Financial services and the Transatlantic Trade and Investment Partnership. CEPS Policy Brief No. 302, 20 November 2013

Given the size of the financial markets on both sides of the Atlantic and the symmetry in the follow-up of the G-20 standards, Karel Lannoo argues in this Policy Brief that the Transatlantic Trade and Investment Partnership (TTIP) provides a good opportunity to put in place a more institutionalised framework. He finds that both blocs have reacted in similar ways to the financial crisis in strengthening their regulatory and supervisory frameworks and incorporating the G-20 recommendations into federal law. He also notes that consumer protection has been reinforced, certainly in the US, with the creation of the Consumer Financial Protection Bureau. And on the EU side, the Single Supervisory Mechanism (SSM) will radically change banking supervision. In his view, inclusion of financial services could also be an opportunity to strengthen prudential rules and consumer protection provisions on both sides. Rather than leading to a reduction of consumer protection, as had been feared in the post-crisis environment, it could lead to an examination, exchange and recognition of best practices in regulation and enforcement. Finally, he concludes that inclusion of financial services would make it part of the permanent regulatory dialogue that will be established as a result of a successful TTIP.

The Judicial Dimension of the European Neighbourhood Policy. EU Diplomacy Paper 08/2013, November 2013

In this paper, the expression “neighbourhood policy” of the European Union (EU) is understood in a broad way which includes the members of the European Free Trade Association (EFTA) contracting parties to the European Economic Area (EEA), the EFTA State Switzerland, candidate states, the countries of the European Neighbour-hood Policy (ENP), and Russia. The European Court of Justice (ECJ) is the centre of gravity in the judicial dimension of this policy. The innermost circle of integration after the EU itself comprises the EFTA States who are party to the European Economic Area. With the EFTA Court, they have their own common court. The existence of two courts – the ECJ and the EFTA Court – raises the question of homogeneity of the case law. The EEA homogeneity rules resemble the ones of the Lugano Convention. The EFTA Court is basically obliged to follow or take into account relevant ECJ case law. But even if the ECJ has gone first, there may be constellations where the EFTA Court comes to the conclusion that it must go its own way. Such constellations may be given if there is new scientific evidence, if the ECJ has left certain questions open, where there is relevant case law of the European Court of Human Rights or where, in light of the specific circumstances of the case, there is room for “creative homogeneity”. However, in the majority of its cases the EFTA Court is faced with novel legal questions. In such cases, the ECJ, its Advocates General and the Court of First Instance make reference to the EFTA Court’s case law. The question may be posed whether the EEA could serve as a model for other regional associations. For the ENP states, candidate States and Russia this is hard to imagine. Their courts will to varying degrees look to the ECJ when giving interpretation to the relevant agreements. The Swiss Government is – at least for the time being – unwilling to make a second attempt to join the EEA. The European Commission has therefore proposed to the Swiss to dock their sectoral agreements with the EU to the institutions of the EFTA pillar, the EFTA Surveillance Authority (ESA) and the EFTA Court. Switzerland would then negotiate the right to nominate a member of the ESA College and of the EFTA Court. The Swiss Government has, however, opted for another model. Swiss courts would continue to look to the ECJ, as they did in the past, and conflicts should also in the future be resolved by diplomatic means. But the ECJ would play a decisive role in dispute settlement. It would, upon unilateral request of one side, give an “authoritative” interpretation of EU law as incorporated into the relevant bilateral agreement. In a “Non-Paper” which was drafted by the chief negotiators, the interpretations of the ECJ are even characterised as binding. The decision-making power would, however, remain with the Joint Committees where Switzerland could say no. The Swiss Government assumes that after a negative decision by the ECJ it would be able to negotiate a compromise solution with the Commission without the ECJ being able to express itself on the outcome. The Government has therefore not tried to emphasise that the ECJ would not be a foreign court. Whether the ECJ would accept its intended role, is an open question. And if it would, the Swiss Government would have to explain to its voters that Switzerland retains the freedom to disregard such a binding decision and that for this reason the ECJ is not only no foreign court, but no adjudicating court at all.

Next steps toward a final deal with Iran. CEPS Policy Brief No. 316, 14 February 2014

On January 20th, the International Atomic Energy Agency confirmed that Iran had been implementing its commitments as part of the Joint Plan of Action (JPA) agreed with the so-called ‘E3+3’ in Geneva (also known as P5+1) on 24 November 2013. The forging of this interim deal, the successful start to its implementation and the temporary sanctions relief represent resounding success for international diplomacy but they should not be allowed to conceal the underlying issues. Reaching agreement on the JPA was achieved at the cost of clarity over what is to follow and it was decided to eschew a structured agreement in favour of a two-step process. The stated aim of the negotiating parties remains that of starting the implementation of a comprehensive solution by November 2014. If agreement is not reached on a comprehensive solution by the expiry of the JPA by July 20th, the action plan can be renewed by mutual consent. The latter might well be the likeliest outcome of the forthcoming negotiations. Apart from the large gap between the E3+3 and Iranian positions on the substance of a final deal, several domestic policy constraints will likely define the parameters of what is achievable in the future. This CEPS Policy Brief argues that the best hope for success lies in continued engagement and consistent incremental progress in the negotiations, with structured concessions on both sides. This should occur, however, not in a two- but a three-step framework based on lengthening Iran’s ‘breakout’ period while re-engaging with the country both politically and economically. The EU is in a unique position to lead this process. Having greater flexibility than either the US or Iran, its main tasks will be that of maintaining the negotiating momentum and broadening dialogue with Iran.

Europe's social problem and its implications for economic growth. Bruegel Policy Brief 2014/03, 1 April 2014

The European Union faces major social problems. More than six million jobs were lost from 2008-13 and poverty has increased. Fiscal consolidation has generally attempted to spare social protection from spending cuts, but the distribution of adjustment costs between the young and old has been uneven; a growing generational divide is evident, disadvantaging the young. The efficiency of the social security systems of EU countries varies widely. Countries with greater inequality tended to have higher household borrowing prior to the crisis resulting in more subdued consumption growth during the crisis. The resulting high private debt, high unemployment, poverty and more limited access to education undermine long-term growth and social and political stability. Policymakers face three main challenges. First, addressing unemployment and poverty should remain a high priority not only for its own sake, but because these problems undermine public debt sustainability and growth. Second, bold policies in various areas are required. Most labour, social and fiscal policies are the responsibility of member states, requiring national reforms. But better coordination of demand management at European level is also necessary in order to create jobs. Third, tax/benefit systems should be reviewed for improved efficiency, inter- generational equity and fair burden sharing between the wealthy and poor.

The European Parliament’s New Role in Trade Policy: Turning power into impact. CEPS Special Report No. 89, 21 May 2014

The power of the European Parliament in EU trade policy has increased significantly with the Lisbon Treaty. Even though it had already acquired a greater informal role, the codification of its involvement enables the EP to have a stronger say in trade policy. Against the background of increased legal competences granted by the Treaty of Lisbon to the European Parliament in EU trade policy, this Policy Brief addresses two important questions. The first concerns the extent to which the EP’s power in trade policy has increased: Has the EP effectively played a bigger role since the end of 2009? The second relates to the substance of the EP’s trade policy preferences: Does the EP attempt to push EU trade relations into a more or less normative and/or protectionist direction? Its main argument is that the Lisbon Treaty not only heralds a major leap forward in legal terms, but that the current EP legislature has also managed to increase its political clout in trade policy-making. Nevertheless, a major challenge for the new EP legislature 2014-2019 will be to turn this into effective influence.

Asset-backed securities: The key to unlocking Europe's credit markets? Bruegel Policy Contribution 2014/07, 24 July 2014

The European market for asset-backed securities (ABS) has all but closed for business since the start of the economic and financial crisis. ABS (see Box 1) were in fact the first financial assets hit at the onset of the crisis in 2008. The subprime mortgage meltdown caused a deterioration in the quality of collateral in the ABS market in the United States, which in turn dried up overall liquidity because ABS AAA notes were popular collateral for inter-bank lending. The lack of demand for these products, together with the Great Recession in 2009, had a considerable negative impact on the European ABS market. The post-crisis regulatory environment has further undermined the market. The practice of slicing and dicing of loans into ABS packages was blamed for starting and spreading the crisis through the global financial system. Regulation in the post-crisis context has thus been relatively unfavourable to these types of instruments, with heightened capital requirements now necessary for the issuance of new ABS products. And yet policymakers have recently underlined the need to revitalise the ABS market as a tool to improve credit market conditions in the euro area and to enhance transmission of monetary policy. In particular, the European Central Bank and the Bank of England have jointly emphasised that: “a market for prudently designed ABS has the potential to improve the efficiency of resource allocation in the economy and to allow for better risk sharing... by transforming relatively illiquid assets into more liquid securities. These can then be sold to investors thereby allowing originators to obtain funding and, potentially, transfer part of the underlying risk, while investors in such securities can diversify their portfolios... . This can lead to lower costs of capital, higher economic growth and a broader distribution of risk” (ECB and Bank of England, 2014a). In addition, consideration has started to be given to the extent to which ABS products could become the target of explicit monetary policy operations, a line of action proposed by Claeys et al (2014). The ECB has officially announced the start of preparatory work related to possible outright purchases of selected ABS1. In this paper we discuss how a revamped market for corporate loans securitised via ABS products, and how use of ABS as a monetary policy instrument, can indeed play a role in revitalising Europe’s credit market. However, before using this instrument a number of issues should be addressed: First, the European ABS market has significantly contracted since the crisis. Hence it needs to be revamped through appropriate regulation if securitisation is to play a role in improving the efficiency of resource allocation in the economy. Second, even assuming that this market can expand again, the European ABS market is heterogeneous: lending criteria are different in different countries and banking institutions and the rating methodologies to assess the quality of the borrowers have to take these differences into account. One further element of differentiation is default law, which is specific to national jurisdictions in the euro area. Therefore, the pool of loans will not only be different in terms of the macro risks related to each country of origination (which is a ‘positive’ idiosyncratic risk, because it enables a portfolio manager to differentiate), but also in terms of the normative side, in case of default. The latter introduces uncertainties and inefficiencies in the ABS market that could create arbitrage opportunities. It is also unclear to what extent a direct purchase of these securities by the ECB might have an impact on the credit market. This will depend on, for example, the type of securities targeted in terms of the underlying assets that would be considered as eligible for inclusion (such as loans to small and medium-sized companies, car loans, leases, residential and commercial mortgages). The timing of a possible move by the ECB is also an issue; immediate action would take place in the context of relatively limited market volumes, while if the ECB waits, it might have access to a larger market, provided steps are taken in the next few months to revamp the market. We start by discussing the first of these issues – the size of the EU ABS market. We estimate how much this market could be worth if some specific measures are implemented. We then discuss the different options available to the ECB should they decide to intervene in the EU ABS market. We include a preliminary list of regulatory steps that could be taken to homogenise asset-backed securities in the euro area. We conclude with our recommended course of action.

Historic turning point or just another chapter? The results of a foreign-policy summit. EPC Post-Summit Analysis, 24 March 2014

The March 2014 European Council could enter the history books as a turning point, not only in the EU’s relations with Russia but also in its role as a foreign policy actor. Events in Ukraine inevitably dominated the Summit, with EU leaders adopting a balanced approach aimed at achieving three key objectives – de-escalation, containment/deterrence and cooperation – based on political and economic support for Ukraine, increased but limited pressure on Russia, and moves to strengthen ties with other EU neighbours. The Summit also discussed a range of economic and environmental policy issues, with the situation in Ukraine casting a long shadow over the discussion on energy policy, but failed to reach agreement on the EU’s climate goals to 2030, or to put more flesh on the bones of calls for a European “industrial renaissance”. However, two other developments were particularly significant: the creation of the second pillar of the future banking union, establishing a single regime for winding down failing banks; and changes to the savings tax directive, bringing years of negotiation to an end.

Priorities for the Juncker Commission: Policy recommendations and advice from the research team at CEPS. CEPS Special Report No. 92, 22 October 2014

In the months leading up to his nomination as President of the European Commission by the European Council in June 2014 through to his approval by the European Parliament in mid-July and finally his approval at a second special summit in August, CEPS’ researchers have closely followed the travails of Jean-Claude Juncker. We have also carefully studied his fundamental restructuring of the College in re-grouping commissioners around seven project teams, each headed by a vice-president. In our view, these changes promise to improve internal coordination, policy-making and transparency of rule-making and hopefully will reduce the personalisation of portfolios. This Special Report brings together under a single cover a series of 14 separate commentaries prepared by senior CEPS researchers, offering their assessment of these profound changes underway and their policy advice to the new commissioners from the perspective of their field of specialisation.

Discretion and Accountability: The ESMA Judgment and the Meroni Doctrine. Bruges European Economic Research (BEER) Papers 30/2014

This paper assesses the effectiveness of the Meroni doctrine in the light of the recent judgment in the ESMA case. The first part explains in detail the problem of delegation of powers in the EU from the perspective of the principal-agent theory and complements it with the analysis of the trade-off between different levels of independence and accountability of agencies. A simple economic model is developed to illustrated the relationship between the independence and accountability of an agency. It shows that it is the accountability mechanism that induces the agent to act, rather than the extent of his independence. The paper also explains the inter-temporal interactions between the principal and the agent on the basis of the incentives in place for the different players. The second part is devoted to analysis of the functioning of ESMA in the context of its delegated powers. After the presentation of main aspects of the regulatory framework establishing ESMA, the paper continuous with an analysis and interpretation of the discretionary powers of ESMA. The rather rigid position of the Court of Justice in relation to the Meroni doctrine seems to be unsuitable to delegation of complex regulatory tasks. This is particularly evident in the case of financial markets. Finally, the judgment does not examine in any detail whether and how the principals - i.e. the EU and Member States - are best able to evaluate the quality of ESMA decisions and regulations and whether there are different but more effective accountability mechanisms.

Iceland’s contested European Policy: The Footprint of the Past - A Small and Insular Society. Jean Monnet Occasional Paper 01/2013

Introduction. Iceland’s domestic politics and foreign affairs are undergoing drastic changes. After an economic crash, violent protests on the streets of Reykjavik for the first time in Iceland’s history contributed to the defeat of the government. The party system has been altered. A turn has been taken towards Europe after the United States left the island, first by closing its military base in 2006 and then by its clear stance not to assist the country in its economic difficulties. The former close relations with the superpower are unlikely ever to be restored. The EU membership application is placing severe constraints on political parties which are split on the issue and has put in jeopardy the unity of the first left majority in the Icelandic parliament, the Althingi. Society is in a state of flux after an unprecedented economic downscaling and the collapse of almost its entire financial sector – which had boomed rapidly beginning in the mid-1990s. The credibility of politicians, the parliament and the media is in ruins. Iceland’s smallness and its location on the geographical map – one could also say the geopolitical map – has had a profound influence on its domestic and foreign affairs. Iceland is closely associated with the other Nordic states and has adopted many of their domestic characteristics, with important exceptions. On the other hand, the country has come under American influence – geographically, it straddles the Mid-Atlantic rift – and has limited its participation in the European project. Its geographical location in the middle of the North Atlantic has led to a notion that the country’s culture is unique and should be protected by all available means. Politicians continue to play the ‘nationalistic uniqueness’ card with considerable success even though the country has been swept by globalization. Rapid modernization (which only really began in the Second World War with British and American occupations) and sudden engagement with the outside world (which only extended to the general public in the last quarter of the twentieth century) are still slowly but steadily making their mark on the country’s foreign policy. The country’s political discourse and foreign policy still bear the hallmark of the past, i.e. of a small and insular society This paper will address the political developments in Iceland since the 2008 economic crash and place it in a historical context. The aim is to understand Iceland’s present foreign policy and, in particular, the highly contested decision by its government in 2009 to apply for membership of the European Union. The paper is divided into five sections in addition to this introduction and the concluding remarks. First, it starts by explaining the importance in Iceland of a political discourse based on the concept of independence which dates back to the historical narrative of the settlement period. This section will also examine Iceland’s close relations with the other Nordic states – despite important differences between it and the others. Second, the paper will analyse the importance of the party system, i.e. the dominance of the centre-right in Icelandic politics, and the changed nature of the system. Third, it examines how Iceland further distinguishes itself from the other Nordic states in many important features. Fourthly, the paper analyses the country’s three main foreign policy priorities in the post-war period, i.e. extensions of the Exclusive Economic Zone, firm defence arrangements with the US and membership of NATO, and the drive for better market access for marine products – including a partial engagement in the European project. Fifthly, the paper examines how the country’s smallness, in terms of its central administrative capacity, has affected its domestic and foreign policy-making. The concluding section summarizes the main findings concerning the political and historical obstacles that the Social Democratic Alliance faces in its hard-fought battle to change the country’s European Policy.

New Pact for Europe: Towards a New Pact for Europe. Second report, October 2014

As the new EU leadership takes office, Europe faces a complex web of economic, political, social and global challenges which require new responses – above all, the need to restore the public’s faith and trust after the years of crisis which have prompted growing dissatisfaction with the Union, with many people now seeing it as part of the problem rather than part of the solution to those challenges. In 2012, a consortium of 11 European foundations initiated by the King Baudouin Foundation and Bertelsmann Stiftung, and supported by the European Policy Centre, decided to launch a project to promote a Europe-wide debate on the future of EU integration: an ambitious participatory initiative whose ultimate goal is to develop realistic reform proposals to shore up a Union hit by multiple storms in recent years, which have left many people questioning its capacity to respond effectively to those challenges. Two years later, we are proud to be able to present the outcome of this endeavour: the result of a joint reflection process involving the public, politicians, policy-makers, business leaders, trade unionists, EU experts, opinion-formers and other civil society representatives in many EU Member States. Obviously, not all the ideas and proposals generated by this process could be included in this report, but we hope that it faithfully reflects the feedback we received in all the debates. The discussions we have had led to the report that you now hold in your hands, which calls for a New Pact for Europe – between EU Member States and between the EU and its citizens – to enhance the Union’s capacity to deliver effective solutions to the many challenges facing Europe, and to do so in a way that benefits all EU countries and groups within society. This report is designed to feed into the on-going discussions about the EU’s future as the new leadership team takes charge, providing what we hope will be seen as a valuable contribution to the debate on how to introduce ambitious while at the same time workable and realistic reforms to make the EU more effective in responding to the challenges we face. We hope that it will be taken up for discussion by the new European Parliament, the new leadership of the European Commission, European Council and European External Action Service, and also by policy-makers in the Member States. And it does not by any means mark the end of the process. The report will be discussed again with policy-makers and stakeholders in a majority of Member States. Their feedback is important to us and will impact the future progress of the initiative.

The transformation of agriculture in Ukraine: From collective farms to agroholdings. OSW Commentary No. 127, 06.02.2014

In recent years, Ukraine’s agriculture has been consistently improving and has been the only part of the country’s economy to buck the recession. According to preliminary estimates, in 2013 agricultural production increased by 13.7% - in contrast to a 4.7% decline in the industrial sector. According to official statistics, Ukraine’s industrial production was up 40% in the final months of 2013 when compared to the same period of 2012. This translated into an unexpected gain in fourth-quarter GDP growth (+3.7%) and prevented an annual drop in GDP. Crop production, and particularly the production of grain, hit a record high: in 2013, Ukraine produced 63 million tonnes of grain, outperforming its best ever harvest of 2011 (56.7 million tonnes). The value of Ukraine’s agricultural and food exports increased from US$4.3 billion in 2005 to US$17.9 billion in 2012, and currently accounts for a quarter of Ukraine’s total exports. Economic forecasts suggest that in the current marketing year (July 2013 - June 2014) Ukraine will sell more than 30 million tonnes of grain to foreign markets, making it the world’s second biggest grain exporter, after the United States.

Rethinking the external dimension of the European Energy Policy. OSW Report, January 2011

The external dimension of the EU Energy Policy, the question about the challenges regarding the effectiveness of the actions in this field and the search for innovative solutions are now one of the key-issues being raised during European energy policy discussions. The European Commission brought up the issue in the "Energy 2020 - A strategy for competitive, sustainable and secure energy" and questions about the most important directions, goals and tools of the external energy policy are the subject of public consultations announced in December 2010 by DG Energy (the final effect of the consultation and the EC’s work in this field is to be published by in 2011). The external dimension of the EU’s energy policy is also set to be one of the priorities of the Polish Presidency of the EU Council in the second half of 2011.

Between energy security and energy market integration. Guidelines for the future development of the EU’s external energy policy in Europe’s neighbourhood. OSW Report, June 2011

For many years the European Union has been improving the efficient use of energy resources and yet the demand for energy in the EU continues to increase. When Europe belonged to one of the world’s key energy markets with relatively easy access to energy resources, growing energy needs were not seen as a source of concern. Today, however, as the competition for energy resources is intensifying and the global position of the EU energy market is being challenged by growing economies in the developing countries, above all China and India, the EU needs to adopt bold policies to guarantee the sustainable supply of energy. This report argues the EU needs to develop a fully-fledged external energy policy; i.e. a common, coherent, strategic approach that build bridges between the interests and needs of the EU integrated energy market on the one hand and supplier countries on the other. The EU’s external energy policy has two main objectives. The first one is to ensure a sustainable, stable and cost-effective energy supply. The second is to promote energy market integration and regulatory convergence with neighbouring countries (often but not always this supports the achievement of the first objective). However, in order to improve its effectiveness, the EU’s external energy policy needs to be seen in a broader economic and political context. Any progress in energy cooperation with third countries is contingent upon the EU’s general stance and offer to those countries.

Trudny "Sojusznik" Bialorus w polityce Rosji. Prace OSW 2008. = Difficult "ally." Belarus in Russia's foreign policy. OSW Study 28/2008

Belarus holds a special position in Russian policy due to its geopolitical, military and transit significance. Russia's influence and position in the entire Eastern European region largely depend on how strong Russian influence in Belarus is. The process of Russian-Belarusian integration began in 1994, when Alyaksandr Lukashenka came to power in Minsk. At the time, Russia's policy towards Belarus was based on twomain assumptions. Firstly, the Kremlin supported Lukashenka's authoritarian regime. This allowed Russia to keep Belarus within its orbit of political influence and prevent other states from getting involved, since an undemocratic Belarus could not count on closer contacts with the West. Secondly, Russia heavily subsidised Belarus with cheap energy resources (way below the market price) and allowed the duty-free access of Belarusian goods to its market. Thus Belarus became a kind of 'sponsored authoritarianism' with a specific economic model, owing its existence to Russia's economic and political support. At the same time, Moscow's key objective in its policy towards Belarus was to make Minsk accept the Russian conditions concerning integration, which would in fact lead to Belarus' incorporation by the Russian Federation. However, Belarus managed to maintain its sovereignty, while Alyaksandr Lukashenka bandied the term 'integration' about in order to maintain the preferential model of his state's relations with Russia. Russia's intention to alter the nature of these bilateral relations became evident when Vladimir Putin took power in 2000. However, Moscow faced Minsk's refusal to accept the Russian integration plan (which, among other measures, provided for the takeover of Belarusian economic assets by Russian companies). This forced Russia to use its main tool against Minsk: the supplies of cheap gas and oil that had been sustaining Belarus' archaic economy. The most serious crisis in Russian-Belarusian relations broke out at the beginning of 2007, following Moscow's decision to raise the energy resource prices. This decision marked the beginning of the application of market principles to settlements between Moscow and Minsk. The key question this study is meant to answer concerns the consequences of the aforementioned decision by Russia for future Russian-Belarusian relations. Are they at a turning point? What are Russia's policy objectives? What results can come from the process of moving mutual relations onto an economic footing? What policy will replace Russia's 'sponsoring of Belarusian authoritarianism', which it has been implementing since 1994? Finally, what further measures will Russia undertake towards Belarus? The current study consists of five chapters. The first chapter offers a brief presentation of Belarus' significance and position in Russian policy. The second analyses the development of Russian-Belarusian political relations, first of all the establishment of the Union State, Belarus' position in Russian domestic policy and Russia's influence on Belarusian policy. The third chapter presents bilateral economic relations, primarily energy issues. The fourth chapter describes the state and perspectives of military cooperation between the two states. The fifth chapter presents conclusions, where the author attempts to define the essence of the ongoing re-evaluation in Russian-Belarusian relations and to project their future model.