The new Europe
The financial crisis is largely over, yet confidence in the ECB and EU remains low. Thanks to Brexit and populism, there is currently no shortage of challenges – nor of a visionary upswing in some parts of Europe.
Billions in taxpayers' money has been spent rescuing banks since the financial crisis erupted in 2008. From the debt crisis to the euro crisis, the EU stumbled from one low point to the next. Greece in particular had to contend with a loss of confidence on the international financial markets – from which Germany gained considerable benefit, by the way. The refugee crisis followed in 2015, with the Brexit referendum in the UK and the election of Donald Trump in 2016. But new visionaries also took to the international stage, including the new French President, Emmanuel Macron.
In order to reboost the economy, the European Central Bank (ECB) has been pursuing a much criticised excessively low interest rate policy for years, which we can assume is benefitting German households, however. Since 2015, the ECB has been buying bonds from European institutions and states – a measure for which there are justifiable grounds. Since June 2016, it has also been buying corporate bonds, and published the results of the second stress test round in July 2016.
"ECB is one of the few institutions contributing to the solution."
It turns out that the ECB is taking specific action to continue providing momentum and security to the European economy. "It is one of the few institutions contributing to the solution", according to Reint E. Gropp, President of the IWH. "But to achieve a sustainable solution, politicians need to act much more decisively." However, countries are different as to how quickly they implement reforms and hand oversight over to EU-institutions.
The refugee crisis was and still is one of the EU's main stumbling blocks. A lack of cooperation between member states has allowed the humanitarian crisis to continue to spread, with immigration and the distribution of refugees remaining a critical issue, despite the EU-Turkey Agreement. Immigrants' integration into the labour market, especially in Germany, will remain a political challenge for decades. But science must also provide analyses and potential solutions. For example, the Leibniz Association's "Crises of a globalised world" research network has addressed the issue of the refugee crisis.
Migration was and is a constant issue when it comes to Brexit. But the UK's decision to leave the EU also touched on other economic dimensions: Even before the referendum, an IWH study had already suggested that the pound would react strongly to the UK's departure. With the increasing likelihood of Brexit, more than 50% of researchers asked by Thomas Krause predicted a significant devaluation of the pound against other currencies, including the euro. Stock market price volatility therefore reached record levels ahead of the referendum. "This turbulence reflected the uncertainty that was and is associated with the Brexit decision", states Gropp. The President takes a calm view the fate of London's financial centre, however: "London's financial centre will retain its dominant position within Europe despite Brexit. This is based on both the experience gained from the introduction of the euro and is also due to London's considerable location factors: the size of the city, the regulatory environment and its human assets."
On a third front, the EU is fighting for the confidence of its citizens. But while on the one hand, the popularity levels of eurosceptic parties rose or national conservative parties even governed some Member States in the past, the EU also appears to be reinventing itself: Neither Brexit nor the election of Donald Trump in the US have fractured the EU. On the contrary. Not only has a committed European scaled the heights of the French political establishment, namely Emmanuel Macron, but the EU also now aims to close ranks when it comes to defence.
Crises are always an opportunity for change. It is no secret that the EU has potential for improvement in many respects. Perhaps this new momentum will finally trigger other important change processes: improvements to the democratic legitimacy of the EU institutions, less regulation of the labour and product markets, a reduction in bureaucracy both in the EU and its member states, the implementation of the capital markets union and a new weighting for EU spending. This is the only way for the EU to remain sustainable – prepared for future financial crises and strengthened by new cohesion.
Current IWH Publications
EFN Report Winter 2017/18: Economic Outlook for the Euro Area in 2018 and 2019
in: European Forecasting Network Reports , No. 1, 2018
With advanced economies likely to face over-utilization of economic capacities in 2018 for the first time since the Great Recession, companies will further expand their investment activities. Price and wage dynamics will pick up globally, triggered by the recent increase in energy prices. A major risk for the world economy pertains to financial markets: measures for risk tolareance and valuations for many types of assets have approached levels last reached ten years ago, on the eve of the financial crisis. A sudden readjustment of asset prices and risk premia could worsen financial conditions globally and seriously affect the global economy. The cyclical upswing of the euro area economy continues. The recovery, under way since summer 2013, transformed into an upswing in autumn 2016 when demand from outside the euro area increased quite abruptly; higher exports and improved expectations have contrinuted to induce firms to invest more into equipment. Wage dynamics in the euro area appear to increase, but only slowly. An annual growth rate for hourly wage costs of about 2% is still not enough to put upward pressure on prices, but this will change eventually as the cyclical upswing is likely to continue. Inflation will, according to our forecast, reach the ECB’s target of below but close to 2% in the second half of 2019. Conditions for further healthy growth in the euro area are in place, but employment dynamics might markedly lose momentum in some member countries in the second half of 2018, as the potential labour force is becoming more and more exhausted. Overall, we forecast euro area GDP to grow by 2.2% in 2018 and by 1.5% in 2019.
Delay Determinants of European Banking Union Implementation
in: IWH Discussion Papers , No. 24, 2017
To safeguard financial stability and harmonise regulation, the European Commission substantially reformed banking supervision, resolution, and deposit insurance via EU directives. But most countries delay the transposition of these directives. We ask if transposition delays result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems? Supervisors might try to protect national banking systems and local politicians maybe reluctant to surrender national sovereignty to deal with failed banks. Alternatively, intricate financial regulation might require more implementation time in large and complex financial and political systems. We therefore collect data on the transposition delays of the three Banking Union directives and investigate observed delay variation across member states. Our correlation analyses suggest that existing regulatory and institutional frameworks, rather than banking market structure or political factors, matter for transposition delays.
How Can We Boost Competition in the Services Sector?
in: Externer Herausgeberband, Nomos , 2017
‘How Can We Boost Competition in the Services Sector?’ is a key question in the process of creating a more effi-cient economic environment in Germany. This book contains a collection of conference contributions on service sector reforms from members of academic institutions, ministries, the EU Commission and other organisations. The conference consisted of a keynote on the importance and implementation of structural reforms in Europe and two panels that dealt with the evaluation of past reforms in the services sector and the potential scope and effects of further reforms. Since the 1990s, productivity growth in Germany and other Member States of the European Union has been significantly lower than in the US. The development of productivity growth in the services sector is estimated to account for two thirds of this widening gap. The European Commission advocated reforms in the services sector in its country-specific recommendations for Germany. At a conference in Berlin in July 2016, experts from various fields presented and discussed studies on service sector reforms.
in: Wirtschaft im Wandel , No. 3, 2017
Deutschland hat gewählt. Die Wahl hat große Verluste für die Volksparteien SPD und CDU gebracht, beide sind auf historische Tiefststände in der Wählergunst gesunken. Zusammen haben CDU und SPD nur noch knapp 54% der Stimmen; der Tag, an dem eine so genannte Große Koalition keine Mehrheit mehr haben wird, scheint nicht mehr fern. Für die CDU waren die Verluste noch deutlich dramatischer als für die SPD, was aber nicht so sehr ins Gewicht fällt, weil die CDU noch immer stärkste Partei ist und die Kanzlerin stellen kann. Allerdings kann sie nicht alleine regieren. Nachdem die SPD sich zumindest vorläufig (wenn auch nicht völlig glaubwürdig) aus der Regierungsbildung verabschiedet hat, bleibt also nur eine Jamaika-Koalition zwischen CDU, FDP und den Grünen.
EFN Report Autumn 2017: Economic Outlook for the Euro Area in 2017 and 2018
in: European Forecasting Network Reports , No. 4, 2017
In 2017 the world economy is in an upswing, but consumer price inflation is still surprisingly low in advanced economies, and central banks will therefore keep key interest rates very low and financial conditions favorable for the rest of the year and, probably, for 2018. Global growth, though, will moderate a bit, since expansive policy measures in China have been reduced. As an early consequence, imports of emerging Asia were no more than stagnant during summer. The upswing in the euro area is broad based, both regionally and with respect to the different components of aggregate demand, as investment has recently picked up markedly, partly due to construction of dwellings. From the production side, the level of capacity utilization in the manufacturing sector is clearly above its long-term average and rising further. Inflation will not have reached the ECB’s target rate of below but close to 2% at the end of 2018. The trend of a growing participation rate in labour markets and the amount of part-time and low quality jobs are some reasons why overall wage and price dynamics are still very moderate; the appreciation of the euro, the incorporation of technical innovations and a possible change in the consumer preferences for low-cost products could be other reasons. We forecast a GDP growth rate of 2.3% for 2017 and 1.9% for 2018. This year’s strong pickup of world trade means that net exports will, in spite of rather strong domestic demand, contribute positively to GDP growth in 2017, while the opposite holds for 2018, due to the significant appreciation of the Euro.