News Archive

The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency. Jean Tirole, Nobel Memorial Prize Winner in Economic Sciences, and French Harvard top economist Emmanuel Farhi provide their theory of the feedback loop that allows for both domestic bailouts of the banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. The theory has extremely important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

The lead story in the Economist earlier this month, “Why the German current-account surplus is bad for the world economy”, starts from the assumption that the rest of the world would benefit if Germany were to spend more. But this holds true only in a world that is constrained by demand, which is less and less the case. The global output gap has already fallen below 0.5% (of potential output) and is projected to disappear within a year or two. Read here why, under these conditions, the German current account surplus, which amounts to 0.33% of global output, cannot do a lot of damage to the global economy.

“EU agricultural policy seems anachronistic. There is no justification for its dominant position in the EU budget,” says Professor Friedrich Heinemann, head of ZEW’s Research Department “Corporate Taxation and Public Finance” and author of the new ZEW study in cooperation with Bertelsmann Stiftung. The EconPol Europe network partner recommends reducing the costs of agricultural subsidies through significant national contributions to agricultural support. “If the Member States wish to privilege their farmers over other economic sectors, they should do so without passing the burden onto European taxpayers,” explains Friedrich Heinemann.

In the international economic policy debate Germany is criticized heavily for its current account surplus. This paper describes the factors that have led to the surplus and discusses the policy implications. The current account surplus is mainly a result of higher savings, driven by an ageing population. The claim that the German surplus causes economic damage either in Germany or in other countries is not well founded. But Germany faces growing political pressures related to the threat of protectionism, the risk that a growing creditor position may lead to political backlash, and the fact that European Macroeconomic Imbalances Procedures imply that current account surpluses should not exceed six percent of GDP. To reduce the surplus Germany should focus on a corporate tax reform to boost private investment.