développement des maladies cardiovasculaires, est un trait multigénique complexe dont les connaissances sur le déterminisme génétique nécessitent d’être approfondies. De nombreux loci à trait quantitatif (QTLs); soit des gènes responsables de faire varier la pression artérielle (PA), ont été identifiés chez l’humain et le modèle animal. Cependant, le mystère plane encore sur la façon dont ces gènes fonctionnent ensemble pour réguler la PA. Hypothèse et objectif: Plutôt qu’une addition de QTLs ayant chacun une action infinitésimale sur la PA, une interaction épistatique entre les gènes serait responsable du phénotype hypertendu. Ainsi, l’étude de cette épistasie entre les gènes impliqués, directement ou indirectement, dans l’homéostasie de la PA nous permettrait d’explorer de nouvelles voies de régulation moléculaire en cause dans cette maladie. Méthodes: Via la réalisation de souches congéniques de rats, où un segment chromosomique provenant d’une souche receveuse hypertendue (Dahl Salt Sensitive, SS/Jr) est remplacé par son homologue provenant d’une souche donneuse normotendue (Lewis, LEW), des QTLs peuvent être mis en évidence. Dans ce contexte, la combinaison de QTLs via la création de doubles ou multiples congéniques constitue la première démonstration fonctionnelle des interactions intergéniques. Résultats: Vingt-sept combinaisons au total nous ont menés à l’appréciation d’une modularisation des QTLs. Ces derniers ont été catégorisés selon deux principaux modules épistatiques (EMs) où les QTLs appartenant à un même EM sont épistatiques entre eux et participent à une même voie régulatrice. Les EMs/cascades agissent alors en parallèle pour réguler la PA. Grâce à l’existence de QTLs ayant des effets opposés sur la PA, nous avons pu établir l’ordre hiérarchique entre trois paires de QTLs. Cependant, lorsque cette suite régulatrice ne peut être déterminée, d’autres approches sont nécessaires. Nos travaux nous ont mené à l’identification d’un QTL situé sur le chromosome 16 du rat (C16QTL), appartenant au EM1 et qui révélerait une nouvelle voie de l’homéostasie de la PA. Le gène retinoblastoma-associated protein 140 (Rap140)/family with sequence similarity 208 member A (Fam208a), présentant une mutation non synonyme entre SS/Jr et LEW est le gène candidat le plus plausible pour représenter C16QTL. Celui-ci code pour un facteur de transcription et semblerait influencer l’expression de Solute carrier family 7 (cationic amino acid transporter, y+ system) member 12 (Slc7a12), spécifiquement et significativement sous exprimé dans les reins de la souche congénique portant C16QTL par rapport à la souche SS/Jr. Rap140/Fam208a agirait comme un inhibiteur de la transcription de Slc7a12 menant à une diminution de la pression chez Lewis. Conclusions: L’architecture complexe de la régulation de la PA se dévoile mettant en scène de nouveaux acteurs, pour la plupart inconnus pour leur implication dans la PA. L’étude de la nouvelle voie de signalisation Rap140/Fam208a - Slc7a12 nous permettra d’approfondir nos connaissances quant à l’homéostasie de la pression artérielle et de l’hypertension chez SS/Jr. À long terme, de nouveaux traitements anti-hypertenseurs, ciblant plus d’une voie de régulation à la fois, pourraient voir le jour.

Strong governments, weak banks. CEPS Policy Brief No. 305, 25 November 2013

Banks in the northern eurozone have capital ratios that are, on average, less than half of the capital ratios of banks in the eurozone’s periphery. The authors explain this by the fact that northern eurozone banks profit from the financial solidity of their governments and follow business strategies aimed at issuing too much subsidised debt. In doing so, they weaken their balance sheets and become more fragile – less able to withstand future shocks. Paradoxically, financially strong governments breed fragile banks. The opposite occurs in countries with financially weak governments. In these countries banks are forced to strengthen themselves because they are unable to rely on their governments. As a result they have significantly more capital and reserves than banks in the northern eurozone. Recommendations More than in the south, the governments of northern Europe should stand up and force the banks to issue more equity. This should go much further than what is foreseen in the Basel III accord. If the experience of the southern eurozone countries is any guide, banks in the north of the eurozone should at least double the capital and the reserves as a percentage of their balance sheets. Failure to do so risks destroying the financial solidity of the northern European governments when, in the future, negative shocks force these governments to come to the rescue of their undercapitalised banks. The new responsibilities entrusted to the European Central Bank as the single supervisor in the eurozone create a unique opportunity for that institution to change the regulatory and supervisory culture in the eurozone – one that has allowed the large banks to continue living dangerously, with insufficient capital.

European banking disunion. CEPS Commentary, 14 November 2013

In this CEPS Commentary Daniel Gros argues that the purpose of the euro was to create fully integrated financial markets; but, since the start of the financial crisis in 2008, markets have increasingly separated along national lines. So the future of the eurozone depends crucially on whether that trend continues or is reversed and Europe’s financial markets in the end become fully integrated. But either outcome would be preferable to something in between – neither fish nor fowl. Unfortunately, that is where the eurozone appears to be headed.

Lisbon Fado: The European Union under Reform

From the Introduction. To address the uncertainties surrounding the Treaty of Lisbon, this book examines several issues from various angles. Regardless of the results of the second referendum in Ireland and the pending ratifications in Poland, the Czech Republic and Germany, the European Union (EU) will not be the same after the Lisbon Treaty. If it comes into effect, Europeans will enter into a new stage in the deepening of the integration process; if it is rejected, the first decade of the 21st Century will represent a period of institutional stagnation in Europe’s integration. Nonetheless, the chapters in this book share the consensus that, despite its limitations, the Lisbon Treaty will make the EU decision making process more efficient, enhance regional democracy and strengthen its international voice.

Quelles solidarités pour surmonter la crise de la zone Euro? = What solidarity to overcome the crisis in the Euro zone? Egmont European Affairs Paper, April 2013

None.

The fragility of two monetary regimes: The European Monetary System and the Eurozone. National Bank of Belgium Working Paper No. 243, October 2013

The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium.

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.

The Sovereign Debt Crisis: Placing a curb on growth (updated edition). CEPS Paperbacks. September 2013

This book provides an update to the major 2012 study by the same authors on the dual role of the public sector as the provider of the ultimate riskless asset and, at the same time, the source of a potential major systemic risk. In this second edition, Brender and his colleagues concentrate again on the tension between the need for the public sector to sustain demand in the face of a deleveraging private sector and the longer-term challenges of sustainability for fiscal policy in the major developed economies of the US, Japan and the euro area. In short, their principal thesis is that sovereign debt is in crisis. This crisis is apparent in the euro area, but it is also real, if at present only latent, in the US and Japan. The book shows how this process has evolved in these three big developed economies – and how their policy choices impact on global financial markets.

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. |

The Great Transformation: Memo to the Incoming EU Presidents. Bruegel Policy Brief 2014/04, July 2014

The European Union’s leadership spent the last five years fighting an acute and existential crisis. The next five years, under your leadership, will be no less difficult. You will have to tackle difficult economic and institutional questions while being alert to the possibility of a new crisis. You face three central challenges: (1) The feeble economic situation prevents job creation and hobbles attempts to reduce public and private debt; (2) EU institutions and the EU budget need reform and you will have to deal with pressing external matters, including neighbourhood policy and the EU’s position in the world; (3) You will have to prepare and face up to the need for treaty change to put monetary union on a more stable footing, to review the EU’s competences and to re-adjust the relationship between the euro area and the EU, and the United Kingdom in particular.

Europe between financial repression and regulatory capture. Bruegel Working Paper 2014/08, July 2014

From the Introduction. In the long shadow of the euro-area crisis, the relationship between governments and their banks has been brought to the the centre of the policy debate in Europe by the implementation of regulatory reforms, the risks associated with financial fragmentation, and the fight to sustain the flow of credit to governments and corporates. The attempt to interpret the patterns of pressure and influence running between governments and their financial system has led commentators to rediscover and give new life to concepts originating from academic debates of the 1970s such as “regulatory capture” and “financial repression”. Government agencies have been frequently described as being at the mercy of the financial sector, often allowing financial interests to hijack political, regulatory and supervisory processes in order to favouring their own private interests over the public good1. An opposite view has instead pointed the finger at governments, which have often been portrayed as subverting markets and abusing the financial system to their benefit, either in order to secure better financing conditions to overcome their own financial difficulties, or with the objective of directing credit to certain sectors of the economy, “repressing” the free functioning of financial markets and potentially the private interests of some of its participants2

ECB Policy and Eurozone Fragility: Was De Grauwe Right? CEPS Working Document No. 397, June 2014

Paul De Grauwe’s fragility hypothesis states that member countries of a monetary union such as the eurozone are highly vulnerable to a self-fulfilling mechanism by which the efforts of investors to avoid losses from default can end up triggering the very default they fear. The authors test this hypothesis by applying an eclectic methodology to a time window around Mario Draghi’s “whatever it takes” (to keep the eurozone on firm footing) pledge on 26 July 2012. This pledge was soon followed by the announcement of the Outright Monetary Transactions (OMT) programme (the prospective and conditional purchase by the European Central Bank of sovereign bonds of eurozone countries having difficulty issuing debt). The principal components of eurozone credit default swap spreads validate this choice of time frame. An event study reveals significant pre announcement contagion emanating from Spain to Italy, Belgium, France and Austria. Furthermore, time-series regression confirms frequent clusters of large shocks affecting the credit default swap spreads of the four eurozone countries but solely during the pre-announcement period. The findings of this report support the fragility hypothesis for the eurozone and endorse the Outright Monetary Transactions programme.

Policy recommendations for the new European Commission: priorities for stabilising EMU. EPC Discussion Paper, 30 September 2014

The euro area crisis exposed substantial structural flaws in the currency area’s architecture. Addressing these flaws this discussion paper explores the ways in which the European Institutions can re-evaluate and overcome challenges for a more positive European future. To do this, Janis A. Emmanouilidis, Jan David Schneider, and Fabian Zuleeg recommend that the coming European Commission should develop a new framework to assess the real returns to growth of public and social investment, which could open the path for more flexibility on deficits in future. In close coordination with the European Parliament, the Commission should also review the Country Specific Recommendations with a stronger focus on a smaller number of key priorities for each country. The construction of a fiscal capacity should be made a priority in the new political cycle to resolve the absence of a mechanism to provide effective ex ante fiscal risk sharing in the Eurozone. Furthermore, to boost growth, there is a need to encourage private, public and social investment through a European Investment Programme (EIP) in the short term. Finally, the Commission should ensure that the implementation of an EIP is compatible with the long term goals of a fiscal capacity.