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№237. Restoring financial stability in the euro area

Author(s): Christian Kopf / Language(s): English

Keywords: financial stability; Euro area; Restoring financial stability; sovereign credit risk; European Monetary Union;

The pricing of sovereign credit risk is a necessary component of the financial architecture of the European Monetary Union. However, unnecessarily high and volatile risk premia on government bonds are currently preventing effective financial intermediation within the euro area, there by inhibiting its economic recovery. Several proposals have been made on how these risk premia should be brought down, namely i) permanent pooling of funding through joint bond issuance, ii) temporary liquidity assistance through multilateral funds, iii) debt buybacks using multilateral funds, and iv) debt restructuring.

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№239. Can the eurozone countries still live together happily ever after?

Author(s): Marcello Messori / Language(s): English

Keywords: Eurozone countries; Greek public debt crisis; European Monetary Union; Europe’s sovereign debt; Government bond spreads;

After the Greek public debt crisis and the bilateral loans to Greece from the other members of the European Monetary Union (EMU), in May 2010 the Ecofin Council launched the European Financial Stabilization Mechanism (EFSM). In June of the same year the EMU countries instituted the European Financial Stability Facility (EFSF). These two mechanisms, which are charged with providing support to EMU countries in “exceptional difficulty”, received their baptism of fire with Ireland in January 2011 and successfully made their first bond issue on the market.

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№240. Labour Immigration Policy in the EU: A Renewed Agenda for Europe 2020

Author(s): Anaïs Faure Atger,Sergio Carrera,Dora Kostakopoulou,Elspeth Guild / Language(s): English

Keywords: Labour immigration policy; EU; Europe 2020; The Lisbon Treaty;

The EU’s capacity for a legitimate, coherent and migrants’ rights compliant policy on labour immigration is now more than ever at a test in light of the political priorities set in the EU’s 2020 Strategy and the effects of the revolutions and war in North African states during the last four months. This Policy Brief examines the incoherencies characterising the current generation of EU’s labour immigration policies and the challenges towards ensuring a global rights-based approach to migration.

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№249. Britain, Ireland and Schengen: Time for a smarter bargain on visas

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

Keywords: Britain; Ireland; Schengen; visas; Government; simple economics;

For the present UK government, full accession to the Schengen area, a passport free travel area covering most of Europe, is a red line that it will not cross. Ireland shares a common travel area and land border with the UK and is also bound by this decision. However, it is becoming increasingly clear that the UK, along with Ireland, is suffering serious economic and reputational costs as a result of its separate visa and border management policies.

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№250. Only a more active ECB can solve the euro crisis

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

Keywords: ECB; Euro crisis; Eurozone; Greek sovereign debt crisis; European Council; Government;

The biggest threat for the eurozone is the contagion of the Greek sovereign debt crisis to the rest of the system. If the Greek crisis could be isolated, it would barely matter for the eurozone as a whole. After countless crisis meetings of the European Council, however, it has to be admitted that the European leaders have failed to isolate the Greek crisis and to stop the forces of contagion. The latest meeting of the heads of state or government of the euro area on July 21st is no exception.

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№251. The Eurozone Debt Crisis: From its origins to a way forward

Author(s): Diego Valiante / Language(s): English

Keywords: Eurozone Debt Crisis; Argentine crisis; monetary policy support and fiscal policy coordination;

The Eurozone debt crisis has now reached a turning point. This paper argues for a more organised intervention by the ECB to stop contagion through the creation of a quantitative easing programme, coupled with a political agreement among member states on a more federalist budget for the Eurozone. The roots of this crisis and how institutions have repeated some of the mistakes of the Argentine crisis, both in 1998 and 2010, are considered in this Policy Brief. The author analyses the reasons why the ECB should start aquantitative easing programme to contain government bond yields, and shows that it can be done with limited impact on inflation targeting policies.

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№252. Partial sovereign bond insurance by the eurozone: A more efficient alternative to blue (Euro-) bonds

Author(s): Hans-Joachim Dübel / Language(s): English

Keywords: Partial sovereign bond insurance; Eurozone; Euro-bonds; Eurozone Stability Mechanism;

‘Blue’ or Eurobonds guaranteed via joint and several liability by the eurozone member states have been proposed by Bruegel, the Brussels-based think tank, as a key tool to stabilise and structure the eurozone sovereign bond markets. However, as current events show, a second key feature of the proposal – their limitation in volume to 60% of GDP – will be untenable in times of financial crisis. It carries the risk of exploding marginal costs of funds to those sovereigns facing rapidly rising debt levels and forcing them to issue ‘red’ bonds on their own standing. Rapidly rising fund costs would quickly drive them out of the bond market and into the blue bond-issuing Eurozone Stability Mechanism (ESM). Therefore, under the current proposal, in practice all sovereign bonds issued in the eurozone, regardless of ex-ante GDP limits, would have to be assumed to be blue bonds – an outcome that is fraught with moral hazard.

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№253. Spanish Constitutional Reform

Author(s): José M. Abad,Javier Hernández Galante / Language(s): English

Keywords: Spanish Constitutional Reform; debt limit; interest and principal payments;

On September 7th, five weeks after the European Central Bank (ECB) started buying Spanish bonds as part of its Securities Market Programme, and four weeks since Merkel and Sarkozy announced their proposal of writing debt limits into national laws, the Spanish Parliament has approved a constitutional reform that, by constraining the general government’s spending and borrowing capacity, aims to mitigate concerns over public finances. This reform, the second since the current Constitution was enacted by referendum in 1978, has been made possible by an agreement between the ruling socialists (PSOE) and the main opposition party (conservative PP).

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№254. How should support for climate-friendly technologies be designed?

Author(s): Christine Fischer,Asbjørn Torvanger,M.K. Shrivastava,Thomas Sterner,P. Stigson / Language(s): English

Keywords: climate-friendly technologies; Stabilising global greenhouse gas; Carbon pricing;

The first principle for guiding the design of clean technology policies is not to pick technology winners, but rather to pick winning technology policies. Many studies analyse the technological options for achieving deep reductions in green house gas (GHG) emissions. Economists who model climate policies, on the other hand, tend to focus on cost-effective solutions, but often with less technological detail. All models have difficulties in incorporating realistic representations of technological change, uncertainties, barriers and non-market-based policies. Energy projections are difficult for proven technologies, and even trickier for emerging ones.

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№255. US Climate Change Policy Efforts

Author(s): Dallas Burtraw / Language(s): English

Keywords: No. 255. US Climate Change Policy Efforts; greenhouse gas (GHG) emissions; Clean Air Act; Environmental Protection Agency;

Until recently, most of the attention in US climate policy was focused on legislative efforts to introduce a price on carbon through cap and trade. Since that policy has stalled, at least at the national level, the Clean Air Act has assumed the central role in the development of regulations that will reduce green house gas (GHG) emissions in the US. The modern Clean Air Act (CAA) was passed in 1970 and conveys broad authority to the Environmental Protection Agency (EPA) to develop regulations to mitigate harm from air pollution. In 2007 the Supreme Court confirmed that this authority applied to the regulation of GHGs (Massachusetts v.EPA). Subsequently, the agency made a formal, science-based determination that GHGs were dangerous to human health and the environment, which compels the agency to mitigate the harm and forms the basis for the agency’s regulation of GHG emissions.

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№256. A Call to Members of the European Parliament: Take transparency seriously and enact the ‘legislative footprint’

Author(s): Lukas Obholzer / Language(s): English

Keywords: European Parliament; legislative footprint; EP Bureau and Conference of Presidents; EU decision-making;

The code of conduct that was agreed by a cross-party working group of the European Parliament (EP), the EP Bureau and Conference of Presidents is a watered-down compromise that lacks provision for the introduction of the ‘legislative footprints’ that the plenary requested the Bureau to set up. The legislative footprint is a document that would detail the time, person, and subject of a legislator’s contact with a stakeholder. Published as anannex to legislative reports, it would provide insight into who gave input into draft legislation. Unfortunately, the Constitutional Affairs (AFCO) Committee with Mr Carlo Casini (EPP) as Chair and Rapporteur has so far failed to improve the draft in this respect.

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№257. Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today)

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

Keywords: Monetary Union; Inflation; Instability of high public debt; Italy; GDP;

Is a high level of public debt inherently more dangerous within a monetary union? During the1990s it was often argued that only by entering the EMU could Italy (or Spain) protect itself from the high interest rates it had to pay on its large public debt. The argument was that by joining the single currency, Italy could convince financial markets that it would not inflate away the value of its debt and hence benefit from lower risk premia.

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№258. Agreement needed on liquidity provision to restore confidence in the eurozone

Author(s): Stefano Micossi / Language(s): English

Keywords: liquidity provision; Eurozone; Reform policies; Stronger economic governance;

Some eighteen months after the first Greek rescue (May 2010), there is little doubt that the multiple attempts at crisis management in the eurozone have failed to restore confidence. Indeed, following each round of emergency measures agreed by the eurozone summits, matters have turned for the worse (see Figure 1 for the widening spreads, over the German Bund, for sovereign borrowing in the eurozone). At the time of writing, contagion has spread beyond Spain and Italy to the core sovereigns, with France close to losing its triple A rating and even Germany experiencing partial failure in a Bund auction on November 23rd.

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№259. Stronger economic governance

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

Keywords: Stronger economic governance; EU; the Euro-plus Pact; EU government;

One positive effect of the euro crisis is that it has provoked Europe to engage in a profound debate on the form and degree of federalism it needs. Even if, until recently, many would have argued that Europe is not a federal state, the EU already has many elements of such a governance model in place, of which European citizens are hardly aware. Many competences are uniquely attributed to the EU.

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№260. Misguided policies risk breaking up the eurozone and the EU

Author(s): Stefano Micossi / Language(s): English

Keywords: Eurozone; EU; Crisis management; Liquidity support and debt restructuring;

I met Tommaso Padoa-Schioppa in the early 1970s as a new young professional in the Research Department of Banca d’Italia, where he was head of the monetary policy unit. Many of us newcomers, fresh from American graduate studies, were appalled by the Bank’s monetary approach, replete with quantitative controls and administrative measures to channel funds to an insatiable Treasury.

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№264. Renewables and the EU Internal Electricity Market. The case for an arranged marriage

Author(s): Jonas Teusch / Language(s): English

Keywords: EU Internal Electricity Market; electricity market; low-carbon economy; internal energy market;

This Policy Brief argues that pursuing there newables objective could contribute to the completion of the internal electricity market, help overcome opposition to transmission projects and decrease the market power of incumbents. Conversely, an integrated internal electricity market means less price volatility inspecific regional markets, which allows for more efficient deployment and grid integration of renewables.

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№265. Liquidity in times of crisis: Even the ESM needs it

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

Keywords: ESM; Liquidity; European rescue fund; European Central Bank;

This paper argues that the new permanent European rescue fund, the European Stability Mechanism (ESM), should be provided with a liquidity backstop by having it registered as a bank – and be treated as such by the European Central Bank. If the crisis were to become acute again, the ESM would stand ready to intervene in secondary markets, potentially with almost unlimited amounts of funding. Access to central bank financing will be crucial in a future crisis, because in such a crisis risk aversion is likely to be extreme, and even the ESM might not be able to raise at very short notice the huge sums that might be required to prevent a breakdown of the financial system. Hundreds of billions of euro might be needed just to top up the programmes for Greece, Ireland and Portugal – and Spain and Italy may require more than a thousand billion euro. Sums of this order of magnitude cannot be raised quickly by a new institution. Simply increasing the headline size of the ESM might thus be of little use.

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№266. Macroeconomic Imbalances in the Euro Area: Symptom or cause of the crisis?

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

Keywords: Macroeconomic imbalances; Euro Area; Credit boom; capital flows; financial stability;

Lax financial conditions can foster credit booms. The global credit boom of the last decade led to larg ecapital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. Since the start of the crisis and more markedly after 2009, these flows have suddenly stopped, creating severe adjustment pressures. At this point, the common monetary policy can only try to mitigate the unavoidable adjustment by maintaining overall financial stability. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances.

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№267. The Spanish Hangover

Author(s): Daniel Gros,Ciniza Alcidi / Language(s): English

Keywords: Spain; foreign capital; Financial system; Housing prices;

What is the problem in Spain? It started with a classic housing bubble financed by foreign capital, and as a textbook would predict, once the inflow of foreign capital stopped and the bubble burst, unemployment soared and the financial system went bust as well.

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№268. In search of symmetry in the eurozone

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

Keywords: Eurozone; divergence of the competitive positions; Internal devaluation;

One of the major problems of the eurozoneis the divergence of the competitive positions that have built up since the early 2000s. This divergence has led to major imbalances in the eurozone where the countries that have seen their competitive positions deteriorate (mainly the so-called ‘PIIGS’ –Portugal, Ireland, Italy, Greece and Spain) have accumulated large current account deficits and thus external indebtedness, matched by current account surpluses of the countries that have improved their competitive positions (mainly Germany).

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Series:CEPS Policy Briefs

№237. Restoring financial stability in the euro area

№239. Can the eurozone countries still live together happily ever after?

№240. Labour Immigration Policy in the EU: A Renewed Agenda for Europe 2020

№249. Britain, Ireland and Schengen: Time for a smarter bargain on visas

№250. Only a more active ECB can solve the euro crisis

№251. The Eurozone Debt Crisis: From its origins to a way forward

№252. Partial sovereign bond insurance by the eurozone: A more efficient alternative to blue (Euro-) bonds

№253. Spanish Constitutional Reform

№254. How should support for climate-friendly technologies be designed?

№255. US Climate Change Policy Efforts

№256. A Call to Members of the European Parliament: Take transparency seriously and enact the ‘legislative footprint’

№257. Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today)

№258. Agreement needed on liquidity provision to restore confidence in the eurozone

№259. Stronger economic governance

№260. Misguided policies risk breaking up the eurozone and the EU

№264. Renewables and the EU Internal Electricity Market. The case for an arranged marriage

№265. Liquidity in times of crisis: Even the ESM needs it

№266. Macroeconomic Imbalances in the Euro Area: Symptom or cause of the crisis?

№267. The Spanish Hangover

№268. In search of symmetry in the eurozone