Overview publications

The functioning of the Eurozone was irreversibly transformed by the European debt crisis and now, as a consequence of the Covid-19 pandemic, a new and even more devastating crisis has hit the EU. German Chancellor Angela Merkel has abandoned her opposition to substantial intercountry transfers and any form of debt mutualization, a turnaround motivated by the exceptional circumstances brought about by the pandemic. The risk that Italy’s fragile financial, economic and political situation, exacerbated by the current crisis, could destabilize the entire Eurozone in the absence of sizeable external assistance was probably one of the main determinants of the German government’s policy shift. In this policy report, Luigi Bonatti and Andrea Fracasso argue that this move will be insufficient to drive Italy into a sustainable and satisfactory growth path, and it will need further financial support from EU institutions and member states. Should they agree to provide financial assistance to the Eurozone's most vulnerable countries and make permanent what was supposed to be temporary, or expose the zone to a possible implosion?

This paper discusses the introduction of new own resources to finance the EU budget. Currently roughly two thirds of the budget is financed from GNI-based own resources, which are essentially contributions made by the member states out of national tax revenues. While GNI resources are transparent, fair and in line with the principle of subsidiarity, they are criticised for leading to political debates that emphasise the cost of EU spending rather than on the benefits, and for contributing to the framing of discussions on the EU budget in terms of net balances, rather than value added through common policies and the provision of European public goods. Clemens Fuest and Jean Pisani-Ferry propose that the EU should receive a new source of funding in the form of revenue from the European emissions trading system (ETS). They recommend that revenue from the ETS be used to finance the EU fund for economic recovery (Next Generation EU), which was adopted in July.

Improving the economic and social integration of immigrants should be prioritized along with economic and health policies to prevent a rise in far-right parties in the wake of the Covid-19 crisis, as the economic downturn caused by the pandemic and the increased economic insecurity of large numbers of the population could lead to xenophobic reactions and rejection of immigrants. This policy report from Anthony Edo and Yvonne Giesing analyzes the impact of immigration on the rise of far-right parties and finds that, while there is a general tendency towards an increase in far-right voting caused by immigration, this is not automatic and depends on the type of migration. And, say authors, the degree of economic and social integration of immigrants plays an important factor in the formation of anti-immigrant sentiment.  

The corona pandemic has created a health and economic crisis without modern parallel. As it hit affected countries ill-prepared and spread quickly within the EU, member states had to adopt more interventionist approaches than ever before – particularly in the areas of fiscal and monetary policy, labor markets and redistribution, and industrial policy. EU member states started controversial discussions about how to support those that were hit particularly hard. This debate has become a litmus test for solidarity in the world's richest bloc of nations.

The decisions and measures taken in each country and at the European level will set the course for economic development in the coming years and shape the countries' long-term prospects for decades to come. This EEAG policy brief is a supplement to the group's usual annual report. The authors examine the various effects of the crisis, how Europe can react effectively and how political measures should evolve as the pandemic subsides. In addition, the authors analyze how an efficient supranational insurance mechanism might look like.

In this working paper from Bruno Biais (HEC Paris), Christophe Bisière, Matthieu Bouvard, Catherine Casamatta and Albert J. Menkveld (EconPol Europe, Toulouse School of Economics, Universite Toulouse Capitole [TSM-Research]), the authors offer an equilibrium model of cryptocurrency pricing and confront it to new data on bitcoin transactional benefits and costs. The model emphasises that the fundamental value of the cryptocurrency is the stream of net transactional benefits it will provide, which depend on its future prices. The link between future and present prices implies that returns can exhibit large volatility, unrelated to fundamentals. They construct an index measuring the ease with which bitcoins can be used to purchase goods and services and measure costs incurred by bitcoin owners. Consistent with the model, estimated transactional net benefits explain a statistically signicant fraction of bitcoin returns.

Hernán D. Seoane (EconPol Europe, Universidad Carlos III de Madrid) has reviewed the main theories of interest rate determination and studied the dynamics of the real interest rate in US. Using cointegration techniques, he searched for equilibrium relationships between the real interest rate, monetary factors and real factors and studied how these relationships change with the policy regimes. His analysis of monthly US data since the early 20th century finds equilibrium relationships between a measure of the real interest rate, the policy interest rate and industrial production growth only after the end of the Bretton Woods. The equilibrium relationships between these variables are not invariant to changes in the monetary policy regime.

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. For an 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.

The confinement measures introduced in several countries to fight the Covid-19 pandemic have imposed a high toll on many economic activities. In this post, EconPol's Stefano Schiavo and co-authors exploit recent evidence on French firms recently published by the OFCE-SciencesPo to discuss the policy options facing European governments and the broader implications of firm exit for competitiveness. Using data on a large number of French firms, they simulate the impact of the lockdown on their balance sheets to estimate the share of companies facing liquidity or solvency issues. The main results from the simulation exercise show that the lockdown has profound effects on firms, with an estimated increase in insolvencies by almost 80%.

Using realized investment data, this working paper from Carlos San Juan Mesonada and Carlos Sunyer Manteiga (EconPol Europe, Universidad Carlos III de Madrid) empirically assesses the effects of the European Structural and Investment Funds on the regional convergence of income in Spanish regions, comparing the results in terms of real regional convergence. The level of indebtedness in the region has a definite adverse effect on the effectiveness of European projects, and the authors also identify an apparent spillover effect from the funds towards other border regions.

What government should do, how it should spend and how far it should intervene in the economy are the issues investigated by António Afonso (EconPol Europe, Universidade de Lisboa; REM/UECE), Ludger Schuknecht (OECD) and Vito Tanzi (International Institute of Public Finance) in this working paper. Taking a historical perspective, they assess the composition of public expenditure for advanced, emerging and developing countries and conclude that, while developing countries can struggle with providing well-functioning services, governments are increasingly demonstrating that progress is feasible.