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1. Overcome divisions and confront threats: Memo to the Presidents of the European Commission, Council and Parliament

Author:
Maria Demertzis, André Sapir, and Jeromin Zettelmeyer
Publication Date:
07-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In the last five years, the European Union managed to find its way through a series of major shocks, including the pandemic and the 2022 surge in energy prices. The response was in many ways remarkable, including unprecedented EU borrowing to fund the NextGenerationEU economic recovery programme and a coordinated reduction in energy demand. However, these crises have left the EU in a bruised state. The pandemic recession and energy-support measures have squeezed fiscal space. Higher energy prices have persisted and EU industrial competitiveness has been eroded. The productivity and per-capita income gap with the United States has widened. Meanwhile, the world around the EU has become more threatening and fragmented. The military situation in Ukraine remains precarious. China has become both more authoritarian and more assertive. The US shift toward protectionism has become entrenched. There is less consensus for measures to combat climate change. In the face of all this, the challenges confronting you are substantial. In the next five years, you must continue to support Ukraine while implementing measures to reinvigorate EU growth, meet the 2030 climate targets and lay the ground for meeting the 2040 goals, and secure faster emissions reductions beyond the EU’s borders. Social cohesion needs to be restored to head off threats to the EU model. More needs to be done to improve EU external security. Promoting growth and enhancing cohesion will entail further deepening of the single market in areas with the highest growth impact, doing more to support innovation and defending competition, openness and multilateralism. Safeguarding the European Green Deal means boosting green industrialisation and fair burden-sharing, while scaling up international climate finance. Strengthening security requires continued support for Ukraine and the addressing of economic security risks. Underpinning all of this, a serious effort must be made to improve EU governance – and it must be done without creating further division.
Topic:
Security, European Union, European Parliament, European Commission, Energy, Regional Politics, Competition, European Council, and Threat Assessment
Political Geography:
Europe

2. The state of financial knowledge in the European Union

Author:
Maria Demertzis, Luca Léry Moffat, Annamaria Lusardi, and Juan Mejino Lopez
Publication Date:
02-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Only one in two individuals in the European Union, on average, is financially knowledgeable. In response to a 2023 survey containing five questions assessing basic financial knowledge, only half of the respondents answered at least three of the five questions correctly. This represents a low level of financial knowledge and an obstacle for individuals to invest in financial markets. The questions most often answered correctly by respondents measured understanding of inflation and the relationship between risk and return. By contrast, only one in five respondents answered a question on the relationship between interest rates and bond prices correctly. Regarding inflation, there is a large difference between the least and most educated respondents in terms of answering the relevant question correctly. Gaps in understanding the concept of inflation are also evident between the youngest (18-24) and oldest respondents (55+) and between the poorest and richest households. A gender gap is present in financial knowledge, with 18 percentage points more men than women answering at least three out of five questions correctly, on average in the EU. Those with greater financial knowledge are less financially fragile in that they can still cover their expenses if there is a sudden loss of income, and are more confident that they will have sufficient funds to sustain themselves during retirement. Countries with higher proportions of people who are financially knowledgeable have higher numbers of people who both save with and borrow from financial institutions, an indication that financial knowledge may improve financial inclusion. All EU countries have, or are in the process of putting together, a national financial literacy strategy. There is an urgent need to roll out these strategies, to monitor progress over time and to establish best practices. Particular attention needs to be given to how financial knowledge interacts with digital skills as financial services are increasingly digitalised. Financial literacy strategies should also help close gender and other gaps in knowledge among vulnerable groups, and should ensure that financial education starts early and in schools.
Topic:
European Union, Economy, Inflation, and Financial Literacy
Political Geography:
Europe

3. The value added of central bank digital currencies: a view from the euro area

Author:
Maria Demertzis and Catarina Martins
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Different jurisdictions have set out different reasons for creating central bank digital currencies (CBDCs). Some countries, particularly those with already-operational CBDCs for retail purposes, aim to to promote financial inclusion. But in countries where most citizens have access to financial services, central banks are interested in CBDCs as an aspect of the increasing digitalisation of finance. Central banks could also choose to use CBDCs to guarantee in full citizen’s holdings (currently, deposits in commercial bank are only partially guaranteed), but this would trigger major changes in the financial system in terms of the role of commercial banks in intermediation and the role of fiat money. So far, central banks have not opted to go this way. In the euro area, consumers have multiple payment options and a very efficient retail payments system. The currency enjoys high levels of trust and is not challenged by the emergence of private currencies, such as Bitcoin, or by the risk that cash, a monetary system’s anchor, will disappear. Therefore, creating a CBDC for retail purposes in the euro area offers little obvious value added, at least for the foreseeable future. However, there is a strong case for building a CBDC that banks could use for cross-border wholesale purposes (ie with other currencies). Wholesale CBDCs could revolutionise the way that cross-border, cross-currency payments are made for two reasons. Cross-border payments are currently slow and inefficient. Pilot projects have shown that wholesale payments with CBDCs can generate substantial time and cost savings. Any two central banks that have operational wholesale CBDCs could settle transactions between themselves. This would be very different from the current system, as most settlements today are done via the dollar (and then the euro) infrastructure and use correspondent banks. The euro area and the United States would have to consider carefully from a geopolitical perspective how wholesale CBDCs might affect their global economic standing. By developing a CBDC for wholesale purposes, the European Union would be able to contribute to developing the global standard.
Topic:
Monetary Policy, Governance, Regulation, Central Bank, Digital Currency, and Euro
Political Geography:
Europe

4. How have sanctions impacted Russia?

Author:
Maria Demertzis, Benjamin Hilgenstock, Ben McWilliams, Elina Ribakova, and Simone Tagliapietra
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Russia’s invasion of Ukraine has triggered a series of sanctions imposed by the European Union, the United States and others. Sanctions included restrictions on Russia’s financial industry, its central bank and its coal and oil exporters, in addition to general export controls. Meanwhile, foreign companies have withdrawn voluntarily from the Russian market as a result of a ‘self-sanctioning’ trend. We assess the impact these sanctions have had on Russia’s economy in the immediate aftermath of the invasion and more structurally. Russian fiscal revenues have not suffered from sanctions sufficiently to reduce the length of this war. Effective management by the Bank of Russia has prevented financial instability and has therefore also protected the real economy. However, this picture of economic containment is coming to an end. Russia’s fiscal revenues are now beginning to take a hit; given the breadth of sanctions, the economy will suffer in the medium to long term. The voluntary departure of a large number of western firms, eventual energy decoupling by the EU and Russia’s inability to find equal alternatives will damage the Russian economy severely. As the Russian economy closes in on itself, it will become harder to find reliable data to evaluate the extent of the hit. Still greater sanctions coordination across the globe is needed to isolate the Russian economy, limit the flow of income into Russian coffers and therefore help stop the war.
Topic:
Governance, Sanctions, Economy, and Russia-Ukraine War
Political Geography:
Russia, Europe, and Ukraine

5. An analysis of central bank decision-making

Author:
Maria Demertzis, Catarina Martina, and Nicola Viegi
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The process by which central banks take decisions has evolved over the years, with a tendency towards independence and decisions taken by committees rather than individuals. Monetary policy committees can be set up formally in different ways, traditionally falling into one of two categories: individualistic or collegial. Individualistic committees reach decisions by voting and publish the votes of each of their members, while in collegial committees, decisions are typically reached collectively. The European Central Bank is an example of the latter, while the Bank of England follows an individualistic approach. Focusing on decision-making, a relevant question is whether the formal set-up in practice leads to different ways of deliberating and reaching monetary policy decisions. We look at decisions taken by the Bank of England, the Federal Reserve and the European Central Bank over more than 20 years to evaluate how different the decision-making process is in these three central banks. The results indicate that, irrespective of the committee type, their approach to consensus building when they take decisions is similar. The three central banks seem to value reaching decisions by unanimity, both on interest rates – the prime monetary policy instrument by definition – and on asset purchases. Decisions to tighten monetary policy are more often taken unanimously than decisions to ease monetary policy. When maintaining policy unchanged, decisions are usually backed by most committee members.
Topic:
Federal Reserve, Finance, Central Bank, European Central Bank, Decision-Making, and Bank of England
Political Geography:
United Kingdom, Europe, Global Focus, and United States of America

6. Europe should not neglect its capital markets union

Author:
Maria Demertzis, Marta Dominguez-Jimenez, and Lionel Guetta-Jeanrenaud
Publication Date:
06-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union’s capital markets remain very underdeveloped compared to the United States. The market for equity, as measured as the size of the total market capitalisation of listed domestic firms relative to GDP, is much larger in the US and in Japan than in Europe.
Topic:
European Union, GDP, and Capital Flows
Political Geography:
Japan, Europe, and United States of America

7. The great COVID-19 divergence: managing a sustainable and equitable recovery in the European Union

Author:
Gregory Claeys, Zsolt Darvas, Maria Demertzis, and Guntram B. Wolff
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The COVID-19 pandemic has led to the biggest global recession since the Second World War. Forecasts show the European Union underperforming economically relative to the United States and China during 2019-2023. Southern European countries have been particularly strongly affected. While the ICT sector has benefitted from the COVID-19 crisis, tourism, travel and services have suffered. Business insolvencies have, paradoxically, fallen. While total employment has almost recovered, the young and those with low-level qualifications have suffered employment losses. Inequality could rise. The pandemic may lead to medium to long-term changes in the economy, with more teleworking, possibly higher productivity growth and changed consumer behaviour. Policymakers must act to prevent lasting divergence within the EU and to prevent scarring from the fallout from the pandemic. The first priority is tackling the global health emergency. Second, we warn against premature fiscal tightening and recommend instead additional short-term support from national budgets. Over the medium term, fiscal policymakers will need to gradually move away from supporting companies through subsidies, towards tax incentives for corporate investment. A review of the European fiscal framework is needed to achieve the EU’s green goals more rapidly. The quality of public finances, how policymakers spend resources and the associated reforms are of central importance to prevent scarring. Improving the efficiency of insolvency procedures will be crucial for speedy and effective recovery. Targeted labour market policies for the young and less-qualified are needed. As teleworking becomes a more permanent feature of the EU’s labour markets, it will be crucial to adapt social security and taxation systems in the context of the single market for labour. The EU should resist protectionist calls in the wake of the pandemic. Rigorous competition policy enforcement and an integrated EU market have been beneficial for European convergence and growth. Capital markets have an important role to play in a speedy recovery.
Topic:
Governance, European Union, Inequality, and COVID-19
Political Geography:
Europe

8. Low interest rates in Europe and the US: one trend, two stories

Author:
Maria Demertzis and Nicola Viegi
Publication Date:
03-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
In both Europe and the United States, interest rates have been declining for more than fifteen years. For much of this period, real interest rates have been negative and they are expected to remain negative for at least another decade. The literature associates this decline in interest rates with a similarly protracted decline in productivity. But the decline in productivity appears paradoxical given major technological advances. The decline in the price of capital is underpinned by the factors that have caused a decline in demand for capital, as well as a relative increase in its supply. On the supply side, aging and an increase in overall macroeconomic risk since the financial crisis have both led to increased savings. On the demand side, the increase in the importance of intangible capital in production has reduced the demand for physical capital. Nevertheless, for the US, the literature has identified the increase in market concentration as the biggest factor responsible for the reduction in the overall demand for capital. Digital innovation has led to the creation of champion firms that have captured big market shares and have been able to prevent others from entering not only the US market, but markets globally. This has dampened investment. Europe is affected by US digital dominance, but other factors, including aging and increased risk, are more prominent in sustaining the downward pressure on interest rates. In particular, the lack of risk capital, in the context of capital markets, contributes to this downward pressure in the EU. As the knowledge economy relies increasingly on intangible capital, a bank-based system that requires collateral is not well suited to finance investments. A lack of suitable finance will remain an important factor in the downward pressure on interest rates. The structural factors behind the downward pressure on interest rates imply that macroeconomic policy will have a reduced role in managing aggregate demand. Monetary policy in the euro area will be more about preventing financial fragmentation and less about stimulating demand. Equally, fiscal policy will have more of a supporting rather than stimulating role. Tackling the structural decline in market dynamism and therefore in real rates will require structural policies to reduce market power globally and ensure the creation of capital markets in the EU.
Topic:
Monetary Policy, Governance, European Union, Finance, and Macroeconomics
Political Geography:
Europe, North America, and United States of America

9. The productivity paradox: policy lessons from MICROPROD

Author:
Gregory Claeys and Maria Demertzis
Publication Date:
01-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Productivity growth in Europe has been on a downward trend for several decades. Given that productivity growth is a crucial source of output growth, particularly in an aging society like the European Union, it is crucial to understand what is driving this slowdown and what the potential consequences are for our economic model and for citizens’ welfare. Some explanations for this trend are global in nature, but there are also significant differences in country structures in Europe that have led to different outcomes and that need to be accounted for before policy prescriptions can be made. The objective of MICROPROD, an EU-wide research project that runs until the end of 2021, is to contribute to this research strand by using data from various European countries to study the microeconomic mechanisms behind this macroeconomic phenomenon. In particular, the aim is to understand the challenges posed to Europe by the fourth industrial revolution and its impact on productivity in the context of globalisation and digitalisation, and to recommend policies to address these challenges. MICROPROD researchers have so far delivered 20 papers on four broad issues relevant for today’s policy debates: the measurement and effects of intangible capital on productivity; the impact of globalisation, international trade and the integration of global value chains (GVCs) on productivity; factor allocation and allocative efficiency; and finally the social consequences of the two structural shocks Europe has faced in the last two decades: globalisation and technological progress. This Policy Contribution reviews the main conclusions of these 20 MICROPROD papers and how they inform policy debates. However, the mid-point of the three-year MICROPROD project also coincided with the start of the COVID-19 crisis, which might have accelerated some trends or possibly reversed others. We therefore discuss how some of the messages of MICROPROD research may contribute to our understanding of the current crisis and its aftermath.
Topic:
Globalization, Governance, European Union, Macroeconomics, Productivity, and Digitalization
Political Geography:
Europe

10. COVID-19 financial aid and productivity: has support been well spent?

Author:
Carlo Altomonte, Lionel Fontagné, Maria Demertzis, and Steffen Müller
Publication Date:
11-2021
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Most European Union countries have made good progress with vaccinating their populations against COVID-19 and are now seeing a rebound in economic activity. While the scarring effects of the crisis and the long-term implications of the pandemic are only partially understood, the effects of support given to firms can be evaluated in order to help plan the removal of crisis support. European regions and countries that depend heavily on services requiring physical proximity have been hit hardest by COVID-19-related measures. But these services sectors tend also to be the smallest and least-productive in any economy, implying that, coming into the crisis, the highest shares of zombie firms were in these sectors. Reliance on physical proximity and the higher incidence of zombies to start with have combined to make those services-dependent economies particularly vulnerable to any attempt to remove the support put in place during the pandemic. The evidence shows that the main goal of the provision of support during the COVID-19 crisis, namely to protect employment, has been achieved. However, the evidence is varied on how efficiently this was done, in terms of helping firms that have a good chance of surviving, while not supporting those that will in any case exit. An analysis of France, Germany and Italy shows the potential for ‘cleansing effects’ in that it was the least-productive firms that have been affected most by the crisis. While support was generally not targeted at protecting good firms only, financial support went by and large to those with the capacity to survive and succeed. Labour schemes have been effective in protecting employment.
Topic:
European Union, COVID-19, and Financial Aid
Political Geography:
Europe, France, Germany, and Italy