Publisher: CEPS Centre for European Policy Studies

№098. What should the Community of Democratic Choice do?

№098. What should the Community of Democratic Choice do?

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

Keywords: democracy; human rights; civil society; community of democratic choice;

In August 2005, President Saakashvili of Georgia and President Yushchenko of Ukraine met at Borjomi, Georgia, and decided to launch an initiative to promote democracy among a community of like-minded states of Central and Eastern Europe. This led to a meeting in Kyiv on 2 December 2005, of a wider group of countries of the Baltic-Black-Caspian Sea region, which adopted a declaration announcing the creation of a Community of Democratic Choice (CDC) as a governmental and non-governmental forum to promote the strengthening of democracy, human rights and civil society. The next meeting of the CDC will take place as a Baltic and Black Sea Summit in Vilnius in May 2006.

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№239. A New Framework for Euro-Med Cooperation on Micro, Small and Medium-Sized Enterprise Support

№239. A New Framework for Euro-Med Cooperation on Micro, Small and Medium-Sized Enterprise Support

Author(s): Rym Ayadi,Antonio Fanelli / Language(s): English

Keywords: New Framework; Euro-Med Cooperation; Micro, Small and Medium-Sized Enterprise Support; Union for the Mediterranean;

Micro, small and medium-sized enterprises (MSMEs) are the driving force behind economic development in the Mediterranean. They perform an essential roleas providers of employment and innovation opportunities and act as key players for regional and local development and social cohesion.

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№247. An evaluation of the French proposal for a restructuring of Greek debt

№247. An evaluation of the French proposal for a restructuring of Greek debt

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

Keywords: French proposal; Restruction of Greek debt; French commercial banks; Greek government;

French commercial banks are proposing a swap of €85.5 billion in Greek government bonds maturing between 2011 and 2014 into a combination of new long-term Greek bonds with principal guarantee and cash payments. If this initiative were implemented under the proposed parameters, private creditors would only suffer a minimal haircut and official lenders would be provided with cash-flow relief of around €20 billion over the next three years, but the solvency of the Hellenic Republic would worsen significantly.

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№269. The Euro Crisis: Implications for the Internal Market and Harmonisation of Corporate Taxes

№269. The Euro Crisis: Implications for the Internal Market and Harmonisation of Corporate Taxes

Author(s): Herman Onno Ruding / Language(s): English

Keywords: Euro Crisis; Internal market; Harmonisation of Corporate Taxes; Economic and Monetary Union;

The so-called ‘euro crisis’ is of the utmost economic, financial and political importance for all member countries of the euro area and for the future of the Economic and Monetary Union (EMU). In my view, however, it is not primarily aeuro crisis in the strict sense. The euro itself is of course involved, but, as a currency with a rather stable exchange rate vis-à-vis other currencies and with a major role in global financial markets,it is not at the heart of the crisis.

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№274. An agenda for the European Council. Feasible steps to bring the eurozone back from the precipice

№274. An agenda for the European Council. Feasible steps to bring the eurozone back from the precipice

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

Keywords: European Council; Eurozone; GDP; Monetary policy; Bank restructuring and banking union;

Once again the European Council will meetin an emergency session at the end of June, with the eurozone economy inrecession and actually plummeting in its Southern periphery. Further doubts are also growing on the sustainability of sovereign debts due to the vicious spiral of deteriorating bank balance sheets, ballooning potential liabilities from banking rescues and widening spreads on government borrowings.

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Balanced budget fundamentalism

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’?

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

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?

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?

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

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

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?

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!

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

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

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

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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More evidence that financial markets imposed excessive austerity in the Eurozone

More evidence that financial markets imposed excessive austerity in the Eurozone

Author(s): Paul De Grauwe,Yuemei Ji / Language(s): English

Keywords: Euro-Bonds; public debt;

The decision by the ECB in 2012 to commit itself to unlimited support of the government bond markets was a game changer in the eurozone crisis. It had dramatic effects. By taking away the intense existential fears that the collapse of the eurozone was imminent, the ECB’s lender-of-last-resort commitment pacified government bond markets and led to a strong decline in the spreads of the eurozone countries.

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Learning from small countries? Contemporary Nordic sagas

Learning from small countries? Contemporary Nordic sagas

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

Keywords: post-2008 Economic Crisis; Baltic States;

Greece, the Baltic states and Iceland are examples of small countries whose experience is often adduced to argue for or against austerity. Paul Krugman, for example, argues that the fact that Latvian GDP is still more than 10% below its pre-crisis peak shows that the “austerity cum wage depression” approach does not work and that, Iceland, which was not subject to Brussels austerity and devalued its currency, seems to be much better off. Others have pointed out that Estonia avoided a financial crisis because it pursued a strict austerity policy in the wake of the crisis and is now growing vigorously again, whereas Greece, which delayed its fiscal adjustment for too long, experienced a deep crisis and is still mired in recession.

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Europe is still standing

Europe is still standing

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

Keywords: Anti-European Europeans: Euroscepticism; EU parliamentary elections;

Judging from the headlines, one might get the impression that the 400 million citizens eligible to participate in the recent European Parliament elections voted massively against the European Union. True, anti-establishment, mostly euro-sceptic, parties won about one-fifth of the vote. But to characterise the election result as a rejection of Europe simply is not quite accurate (or fair).

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