Repair and Prepare: Strengthening Europe

This project delivers ideas and analyses for a stronger European economy. It covers three areas: We outline a reform agenda for the Eurozone that addresses key economic, political, and legal aspects; we propose improvements to make the European Single Market fit for the future; and we address the prospects for and determinants of sustained growth and prosperity in a Social Europe.

Publications

Study: The Impact of Monetary Policy on Structural Reforms in the Euro Area

Since the euro area crisis, there has been an intense discussion about the potential side effects of ECB policy on reform efforts of euro area countries. This discussion is set to become even more intense in the wake of the corona crisis and the ECB’s forceful intervention. Opponents of expansionary monetary policy contend that it reduces reforms, whereas proponents argue that it spurs reforms. We test these arguments empirically by studying the effect of monetary policy shocks on structural reform adoption in the euro area. Using an event study approach, we find that surprise monetary expansions causally increase the likelihood of structural reforms significantly: For the period between 2006 and 2016, a monetary surprise expansion of 25 basis points by the ECB increased on average countries’ reform rate by roughly 20 percentage points after two years. This effect is stronger for countries with weaker macroeconomic fundamentals or tighter public budget constraints. The findings are consistent with the ‘room-for manoeuver hypothesis’ that expansionary monetary policy spurs competition-friendly supply-side policy by reducing the shortrun costs of reforms and increasing governments’ financial leeway. More research will be required to establish whether the results are applicable in a post-corona economic environment.

Policy Brief: The Corona crisis and the stability of the European banking sector

The Covid-19 crisis put a huge burden on the global economy and could affect the economy more severe than the Great Financial crisis in the end. Governments responded to the shock imposed by Covid-19 by offering liquidity to the real economy, either directly or indirectly by guaranteeing new bank lending. So far European banks have weathered the storm, but will they be able to withstand a prolonged economic downturn? This paper suggests that the fortunes of European banking systems will depend on the economic recovery we will experience. To get insights on the recovery to be expected, we present the latest economic forecasts and contrast the current crisis to the Great Financial Crisis. Afterwards, we present the results of the 2018 EBA adverse stress test and compare the stress test scenario with a plausible “ticked-shaped” recovery post Covid-19. To assess the impact of the crisis on the stability of the banking system, the paper presents illustrative impacts on capital ratios - one of the key benchmarks used to assess the stability of banking systems - in a selected number of EU member states. The paper suggests that capital ratios could drop dramatically in a number of EU member states such as France and Spain well below what supervisors generally consider to be “sound” even under stress conditions. Our illustrative scenario suggests that banking systems in a number of European countries would likely come under extreme stress and would probably fail a rigorous stress test. Finally, we go one step further and give an outlook to what the Covid-19 crisis might mean for the future of the EU's Banking Union and Capital Markets Union.

Policy Position: Contact tracing apps in Europe

One of the issues brought forth by the COVID-19 crisis is the need to track the infection chains in order to stop the disease from spreading. One of the simplest ways this can be done is via a smartphone app. However, this can bring about several privacy issues. Furthermore, unless a common protocol is taken up all over Europe allowing apps from different member states to be able to seamlessly communicate with each other, the discrepancies would render the national apps ineffective. The member states need to decide on a single app protocol throughout Europe and the European Commission should strongly back its uptake.

Policy Brief: How to spend it right

The Recovery and Resilience Facility (RRF) will be the core of the EU’s new Recovery Instrument to fight the economic fallout of the pandemic. ...