The political economy of multilateral lending to European regions

We study the political economy of allocation decisions within a major state investment bank. Our focus is the European Investment Bank (EIB) – “The Bank of the EU” – which is the largest multilateral lending (and borrowing) institutionin the world. We collect (and make available) information on the regions of origin of about 500 national representatives at the EIB’s Board of Directors – the decisive body for loan approvals – since its foundation in 1959 and show that arepresentative’s appointment increases the probability of her sub-national region receiving a loan by about 17 percentage points. This “home-bias” effect is driven by large loans financing infrastructure projects. We provide several pieces of evidence, which are consistent with the hypothesis that home-bias lending may lead to resource misallocation, however we cannot conclusively demonstrate this case of economic inefficiency

Vetoing and inaugurating policy like others do : evidence on spatial interactions in voter initiatives

A sizeable literature studies whether governments strategically interact with each other through policy-diffusion, learning, fiscal and yardstick competition. This paper asks whether, in the presence of direct democratic institutions, spatial interactions additionally result from voters’ direct actions. The proposed mechanism is that the voters’ actions in vetoing a decision or inaugurating a preferred policy by a binding initiative in their jurisdiction can potentially have spillover effects on the actions of voters and special interest groups of neighboring jurisdictions. Utilizing data on around 1,800 voter-petitions across over 12,000 German municipalities in 2002-09, we find that a jurisdiction’s probability of hosting a petition is positively driven by the neighbors’ direct democratic activity. These effects are persistent, and are stronger for more visible instruments of direct democracy. The interactions are also mostly driven by petitions in same or similiar policy areas, and are stronger in towns with relatively more per capita newspapers

Sliding down the slippery slope? Trends in the rules and country allocations of the Eurosystem’s PSPP and PEPP : Study with support from the Brigitte Strube Foundation

Over the last decade, the Eurosystem has become one of the crucial players in the market for euro area government bonds. After first substantive purchases through the Securities Market Programme (SMP) in 2010, the Eurosystem’s involvement has reached a new breadth and magnitude with the establishment of the Public Sector Purchase Programme (PSPP) in 2015. On top of this, the ECB Council has set up the Pandemic Emergency Purchase Programme (PEPP) in March 2020 in order to stabilize the euro area economy in the crisis and to contain the rise of sovereign risk premia. This study analyzes trends in the rules, volumes and country allocations of the two active sovereign purchase programmes, the PSPP and the PEPP. Programme rules and the effective country allocations are of legal and economic relevance. In their PSPP rulings, both the European Court of Justice and the German Federal Constitutional Court have emphasized the importance of initial programme constraints. Both Courts agree that that rules like issuer limits or the orientation of country allocations to the country shares in the ECB capital key are important safeguards against a possible infringement of Art. 123 TFEU with its ban of monetary financing of governments. For the economic assessment, it is of importance to which extent the purchase programmes are of an asymmetric nature and whether the Eurosystem increasingly accepts the role of a strategic creditor who has veto power in debt negotiations

Magnitudes and capital key divergence of the Eurosystem's PSPP/PEPP purchases - update December 2020 : study supported by the Brigitte Strube Foundation

Since March 2020, the Eurosystem has been purchasing government bonds under the Pandemic Emergency Purchase Programme (PEPP). The PEPP was set up as a non-standard policy measure to encounter the economic and financial consequences of the Covid-19 pandemic and is an additional program to the ongoing Public Sector Purchase Programme (PSPP). This study updates the quantitative analysis by Havlik and Heinemann (2020) with a focus on the Eurosystem’s PSPP and PEPP transactions since the outbreak of the pandemic. With respect to the PSPP/PEPP purchases made between March and September 2020, this expertise assesses the size of purchase flows and stocks, country allocations and their magnitude relative to this year’s projected government deficits. Moreover, we assess the speed of purchases in light of the current existing envelopes

Which role for a European Minister of Economy and Finance in a European Fiscal Union?

The European Commission has proposed to inaugurate a European Minister of Economy and Finance with the broad purpose of streamlining the complex and fragmented decision-making processes within the European Monetary Union. The Minister would jointly serve as Vice-President of the Commission and President of the Eurogroup, and have the tasks of coordinating budgetary instruments and structural reforms, designing and implementing adequate fiscal policies for the euro area, coordinating the enforcement of the Stability and Growth Pact, among others. This policy report discusses the potential role the Minister could play in the development of the European Fiscal Union. The report lays out the main challenges along the current institutional solutions facing several dimensions of the Fiscal Union, in particular related to fiscal sustainability, macroeconomic shocks, incentives of structural reforms, and the optimum provision of European public goods. The report then discusses whether and to what degree the new European Minister of Economy and Finance can provide appropriate solutions to these challenges for the Fiscal Union

Biases in fiscal multiplier estimates

The "true" size of fiscal multipliers is widely debated by economists and policy makers as large (small) multipliers provide arguments to expand (cut) public spending. Within a meta-analytical framework, we ask whether the large observed variance in multiplier estimates can be explained by the national imprint and various author incentives. For this purpose, we use data on economists' personal characteristics including results from a selfconducted author survey. Our evidence is consistent with the hypotheses that the national background of researchers and the interests of donors financing the research matter for the degree and direction of multiplier estimates. These potential biases largely disappear for teams of international co-authors

Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for euro area sovereign spreads in the Corona pandemic

The COVID-19 pandemic has put the public finances of industrial countries under severe stress. The resulting recession has not only led to shortfalls in tax revenues but also to increased public expenditures. National governments have embarked on massive rescue packages to protect citizens and companies against the potentially disastrous health, social and economic consequences of pandemic disruptions. In addition, EU Member States have designed stimulus packages in order to support the economic recovery of affected sectors. For the euro area, the deep economic contraction and the soaring public debt levels have recalled bad memories from the years of the global financial crisis and the subsequent euro area debt crisis. The concern has been that this new and substantial solvency shock could once again trigger a vicious and self-enforcing cycle of rising sovereign bond spreads, a destabilization of the financial sector and a further decline in real economic activity. Subsequently, this could all lead to a new sovereign liquidity crisis similar to the contagion following the Greek government-debt crisis in spring 2010

Dispelling the shadow of fiscal dominance? Fiscal and monetary announcement effects for Euro area sovereign spreads in the corona pandemic

We use event study regressions to compare the impact of EU monetary versus fiscal policy announcements on government bond spreads of ten euro member countries. Our motivation is to evaluate which of the two players – the ECB or the EU fiscal level – has been more crucial for the stabilization of euro sovereign bond markets in the crisis environment of the pandemic. This question is of substantial relevance to assess potential risks for the effective independence of the ECB in the future. Our key result is that the pandemic monetary emergency measures through the PEPP have been highly effective, whereas fiscal rescue announcements had much less impact. We document a smaller and statistically significant spread-reducing effect only for the announcement of the "Next Generation EU" program. In contrast, a temporary relaxation of European fiscal rules through the activation of the emergency-escape clause under the Stability and Growth Pact is associated with rising spreads. Our results have an unpleasant implication for the debate on a looming fiscal dominance of the ECB in the presence of rising public debt levels as so far, the stabilization of sovereign bond markets appears to hinge largely on the Eurosystem's role as a massive buyer of high-debt countries' sovereign bonds