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21. Resisting deglobalisation: the case of Europe

Author:
Zsolt Darvas
Publication Date:
02-2020
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Global trade and finance data indicates that the pre-2008 pace of economic globalisation has stalled or even reversed. The European Union has defied this trend, with trade flows and financial claims continuing to grow after the recovery from the 2008 global economic and financial crisis. Immigration, including intra-EU mobility, has also continued to increase.
Topic:
Globalization, Immigration, European Union, Finance, Economic growth, Global Financial Crisis, and Trade
Political Geography:
Europe

22. A post-Brexit agreement for research and innovation

Author:
Michael Leigh, Beth Thompson, and Reinhilde Veugelers
Publication Date:
01-2020
Content Type:
Special Report
Institution:
Bruegel
Abstract:
This report sets out what the Wellcome Trust and Bruegel have learned from a project to simulate a negotiation process between the UK and EU to create a post-Brexit research and innovation agreement. Our negotiating scenario assumed that the UK had left the EU with a withdrawal agreement, and that the negotiation was taking place during a ‘standstill’ transition period.
Topic:
Treaties and Agreements, Governance, European Union, Research, Brexit, Macroeconomics, Innovation, and Transition
Political Geography:
United Kingdom and Europe

23. Market versus policy Europeanisation: has an imbalance grown over time?

Author:
Leonardo Cadamuro and Francesco Papadia
Publication Date:
01-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
This Policy Contribution tests the hypothesis that an imbalance has grown in Europe over the last few decades because markets have integrated to a greater extent than European-level policymaking, potentially creating difficulties for the democratic process in managing the economy. This hypothesis has been put forward by several authors but not so far tested empirically.
Topic:
Markets, Governance, Democracy, Regional Integration, Macroeconomics, and Trade Policy
Political Geography:
Europe

24. Can EU competition law address market distortions caused by state-controlled enterprises?

Author:
Matthew Heim
Publication Date:
12-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
This Policy Contribution considers whether European competition law could be applied more directly to state owned enterprises that create an unlevel playing field in Europe due to the support they receive from their home governments. This issue is now a priority for many Member States and the European Commission given the impact on European economic autonomy. Competition law may not be the appropriate tool for addressing the granting of illegal subsidies or other forms of support in third countries but it may be more effective than previously thought in dealing with the effect of state-owned entities that distort the internal market. If SOEs are not be resource-constrained or even profit maximising, such SOEs could be unconstrained by competitive pressures and therefore possess a de facto level of market power. By evolving existing exclusionary antitrust theories of harm, such as predatory pricing, to fit the specificities of SOEs, this Policy Contribution argues that it should be possible to add further tools to the EU’s toolbox. In any event, as part of its efforts to address the distortive effects of foreign state ownership and subsidies in the internal market, the Commission should develop a coherent and proactive competition policy to provide guidance to the market.
Topic:
Markets, Governance, Macroeconomics, and Strategic Competition
Political Geography:
Europe

25. A new look at net balances in the European Union’s next multiannual budget

Author:
Zsolt Darvas
Publication Date:
12-2019
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Whenever the European Union’s budget is discussed, much of the political focus is on net balances – whether countries pay in more than they receive – rather than on the broader overall positive effects of EU spending. The largest net contributor countries have sought to limit their contributions, leading to the build-up of an ad-hoc, complex, opaque and regressive system of revenue corrections.
Topic:
Governance, Budget, European Union, and Macroeconomics
Political Geography:
Europe

26. Bridging the divide: new evidence about firms and digitalisation

Author:
Reinhilde De Veugelers
Publication Date:
12-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Using new evidence on the digitalisation activities of firms in the European Union and the United States, we document a trend towards digital polarisation based on firms’ use of the latest digital technologies and their plans for future investment in digitalisation. A substantial share of firms are not implementing any state-of-the-art digital technologies and do not have plans to invest in digitalisation. However, there is also a substantial share of firms that are already partially or even fully implementing state-of-the-art digital technologies in their businesses and that plan to further increase their digitalisation investments. Small Manufacturing firms and old small firms in services are significantly more likely to be and remain non-active in terms of digitalisation. Our results do not provide any evidence that EU firms are more likely than their US counterparts to be stuck on the wrong side of the digitalisation divide. Taking into account firm size and firm age, there are no significant differences between the EU and the US in terms of having more or fewer persistently non-digital firms. As persistently digitally-inactive firms are also less likely to be innovative, to add employees or to command higher mark-ups, it is important for policymaking to remove barriers that trap these firms in persistent digital inactivity. Lack of access to finance is a major barrier for EU firms compared to their US counterparts, particularly for the EU’s persistently non-digital firms, and especially for older, smaller companies in services. Improving their access to finance might therefore go a long way towards addressing the corporate digitalisation divide in the EU.
Topic:
Science and Technology, Innovation, Strategic Competition, and Digital Revolution
Political Geography:
Europe, North America, and United States of America

27. The European Union-Russia-China energy triangle

Author:
Georg Zachmann
Publication Date:
12-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
We argue that energy relations between the EU and Russia and between China and Russia influence each other. We analyse their interactions in terms of four areas: oil and gas trading, electricity exchanges, energy technology exports and energy investments. We discuss five key hypotheses that describe the likely developments in these four areas in the next decade and their potential impact on Europe: 1. There is no direct competition between the EU and China for Russian oil and gas 2. China and the EU both have an interest in curbing excessive Russian energy rents 3. The EU, Russia and China compete on the global energy technology market, but specialise in different technologies 4. Intercontinental electricity exchange is unlikely 5. Russia seems more worried about Chinese energy investments with strategic/political goals, than about EU investments We find no evidence of a negative spillover for the EU from the developing Russia-China energy relationship. But, eventually, if these risks – and in particular the risk of structural financial disintermediation – do materialise, central banks would have various instruments to counter them.
Topic:
Climate Change, Energy Policy, Oil, and Europe Union
Political Geography:
Russia, China, and Europe

28. The next generation of digital currencies: in search of stability

Author:
Gregory Claeys and Maria Demertzis
Publication Date:
12-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Four major developments have challenged the status quo and reopened the debate on the forms that money will take in the future: 1) use of cash as a medium of exchange has declined; 2) distributed ledger technology (DLT) has led to the emergence of thousands of digital cryptocurrencies; 3) some global tech giants are planning to provide private digital currencies to their billions of users in the form of stablecoins; and 4) in turn, public authorities are thinking about providing their own digital currencies to the general public. These developments raise questions about the implications for financial stability, the transmission of monetary policy and financial intermediation. This Policy Contribution focuses on the consequences stablecoins and central bank digital currencies could have. Stablecoins, such as Facebook’s Libra, differ from earlier generations of cryptocurrencies in three fundamental ways. First, they would start with large networks of users and global accessibility, two pivotal features for the critical uptake of a new currency. Second, given the current limitations of DLT, including in terms of energy efficiency, new stablecoins would rely on (more) centralised systems to validate transactions. Third, stablecoins would focus particularly on reducing the volatility in the value of the new currency. These new features of stablecoins attempt to correct some of the critical deficiencies identified in first-generation cryptocurrencies, which meant they did not acquire the main functions of money. However, new stablecoins raise other questions and potentially create new problems. One issue could arise from the more centralised (permissioned) validation system, which could lead to collusion problems. Another issue could arise from the reserve system that is supposed to ensure the stability of stablecoins, such as Libra, which could be incompatible with the profit maximisation behaviour of a private issuer. Facebook’s Libra plan has been a wake-up call to central banks and governments which, afraid of losing their monetary sovereignty, have renewed their interest in central bank digital currencies (CBDCs) as a potential solution. CBDCs could make private digital currencies less attractive and slow down their adoption. But there are other reasons to give the general public access to central bank liabilities. One important reason to provide CBDCs to citizens is that if cash disappears, citizens will lose direct access to sovereign money. Another benefit of the introduction of CBDCs is that monetary policy could be strengthened by transmitting it directly to the general public. However, the introduction of CBDCs could also be disruptive and create risks. In particular, CBDCs could have major consequences for financial intermediation. These risks would have to be evaluated by policymakers before any decisions are taken. If CBDCs are introduced, central banks would have to carefully calibrate their properties to minimise these risks. But, eventually, if these risks – and in particular the risk of structural financial disintermediation – do materialise, central banks would have various instruments to counter them.
Topic:
Science and Technology, Central Bank, Currency, Cryptocurrencies, and European Parliament
Political Geography:
Europe

29. The state of China-European Union economic relations

Author:
Uri Dadush, Marta Dominguez-Jimenez, and Tianlang Gao
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
China and the European Union have an extensive and growing economic relationship. The relationship is problematic because of the distortions caused by China’s state capitalist system and the diversity of interests within the EU’s incomplete federation. More can be done to capture the untapped trade and investment opportunities that exist between the parties. China’s size and dynamism, and its recent shift from an export-led to a domestic demand-led growth model, mean that these opportunities are likely to grow with time. As the Chinese economy matures, provided appropriate policy steps are taken, it is likely to become a less disruptive force in world markets than during its extraordinary breakout period.
Topic:
Economics, Governance, European Union, Investment, and Trade
Political Geography:
China, Europe, and Asia

30. Crisis management for euro-area banks in central Europe

Author:
Alexander Lehmann
Publication Date:
11-2019
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The deep involvement of a number of euro-area banking groups in central and southeastern Europe has benefitted the host countries and has strengthened the resilience of those banking groups. But this integration has become less close because of post-financial crisis national rules that require banks to hold more capital at home, or other ring-fencing measures. There is a risk integration might be undermined further by bank resolution planning, which is now gathering pace. Regulators and banks will need to decide between two distinct models for crisis resolution, and this choice will redefine banking networks. Most efficient in terms of preserving capital and the close integration of subsidiary operations would be if the Single Resolution Board – the banking union’s central resolution authority – takes the lead for the entire banking group. However, this will require parent banks to hold the subordinated debts of their subsidiaries. Persistent barriers to intra-group capital mobility – or the option for home or host authorities to impose such restrictions – will ultimately render such schemes unworkable. The second model would involve independent local intervention schemes, which European Union countries outside the banking union are likely to call for. This will require building capacity in local debt markets, and clarifying creditor hierarchies. Exposure to banking risks will ultimately need to be borne by host-country investors. Bail-in capital issued by subsidiaries to their parents cannot be a substitute because it would expose the home country to financial contagion from the host. To sustain cross-border linkages, banking groups and their supervisors will need to make bank recovery plans more credible, and to strengthen cooperation in resolution colleges (platforms that bring together all relevant parties in resolution planning and execution). Within the banking union there is no justification for the various ring-fencing measures that have impeded the flow of capital and liquidity within banking groups.
Topic:
Governance, European Union, Regulation, Banks, and Macroeconomics
Political Geography:
Europe