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№230. A less punishing, more forgiving approach to the debt crisis in the eurozone

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

The debt crisis that hit the eurozone last year forced European leaders to develop new solutions to deal with the crisis. These solutions have been dominated by the idea that sanctions should be imposed everywhere in the system. Thus, European leaders are tightening up the Stability and Growth Pact (SGP) and are imposing stiffer sanctions on governments that do not obey the rules. Bond holders who have the temerity to buy government bonds will face sanctions in the form of haircuts when governments get into payment difficulties. The financial rescue mechanism aimed at providing liquidity to distressed governments carries punitive interest rates.

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№231. Single eComms market? No such thing…

Author(s): Andrea Renda,Jacques Pelkmans / Language(s): English

Not withstanding the undeniable success of telecoms liberalisation in terms of price reduction, new services and technologies as well as consumer satisfaction, EU telecoms policy is at least a half failure. This might seem hard to believe, but we show in this Policy Brief that there is no such thing as an EU telecoms (or eComms) single market. We provide ample empirical economic and regulatory evidence of profound and lingering fragmentation as well as a brief assessment of the flaws of the third eComms package of 2009, now in force. Overcoming the fragmentation cannot but yield a considerable welfare improvement for the Union, which is exactly what a single market should be expected to deliver. Doing away with the flaws in the EU system requires a better institutional design. We wonder whether the regulatory (and competition policy) approach is really suitable for the Union and whether the fundamental conflict between the EU constitutional doctrine and the building of the single market (just as much a constitutional duty!) should not be resolved in novel ways.

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№237. Restoring financial stability in the euro area

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

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

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

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

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

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

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

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

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

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

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

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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Central Asia and the Global Economic Crisis

Author(s): Richard Pomfret / Language(s): English

In 2007 the EU published a Strategy for a New Partnership with Central Asia. In its initial stages the EU focused on developing new forums for dialogue with the Central Asian countries, and received some criticism for inadequate substantive actions. This Policy Brief argues that the current global economic crisis does not alter the priorities of the EU Strategy, but it does require the EU to stick to existing obligations and also provides an opportunity for fresh initiatives to better achieve the Strategy’s fundamental goals. A striking feature of the five Central Asian countries’ economic strategies is that they followed divergent paths after becoming independent in 1991. Despite strong similarities in culture, history and economic structure, their transitions from Soviet central planning ranged from the most rapidly liberalising (the Kyrgyz Republic) to the most non-reforming (Turkmenistan) of all former Soviet republics.

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Kyrgyzstan: Balancing on the Verge of Stability

Author(s): Anna Matveeva / Language(s): English

In Kyrgyzstan the risk of instability remains. The country practices genuine elections and power-sharing, is open to international engagement, and promotes basic rights such as free speech. In 2010 Kyrgyzstan adopted a new Constitution, moving away from a super-presidential model to a system in which the president and the parliament share power more equally. Its economic performance is positive: the IMF assessed that the economy recovered quickly due to improved security and political stability, better-than-expected agricultural performance and a timely fiscal stimulus. However, it is the only ex-Soviet state to undergo two turbulent regime changes – the so called ‘Tulip-1’and ‘Tulip-2’ revolutions of 2005 and 2010 – and is affected by a strong regional split between the North and the South, one of the factors behind both ‘revolutions’. This makes Kyrgyzstan a country of paradoxes where it mixes positive developments with severe threats to its stability. The country is split geographically into the North and the South, each with a distinct identity. The first president, Akayev (until 2005), was from the North, and after his removal power shifted to the South, where Kurmanbek Bakiyev originated from (until April 2010).

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№268. In search of symmetry in the eurozone

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

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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Ten Tasks for the New EU Special Representative to Central Asia

Author(s): Jos Boonstra,Vera Axyonova,Michael Denison,Jacqueline Hale,Marlène Laruelle,Erica Marat,Sébastien Peyrouse,Tika Tsertsvadze / Language(s): English

The EU has a new Special Representative (EUSR) for Central Asia. It was announced on 18 June that Patricia Flor from Germany would on 1 July replace Ambassador Pierre Morel, who has been EUSR for Central Asia since 2006. Ambassador Morel has been the face of Europe in Central Asia. His work involved promoting EU energy and security interests in the region, as well as establishing close ties with leaders in Central Asia and liaising with China, Russia and the United States. He coordinated policies with the OSCE and NATO, actively engaged with expert communities in Europe and Central Asia and travelled extensively throughout the region. The EUSR’s role in Central Asia is substantial, especially in view of the fact that there are few European national embassies in the region. The challenge for the new EUSR is one of balancing priorities. She will need to maintain contacts with the region’s authoritarian governments while at the same time engaging fully with civil society.

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№277. Unholy compromise in the eurozone and how to right it

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

Two years after the first Greek rescue in May 2010, crisis management in the eurozone has still failed to restore confidence. A vivid picture of the situation can be found in Figure 1: the constellation of spreads on ten-year sovereign debts over the Bund in the eurozone is wider thanit was before monetary union, as though financial markets had already discounted its breakdown. Temporary respites, notably in the early part of 2012, have not interrupted the trend of increasing divergence that risks undermining the credibility of adjustment efforts under way.

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№280. A Sovereign Wealth Fund to Lift Germany’s Curse of Excess Savings

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

We suggest in this paper that the risk-adjusted rate of return on German savings could be improved by creating a sovereign wealth fund for Germany (designated DESWF), which couldinvest excess German savings globally. Creation of a DESWF should of course complement—and not substitute—for policies helping current account adjustment and funding through private sector capital flows.

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№284. Unleashing Competition in EU Business Services

Author(s): Henk L.M. Kox / Language(s): English

In most EU member states, the business services industry has booked no productivity growth during the last two decades. The industry's performance in the other member states was weaker than that of its US counterparts.

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№285. Commission v. Gazprom: The antitrust clash of the decade?

Author(s): Alan Riley / Language(s): English

It may well be that the Gazprom anti-trust case launched by DG Competition on September 4th will turn out to be the landmark anti-trust case of this decade, as Microsoft was of the last decade. The argument of this paper is that, for a host of political and economic reasons, this case is likely to be hard fought by both sides to a final prohibition decision and then onwards into the EU courts.

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№292. E3+3 coercive diplomacy towards Iran: Do the economic sanctions add up?

Author(s): Stefan Waizer,Steven Blockmans / Language(s): English

Uncertainty about the peaceful nature of the Iranian nuclear programme still poses a major challenge to the international community, and to the Middle East in particular. More than ten years of negotiations have brought no resolution to the dispute, so in recent years the EU and the US have upped the pressure on the Islamic Republic. In January 2012 the EU adopted an unprecedented sanctions package, mainly directed at the Iranian oil industry. Together with US measures, this strike at the centre piece of the Iranian economy was intended to force the Iranian regime to agree to demands of the international community in the framework of the ‘E3+3’ (Germany, France, the UK, plus the US, China and Russia) negotiations, conducted under the auspices of EU High Representative, Catherine Ashton.

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Czech Presidency overwhelmed by challenges: Is Central Asia one of them?

Author(s): Jos Boonstra,Ona Juknevičienė,Aibek Tilebaliev,Gulnura Toralieva,Anvar Kamolidinov,Charlote Adriaen / Language(s): English

Every member state that chairs the EU Council must strike a balance between the policies it wants to develop and the immediate crises that need to be dealt with. The active French EU chairmanship served to increase the visibility of France and its president, which also helped the EU to be seen as a more active and influential player on the international stage. However, this has not made matters easier for the Czechs, who are at the EU helm until mid-2009. Whereas Sarkozy’s main immediate crises were of a financial nature, preceded by the August Russia-Georgia war, the Czechs have already been confronted with two major EU foreign policy matters from the outset: the Israeli Gaza strip offensive and the Russia-Ukraine gas dispute. The Czech team may well end up continually dealing with one crisis after another instead of pushing ahead with further European integration, increasing the effectiveness of the Brussels institutions and developing foreign and energy policies.

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