Estimating the impact of Brexit on European countries and regions. Bertelsmann Policy Paper, March 2019

In this paper we provide quantitative insights into the economic impact of Brexit on European countries and regions. More specif- ically, we evaluate the impact of a soft and a hard Brexit on pro- ductivity, markups, product variety, welfare and the distribution of population across European countries and regions. We employ a model characterized by costly trade, love of variety, heterogeneous firms, labour mobility as well as endogenous markups and produc- tivity. We quantify the model using goods and services trade data as well as GDP and population for EEA countries/regions plus BRIC countries and other OECD countries. We finally compute, starting from the observed initial situation in the year 2016, counterfactual economic changes stemming from changes in trade costs related to the implementation of both a soft and a hard Brexit. We find that Brexit would have a significant impact on the UK and EU economies. A hard Brexit could lead to annual welfare losses of 57 billion euros in the UK and about 40 billion euros in other EU countries. A soft Brexit would strongly mitigate these losses. Productivity losses and markup increases drive the simulated effects

Estimating economic benefits of the Single Market for European countries and regions. Bertelsmann Stiftung Policy Paper, May 2019 Separate pdf Technical Appendix for Policy Paper Estimating economic benefits of the Single Market for European countries and regions

This study provides insights into the economic benefits of the Eu- ropean Single Market (SM) for countries and regions across Europe. Specifically, we evaluate the impact of the trade boosting effects of the SM on productivity, markups, product variety, welfare and the dis- tribution of population across European countries and regions. We employ a model characterized by costly trade, love of variety, hetero- geneous firms, labour mobility as well as endogenous markups and productivity. The model is quantified using trade as well as GDP and population data for European countries and regions as well as other countries. We compute counterfactual economic changes stemming from changes in trade costs related to the SM. The findings suggest that on average, EU citizens’ per capita welfare gains from the SM amount to 840 euros per year. We uncover a strong heterogeneity of gains: Countries and regions in the geographic core of the EU see gains of up to 3,600 euros per capita (a 4.7% increase) while gains in some peripheral regions can be as small as 150 euros (about 2%). We also shed light on regional variation of welfare gains from the SM within individual EU countries

The Single Market, welfare and population size – an analysis of EU countries and regions. Bertelsmann Policy Brief

The Single Market (SM) constitutes the world’s largest economic area. Its trade liberalization policies can bring about significant income gains: Fewer barriers to trade are likely to increase competition and boost the productivity of firms – which would positively impact upon wage growth. Moreover, heightened competition decreases markups and reduces the prices of goods and services, which fosters consumer welfare. Through these channels, the SM increases the size of the “economic pie” and contributes to stronger economic growth across European countries and regions. These welfare gains can be deemed as “direct” or “first round” as fewer trade barriers and thus lower trade costs due to the SM directly translate into higher productivity and lower prices. Empirically, these welfare gains have been documented in a number of recent studies (e.g., Ponattu and Mion, 2019a)

Banking Crises, Firms and their International Affiliates in the EU. Bertelsmann Stiftung Policy Paper September 2019

This study analyzes how banking crises affect European economies. First, we show that European firms grow more slowly if they have relationships to crisis banks in their home country. Second, we argue that the international affiliates of multinational corporations grow more slowly when their parent firm is hit by a banking crisis in its home country. This suggests that the internal networks of multinational firms can transmit banking crises across European countries. The effects could be sizable: for example, back-of-the envelope calculations suggest that a banking crisis in the US could lead to an estimated decrease in sales in the German business economy of about 21 billion euros each year, while a banking crisis in the UK could induce a sales loss of about 13 billion euros in the German business economy. The results suggest that measures to prevent banking crises, for example reductions in political risks (like Brexit) or Eurozone reforms (averting the "diabolical loop"), would significantly reduce cross-country contagion of crises via firms – and this way contribute to a smooth functioning of the real economy in the Single Market

Market Concentration and the Labor Share in Germany. Bertelsmann Policy Brief #2018/03

Highly innovative firms are commanding a growing share of the market in several industries. This trend not only has an impact on competition and prices – but it also affects the share of overall income going to labor. This, in turn, can exacerbate income inequality

Inclusive Growth – an Agenda for Germany Five action areas for a new growth strategy. Bertelsmann Stiftung Inclusive Growth for Germany|20

Germany is entering a new legislative period with a strong economic position. Across the board, current figures and forecasts for the near future are encouraging. But both the private sector and society are confronted with major challenges – globalization, digitalization and demographic shifts are transforming the demands made on our economy. Current economic policy in Germany must pave the way for tomorrow’s prosperity. This involves making a priority out of promoting growth that provides everyone an opportunity to participate in and thereby benefit from this growth. We need an Agenda for Inclusive Growth

Financial market integration in the EU: A practical inventory of benefits and hurdles in the Single Market

It is 25 years since the European Union (EU) agreed to complete the European Single Market (SM) in goods, ser- vices, people, and capital. While many barriers to the free movement of capital across borders have been removed, some important practical hurdles are still in place. The euro crisis has shown that the European finan- cial sector in particular remains vulnerable and fragmented and this poses serious risks to the stability of both national economies and the euro area as a whole. In 2015, the European Commission therefore set out a list of measures to establish an integrated capital market in the EU by 2019. The first part of this policy paper analyzes the channels through which financial integration affects growth, stabil- ity, and convergence in the EU, including capital allocation, production specialization, diversification of risk, and access to investment opportunities. The second part takes stock of persisting administrative and legal hurdles that impede full market integration. In particular, this paper distinguishes between a firm-level perspective, inves- tors, and banks in its analysis. The final part provides some specific recommendations to improve the internal market for capital in the EU

Learning from Trump and Xi? Globalization and innovation as drivers of a new industrial policy. Bertelsmann GED Focus 2020

Technological innovations are essential drivers of longterm and sustainable growth. Accordingly, there currently is a debate in Germany and the EU as to whether a new, strategic industrial policy can be an answer to the complex dynamics of digitization. Products of this discussion are, for example, the Industrial Strategy 2030 published by the Federal Ministry for Economic Affairs and Energy in November 2019 and the Franco-German Manifesto for a European Industrial Policy for the 21st Century. The focus here is on the question of how the EU and its member states can maintain their innovative and thus competitive ability in the face of diverse challenges. However, there is no standard recipe for building and expanding the innovative capacity of an economy. Different countries rely on different strategies that can be equally successful. An important distinguishing feature is the role of the state. A clear example of divergent innovation models are China and the USA. Although both countries have completely different approaches to an innovation-promoting industrial policy, both models are characterized by major technological successes. With an analysis of the Chinese and American innovation system, this study highlights the main features and success factors of both innovation models and discusses whether and to what extent these factors are transferable to the European and German case. Five fields of action for an innovation-promoting industrial policy in the EU and Germany emerge from this analysis • Implementation of a long-term innovation strategy • Expansion of venture capital • Expansion of cluster approaches at EU level • Thinking and strengthening of cybersecurity at EU level • Creation of uniform and fair conditions for competition In addition to these fields of action, which are relevant both for the EU and for individual member states, industrial policy measures in the following three areas could be useful for Germany. In particular: • Improvement of framework conditions for research and development • Gearing the education and research system more strongly towards entrepreneurship and innovation • State as a pioneer and trailblazer in new technologies In their implementation, however, strategic European and German industrial policies face a trade-off between the protection and promotion of legitimate self-interests on the one hand and the defense against economically damaging protectionism and ill-considered state interventionism on the other. The so-called “mission orientation” can make a significant contribution here: Accordingly, industrial policy should serve to address specific societal challenges (e. g. globalization, digitization, demographic change, climate change) and be coherently targeted towards these objectives. Furthermore, industrial policy is to be driven in parallel by different actors. Above all, it is a joint task of business and politics to enable a competitive business location where the state ensures good competition- promoting framework conditions and the private actors implement concrete actions

The Impact of Monetary Policy on Structural Reforms in the Euro Area. Bertelsmann Stiftung May 2020.

Since the euro area crisis, there has been an intense discussion about the potential side effects of ECB policy on reform efforts of euro area countries. This discussion is set to become even more intense in the wake of the corona crisis and the ECB’s forceful intervention. Opponents of expansionary monetary policy contend that it reduces reforms, whereas proponents argue that it spurs reforms. We test these arguments empirically by studying the effect of monetary policy shocks on structural reform adoption in the euro area. Using an event study approach, we find that surprise monetary expansions causally increase the likelihood of structural reforms significantly: For the period between 2006 and 2016, a monetary surprise expansion of 25 basis points by the ECB increased on average countries’ reform rate by roughly 20 percentage points after two years. This effect is stronger for countries with weaker macroeconomic fundamentals or tighter public budget constraints. The findings are consistent with the ‘room-for-manoeuver hypothesis’ that expansionary monetary policy spurs competition-friendly supply-side policy by reducing the shortrun costs of reforms and increasing governments’ financial leeway. More research will be required to establish whether the results are applicable in a post-corona economic environment