EconPol Policy Briefs

Advances in total factor productivity (TFP) are important for sustaining economic growth in modern economies, in particular in the face of a declining working-age population. In this Policy Brief, we identify investment in research and development, good governance, the capital intensity, a high share of information technology in the total capital stock, and the number of industrial robots per employee as conducive for TFP growth. Based on the empirical results, policies that are beneficial for capital formation in general, investment in computer technology, research and development as well as the use of industrial robots could boost TFP in Europe.

In recent studies the IMF and the OECD claim that inequality has a negative impact on economic growth and conclude that redistribution policies have no adverse growth effects. We argue that this claim is misleading. We show that, for developed countries, the correlation between inequality and growth is positive, not negative. But this correlation cannot be given a causal interpretation.

What are the potential advantages and drawbacks of proposals to create a Capital Market Union in the EU? This Policy Brief discusses the long-term implications of perfectly integrated capital markets, ignoring crises but taking population aging into account. Recent research shows that redistribution would take place, from fast aging to slow aging countries, because investors seek access to the largest labour markets that deliver the highest returns on their investments. In some countries like Austria social security reforms like raising the retirement age would play a crucial role in maximizing the benefits of CMU, or minimizing related losses.

The debate over the next EU budget is already heating up. In early May the European Commission will publish its proposal for the Multiannual Financial Framework (MFF) for the years 2021-2027. Agricultural subsidies and regional transfers are likely to continue to swallow a large share of the EU budget. In view of the acute legitimacy crisis facing the EU, this spending structure calls for reform. The Commission has recommended using “European added value” (EAV) as a reform criterion. This policy brief considers whether allocating competences more effectively between the EU and its member states could boost the EU’s performance.

A key remaining issue for the completion of the Banking Union is the concentrated exposure of banks in many countries to their own sovereign. This paper examines the belief that banks should be allowed to buy large amounts of their own sovereign so that they can stabilise the market in a crisis and argues that it is mistaken for two reasons. In the first instance, banks are only intermediaries for private savings, and secondly, banks have a higher cost of funding than do their sovereign. The overall conclusion is that governments should make it more attractive for households (and other real money investors) to hold government debt directly.