Overcoming the gridlock in EMU decision-making. CEPS Policy Insights No 2020-03 / March 2020

The completion of EMU, and banking union as its critical component, requires that certain taboos in the policy debate are brought out in the open. First, the Commission must stop pretending that Italian public debt is sustainable under current policies and shift from politically motivated forbearance to serious implementation of the SGP and notably its debt rule. Second, it is necessary to acknowledge that crisis management by the ESM is crippled as long as its financial assistance can only be granted after the country in need is close to losing market access and, in addition, this threatens the financial stability of the entire euro area. The already-existing alternative to assist a country that is not respecting the SGP is to utilise the enhanced conditional credit line (ECCL) introduced by the ESM reform, approved by the European Council and awaiting national ratifications, in order to agree on a full-fledged adjustment programme before any euro area member (Italy) comes to the brink again – without any preventive conditions on the sustainability of public debt. And, third, the completion of the banking union requires a reduction of banks’ home sovereign portfolios, that can be incentivised by the introduction of mild concentration charges. However, the system will not work without simultaneously offering the banks and financial investors in general a true European safe asset, fully guaranteed by its member states. Our proposal is that such a safe asset could be offered by the ESM, which would purchase in exchange the sovereigns held by the ESCB as a result of the quantitative easing asset purchase programme. The risk of losses on these sovereigns would continue to lie with the national central banks, thus avoiding the transfer of new risks to the ESM

Flexibility clauses in the Stability and Growth Pact: No need for revision. CEPS Policy Brief No. 319, 24 July 2014

This Policy Brief offers an in-depth review of the Stability and Growth Pact (SGP) and looks at whether the margins of flexibility within existing rules are sufficient in the current climate of low growth, or whether there is a need to broaden them. The issue is especially relevant as the changing economic environment is raising fresh questions about whether the EU’s current common economic policies are able to manage dismal growth and low inflation. The fragile state of confidence in financial markets and the unresolved but inevitable questions of moral hazard linked to lax fiscal policies mean that no large-scale fiscal expansion to support the recovery of economic activity is feasible. The discussion may therefore only concern the scope within the SGP to accommodate an unexpected drop in economic activity and to provide room for the implementation of structural reforms. Here, we analyse the flexibility clauses of the Stability and Growth Pact under three headings; namely “exceptional circumstances”, “structural reforms and other relevant factors”, and the “investment clause”. Recommendation: Our main conclusion is that the SGP contains sufficient flexibility to accommodate an unexpected drop in economic activity and has the margins needed to finance structural reforms during the transition to the new regime. We therefore see no need to change the existing rules of the SGP. We believe that the ongoing debate about a fresh growth strategy for the eurozone and the European Union would greatly benefit from removing from the Council table ill-formulated and unnecessary demands for greater flexibility in the SGP

On German External Imbalances. CEPS Policy Insights No 2018/13, November 2018

This paper describes four features of the German economy which lie at the root of its external imbalances: the evolution of its real exchange rate; the underlying trends in productivity and unit labour costs; the persistent shortfall of investment relative to domestic savings; and the deployment of much of the current external surplus in portfolio investments outside the euro area. The euro has helped Germany maintain a strong competitive position for its exports within the euro area and has helped moderate the appreciation of its exchange rate vis-à-vis the main third-country currencies. Moreover, the currency union has eliminated much of the pressure on Germany to adjust its burgeoning external surplus, since capital inflows no longer affect its monetary base creation. The export strength of German manufacturing has been built, on one hand, upon a rate of growth in productivity in manufacturing, which even if declining has been almost constantly higher than that of its European partners; on the other hand, upon a remarkable measure of wage restraint. The analysis of sectoral balances between savings and investment shows that the enormous increase in Germany’s current external surplus in the euro years was determined by rising profits and low investment in the corporate sector, and by the shift of the public sector budget from deficit to surplus. Increased savings by the household sector do not contribute to the explanation of the surplus, contradicting the view whereby the surplus was the result of higher savings by an ageing population. Finally, the analysis of the capital account of the balance of payments shows that Germany has contributed neither to real investments within the euro nor to sharing the risks implicit in an incomplete monetary union with divergent national fiscal policies

Beyond the Short Term A Study of Past Productivity’s Trends and an Evaluation of Future Ones

This is the second report to be issued by a group of international economists brought together under the auspices of LUISS. LIGEP stands for LUISS International Group on Economic Policy. Its mandate was to consider problems of economic policy in the aftermath of the Global Crisis in the World, Europe and Italy

The implications for the EU and national budgets of the use of EU instruments for macro-financial stability. CEPS Special Report, 4 September 2012

The euro crisis has forced member states and the EU institutions to create a series of new instruments to safeguard macro-financial stability of the Union. This study describes the status of existing instruments, the role of the European Parliament and how the use of the instruments impinges on the EU budget also through their effects on national budgets. In addition, it presents a survey of other possible instruments that have been proposed in recent years (e.g. E-bonds and eurobonds), in order to provide an assessment of how EU macro-financial stability assistance could evolve in the future and what could be its impact on EU public finances