Policy

The Capital Markets Union – an extra feather for the EMU [Paper]

This paper summarizes the progress on the EU Capital Markets Union in recent years (it was demure!); the next steps necessary as identified by Eurogroup, ECB, the Letta and Draghi Report & Draghi Report; and why all of this matter for the European Central Bank and monetary policy. Despite all the big words, the progress on the CMU in the past decade was … demure! (this trending word actually means „reserved, modest”, exactly the type of progress the CMU has had). The EU should have proven to be the right landscape for a large, well-integrated single capital market. Instead, fragmentation across national borders hinders the efficient usage of capital and leads to costliers funding for firms and underutilisation of EU private savings. I document the huge gap between EU & US capital markets across many dimensions: size of equity markets, households participation, firms’ financing structure, role of institutional investors & venture capital. 

Why does that matter for the ECB? The unfinished nature of the CMU has direct relevance for the ECB by affecting financing conditions in Member States and eroding the risk-sharing ability of the EMU, imposing a higher burden on the ECB to act as “the only game in town”. The current EU financing structure contributes to diverging financing conditions in Member States. The bank-dominated landscape in the EU might impede economic recovery through subdued credit growth following downturns and negative financial stability implications. Most importantly, the lack of sufficient risk-sharing in the EMU contributes to a high burden on the ECB to be the only game in town in terms of macroeconomic stabilisation, as long as there is no common fiscal budget as a form of risk-sharing. Famously, the euro is like a bumblebee – according to nature it should not be able “to fly” (function), yet it does. Completing the CMU can help the euro “fly” and achieve “soft landing” bc it affects ECB transmission and unburdens it from the role of “only game in town”.

The study also includes a comparison of recent statements by the Eurogroup, the ECB Governing Council and the Letta & Draghi Report on what to do next for CMU. There are many steps which are shared by all four and the EU should move on them fast! One cannot oversee that the statements by the ECB & Eurogroup largely ignore one crucial element of a true CMU: the creation of a permanent EU safe asset. Ignoring the importance of a safe asset is all the more regretful in the statements of the Eurogroup and the ECB Governing Council given the strong performance of NextGenEU bond issuances since their introduction.

Given all of the above, I conclude with 3 points. 1. A “Kantian shift” in thinking about CMU is essential – this project is relevant for EU citizens in finding a better use of their savings to face the challenges the EU is facing. New Commission portfolio for Savings & Investment Union is a step in this direction by EU Comm. 2. There are concrete steps on which we agree on 3. Yet there continue to be 27 national views on CMU – they need to converge to achieve a unified capital market. 

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Pan-European Public Goods: Rationale, Financing and Governance [Paper]

Gabriel Felbermayr and I write on the need for pan-European public goods. A simple idea – given new challenges, the EU needs a bigger budget to provide pan-European public goods in infrastructure, research & innovation and defence. We start by discussing pan-European public goods, which create true EU-wide value added. Currently, they are not a major part of the EU Budget.  In fact, the budget itself is small – at around a mere 1.0% of ЕU GNI for 21-27 (and 1.7% with NextGenEU). Compared to national budgets and to the size of EU economy, this is minuscule. In most countries, government expenditure amounts to more than 40% of GDP. It means that the EU currently can neither play a strong geopolitical role, nor properly serve a real macroeconomic stabilisation function (a problem!). We discuss the rich literature on smoothing of shocks in monetary unions, showing the lacking EU shock absorption and risk-sharing capacity in comparison to countries such as the US, DE & CAN. NextGenEU addressed this problem temporarily, yet it will expire soon. An expanded EU budget will assume the dual function of providing automatic stabilisation and finance public investments in pan-European public goods. To have a meaningful macro effect, the budget needs a certain minimum size. While impossible to propose an optimal level we discuss maximum ceiling of 4% of EU GNI in the long-term – a combination of the well-established current EU budget of close to 1% of GNI and a top-up of up to 3% of GNI, similar to the maximum 3% deficit in the Maastricht criteria.
But what should this expanded EU budget finance? We discuss 3 areas, where we see both the necessity to provide EU value added given the geopolitical environment, but also efficiency and long-term productivity gains. Firstly, we discuss a classical example of a public good – infrastructure. We need to build EU wide infrastructure in the area of transport & energy. As forcefully argued by Letta, an EU high-speed railway network should be high on EU agenda for economic & climate reasons. Recent geopolitical shocks also highlight the need for EU energy infrastructure, as grid and storage infrastructure are essential for the functioning of an energy system built on renewables and a diversified commodities supply. We argue it will be more efficient to do this public spending in a coordinated, EU-wide fashion, rather than on the national level. We will also need better governance structure however. As Felbermayr proposes in his book on Europe, one way to achieve this is to create a European Infrastructure Agency, to coordinateand publicly communicate on EU wide infrastructure plans. Next, we discuss defence & security as a priority on top of the EU agenda recently. If EU Member States agreed to collectively organise part of their national defence, efficiency gains and savings at the national level could be realised. If Member States agree that half of the 2% NATO target is provided by common defence at the EU level – they will achieve significant savings. Finally, we argue R&D and innovation is an area where the EU budget should do more to close the innovation gap to the US. In fact already a significant part – ca. 7% of the EU budget is committed to this. But the EU still lags considerably behind the US on R&D spending. While the total R&D spending gap is driven mainly by US top high-tech firms, this will not change soon in EU favor. Moreover, currently 90% of R&D expenditure in the EU is at the national level. We need more EU level spending, enhanced by better governance and an European DARPA. 
In conclusion, the EU needs to strengthen its geopolitical position. The EU should focus on providing pan-European public goods. Such goods cannot be provided by Member States on their own to the same extent of efficiency. To deliver on this, the EU needs an expanded budget.
 

 

Business cycle synchronization across the European Monetary Union – the case of Bulgaria and its driving factors

(The research was prepared as part of the Bulgarian National Bank annual scholarship for young researchers)

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