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Balanced budget fundamentalism

Author(s): Paul De Grauwe / Language(s): English

Keywords: EU; economy; euro-zone; Germany; financial markets; budgeting;

Under extreme pressure from the financial markets and from Germany, member countries of the euro-zone feel obliged to introduce balanced budget clauses into their constitutions. The German government argues that balanced budget constitutional clauses are necessary to avoid future government debt crises.

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Can Greece ‘grow solvent’?

Author(s): Daniel Gros,Mikkel Barslund,Thomas Barnebeck Andersen / Language(s): English

Keywords: EU; Greece; euro-zone; solvency; debt reduction; European Council; labor relations;

The first act of the euro-zone debt drama was about whether any European Union member country could ever become insolvent. It ended when the highest EU authority, the European Council, officially recognized in late July that Greece does need a reduction in its debt obligations.

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Debt Reduction without Default

Author(s): Daniel Gros,Thomas Mayer / Language(s): English

Keywords: EU; euro-zone; Greece; debt reduction; economic policy; reforms; EFSF;

The government of Greece continues to have difficulties implementing the promises it gave to its creditors and convincing its own population that ‘there is no alternative’ to further rounds of tough cuts and reforms. Moreover, investors are now convinced that the country will not be able to grow out of its public debt, which is now on course to top 160% of a shrinking GDP. Bond prices have fallen to between 35-45% of their face value.

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Will the Financial Transaction Tax (FTT) enhance stability?

Author(s): Emrah Arbak / Language(s): English

Keywords: EU; economic policy; taxes; FTT; tax revenues; financial stability contribution;

In all likelihood, the European Commission’s proposed tax on financial services, the financial transactions tax (FTT), will raise size-able tax revenues, which explains its political appeal in the current context. However, the tax fails to address the key factors that contributed to the global financial crisis. Short of global or even EU-wide cooperation, many of the transactions subject to a tax will relocate to non-cooperating countries, thereby reducing revenue prospects and the effectiveness of supervision. Moreover, the proposal fails to address the growth of leverage, systemic risks, or the moral hazard risks arising from ‘too-big-to-fail’ or ‘too-systemic-to-fail’ institutions. Even if it becomes a reality, the proposal should not undermine the chances of more meaningful tax policy alternatives being implemented in the future.

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A liquid Europe?

Author(s): Daniel Gros / Language(s): English

Keywords: euro-zone; EU; economic policy; economic stability; debt crisis; Greece; Ireland; Portugal; Italy; Spain; EFSF;

Is the euro-zone stepping back from the brink? This might just be possible, because the emerging outlines of a new framework to resolve the ongoing sovereign debt crisis contain a key component that was missing so far. Indeed, that component’s absence was behind this summer’s spreading financial crisis, which moved beyond small, peripheral countries like Greece, Ireland and Portugal to strike systemically important countries like Italy and Spain.

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The case for a euro-TARP

Author(s): Karel Lannoo / Language(s): English

Keywords: EU; TARP; euro-zone; economic stability; EFSF; aid; financial markets;

The European Union should move quickly to enact an American-style ‘TARP’1 in the euro-zone to strengthen the financial sector and maintain lending. Through the European Financial Stability Facility, the EU now has the structure in place for a truly European support fund for the banking sector, which it did not have in 2008. This should be put into motion without delay, taking into account the lessons of the 2008 crisis and applying EU state aid rules. A euro-zone recapitalization fund would better limit distortions to the functioning of the single market than the current arrangement of ad hoc guarantees and support mechanisms.

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A closer look at Dexia: The case of the misleading capital ratios

Author(s): Willem Pieter DE GROEN / Language(s): English

Keywords: EU; financial markets; economic policy; EBA; Dexia; capital ratios;

When first published, the results of the stress tests performed by the European Banking Authority (EBA) gave little evidence of Dexia’s vulnerability. The test was based on the current criteria for Basel II capital (core Tier-1 ratio). Dexia was ranked 12th of the 90 tested banks, with a stressed core Tier-1 ratio of more than twice the benchmark of 5%. In turn, the equity ratio was only about 1.9%, representing one-sixth of the core Tier-1 ratio at year-end 2010. In other words, for every €53 in assets, the bank had only €1 in capital (see Table 1). Such a level of leverage is high, twice in fact the average of large EU banks.3 The leverage and difference with other large banks are largely explained by the calculation of the risk-weighted assets (RWA) and the definition of core Tier-1 capital, both of which painted an overly optimistic picture.

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Poland and Slovakia: Drawing the same lesson from two different events?

Author(s): Piotr Maciej Kaczyński / Language(s): English

Keywords: EU; Poland; elections; Slovakia;Czech Republic; economic stability; EFSF;

One government is up, one down. The Polish government has had its mandate extended for yet another four years, while the Slovak’s mandate was suddenly cut short when the parliament refused to ratify the European Financial Stability Facility (EFSF). The messages from those two situations may at first seem contradictory, but that is not necessarily the case: any new party entering the political scene needs some time to consolidate internally before it enters the government. Both the Slovak and the Czech governments have suffered recent instability due to their political backing by newly emerging actors. Poland should not make the same mistake.

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A Three-Pillar Firepower to Solve the European Sovereign Crisis: A last chance!

Author(s): Rym Ayadi / Language(s): English

Keywords: EU; European Sovereign Crisis; debt; economic stability; banking sector; Dexia;

EU policy-makers, led by Germany, have a last chance to work together with the private sector to produce a comprehensive, multi-pillar framework to stop the pernicious spread of economic contagion from the sovereign debt crisis in Europe with its detrimental effects on the real economy and the society. The sovereign debt crisis and the turmoil in the banking sector have become intimately intertwined. Partial cures will not be strong enough to tackle the root cause of the disease, which has macro and micro origins resulting from the close relationship that has developed over decades between sovereigns and banks and been reinforced by the erroneous zero-risk weight treatment of the EEA countries under the Basel regulatory regime. Recent calls to increase core Tier-1 capital ratios (up to 9%) on all European banks without reconsidering the ratio’s design profoundly miss the point. The experience of Dexia, which had a core Tier-1 ratio of approximately 12.1% in 2010, seemingly superior to the 9%, reveals the limits of these capital indicators to assess a bank’s soundness. Therefore, creating unnecessary noise in the market may derail policymakers’ efforts to solve the European sovereign debt crisis.

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Eurozone Bank Recapitalisations: Pouring water into a leaky bucket

Author(s): Paul De Grauwe / Language(s): English

Keywords: EU; euro-zone; banking; debt crisis; economic policy; ECB;

The sovereign debt crisis has degenerated into a banking crisis. This was perfectly predictable. A sovereign debt crisis always leads to a banking crisis. Yet policy-makers did not see it coming, or if they did see it, they failed to act in time.

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The pitfalls of official first-loss bond insurance

Author(s): Daniel Gros / Language(s): English

Keywords: EU; euro-zone; debt crisis; first loss insurance; economic policy; Italy; Greece;

Euro-zone leaders agreed this morning on the rough outline of a package of measures designed to end the crisis in the euro-zone. This commentary argues that a central pillar of the package will not work. The so-called ‘first-loss insurance’ of euro-zone sovereign debt relies on an incomplete analysis of the underlying problem and the proposed solution.

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East goes right, South goes left

Author(s): Michael Emerson / Language(s): English

Keywords: EU; Eastern Europe; Arab Revolution; Egypt; political systems;

The most striking and indeed astonishing feature of this autumn’s political landscape in the European neighborhood is the contradictory trend between East and South. Eastern Europe is reverting back towards authoritarianism, while the Arab world proceeds with its anti-authoritarian revolution. Neither region is homogenous, of course. But the mainstream tendencies are clear.

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Post Durban: Moving to a fragmented carbon market world?

Author(s): Andrei Marcu / Language(s): English

Keywords: global climate changes; COP 17; greenhouse gas; Kyoto Protocol; US; EU; Japan;

The agreements recently struck during the COP 17 global climate change negotiations in Durban, South Africa, from November 29th to December 9th, bring us to a new crossroads.

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The euro’s global dreams and nightmares

Author(s): Barry Eichengreen / Language(s): English

Keywords: EU; Euro; currency; Dollar; single European currency; financial markets; banking;

One motive for founding the euro was to create a European unit that might provide an alternative to the dollar as an international and reserve currency. The Werner Report, the first full-throated argument for a single European currency, was issued in a period of angst about the Bretton Woods System and the dollar (Zimmermann, 2002). The Delors Report, which provided a detailed road-map in 1989, was not unrelated to the preceding decade of wild dollar fluctuations.

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Solidarity for Adamowicz, Poland, and Europe

Author(s): Danuta Hübner / Language(s): English

Keywords: Europe; Poland; Paweł Adamowicz; political opponents; liberal politics;

As the birthplace of Solidarity, the movement that helped bring communism to an end in Europe, Gdańsk has long served as a symbol of freedom and openness. But now the city is coping with the assassination on January 13 of its mayor, Paweł Adamowicz. Simply writing that sentence is a surreal and painful experience for me. The question is what consequences his public murder will have for Poland – and for Europe.

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The Greek-Macedonian name agreement - Promoting Reconciliation in the Western Balkans

Author(s): Erwan Fouéré / Language(s): English

Keywords: Greece;North Macedonia; name agreement; Western Balkans; identity politics;

With the formal ratification by the Greek Parliament last Friday of the agreement to resolve the name dispute between Macedonia and Greece, a dark cloud has been lifted, enabling the hitherto fractious relations between these two neighbouring countries to enter into a new and hopefully more promising phase. The Macedonian Parliament also ratified the agreement earlier in the month.

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The EU-Arab Summit: A chance to reset relations with the Arab world?

Author(s): James Moran / Language(s): English

Keywords: EU; Arab League; summit; political relations; economic relations; security;

Leaders of the 50 countries that comprise the EU and the Arab League, together with the European Institutions, are set to meet in Egypt’s Sharm el Sheikh on 24-25th February in an unprecedented summit encounter. Chaired by Presidents Abdel Fatah El-Sisi and Donald Tusk, the event marks the first time these close neighbours have come together in this format. As such, this is something of a breakthrough, although there is a risk of failure.

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Beyond Public Debt - The hidden rapid erosion of EU governments’ balance sheets is a threat that should and can be stopped

Author(s): Jorge Núñez Ferrer,Roberto Musmeci / Language(s): English

Keywords: EU; debt; financial crisis; economic policies; treaties; governments response; taxes; GDP;

Eleven years after the outbreak of the financial crisis, several countries are still crawling from the economic wreckage. While political tensions have led to much debate around the principle of fiscal prudence and concerns about ‘moral hazard’ enshrined in the debt and deficit criteria in the Maastricht Treaty as well as the ‘no bail-out’ clause in the Lisbon Treaty, not enough attention has been paid to the reasons why governments were so unprepared to respond.

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Castles in the Sand: Mali and the demise of the EU’s Common Security and Defence Policy

Author(s): Giovanni Faleg / Language(s): English

Keywords: EU and Africa; France and Mali;

France’s solitary intervention in Mali and the EU’s absence there – in an area no less strategicthan the Maghreb – raises two questions of prime importance for the future of the EU’ssupposedly ‘Common’ Security and Defence Policy. The first has to do with the crisis itself,its nature and the threat posed by the terrorist groups and militias that are being counteredby French armed forces. The second concerns the causes and implications of yet anotherexample of the EU’s inability to take responsibility for security matters in its neighbourhoodand beyond. How did this happen and can things get any worse?

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Strengthening the strategic choice offered to the EU’s southern Mediterranean neighbours

Author(s): Steven Blockmans,Bart Van Vooren / Language(s): English

Keywords: EU Maghreb Policy; EU and Africa; Migration; Mediterranean;

The European Neighbourhood Policy (ENP) currently lacks a strategic vision for states in the southern Mediterranean that would offer substantial returns in exchange for making tough reforms. This lack of real incentive can be resolved through a concrete prospect of regional integration pro-actively driven forward by the European Union. Inspired by current projects such as the Energy Community Treaty, the EU should explicitly incorporate “legally binding sectoral multilateralism” into the ENP. This would provide the Union’s partners with a tangible prospect of reaping real long-term benefits from EU cooperation and reinvigorate the ENP for the next decade.

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Series:CEPS Commentary

Balanced budget fundamentalism

Can Greece ‘grow solvent’?

Debt Reduction without Default

Will the Financial Transaction Tax (FTT) enhance stability?

A liquid Europe?

The case for a euro-TARP

A closer look at Dexia: The case of the misleading capital ratios

Poland and Slovakia: Drawing the same lesson from two different events?

A Three-Pillar Firepower to Solve the European Sovereign Crisis: A last chance!

Eurozone Bank Recapitalisations: Pouring water into a leaky bucket

The pitfalls of official first-loss bond insurance

East goes right, South goes left

Post Durban: Moving to a fragmented carbon market world?

The euro’s global dreams and nightmares

Solidarity for Adamowicz, Poland, and Europe

The Greek-Macedonian name agreement - Promoting Reconciliation in the Western Balkans

The EU-Arab Summit: A chance to reset relations with the Arab world?

Beyond Public Debt - The hidden rapid erosion of EU governments’ balance sheets is a threat that should and can be stopped

Castles in the Sand: Mali and the demise of the EU’s Common Security and Defence Policy

Strengthening the strategic choice offered to the EU’s southern Mediterranean neighbours