JanuaryEU ePub2019 WORLD COMMERCE REVIEW

Jean-Claude Juncker The European Union A new vision for trade says there can be no can help to make trade is presented by the respite in building a more equitable, Benoît Foundation for European united Europe Cœuré believes Progressive Studies

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www.hermes-aviation-consulting.com www.worldcommercereview.com Benoît Cœuré,Benoît and the EUisvehicle to maketrade more equitable protectionism of Protectionism isthewrong solutionto address concerns effectsofglobalisation, aboutthe distributional says consequences The values? European interests, argues Luisa Santos promoting in go policy The EUcan andshouldusetrade agreements to promote European values butnotat theexpense ofitseconomic trade can far How progressive modelfor trade andinvestment trade The Foundation for European Progressive Studies present avisionthat canform thecore ofa new, forward-looking for vision new A hasbenefitedhow thepeopleof theSingle Market Europe over thepast20 years on years 20 We shouldconsider thegainsmadeasaresult ofhaving withonemoney, onemarket says Draghi, outlining Mario euro the and Europe Europe sovereignty JunckersaysJean-Claude there canbenorespite inthework to buildamore united, stronger andmore democratic European of hour The CONTENTS www.worldcommercereview.com the European economy economy European are firms investing too little compared to global competitors.DeboraRevoltella calls for a'retooling' of Europe’s Retooling convergence fostering and foster cohesion inEurope in Union CœuréBenoît focusses ontheCESEEeconomies to explain howEuropean completion ofEMUcanaccelerate convergence the of role The times,normal inbadtimes they are complementary EMU in capacity fiscal Marco Carnot argue ButiandNicolas that whilst financialunionandaeuro area fiscalstabilisation are substitutes in central a for case The capacity fiscal more effective risksharing useoffiscalstabiliserswillmeannoadditional central a require not does Heijdra, Michel Tjalle Aarden, JesperHansonand Toep van Dijkargue that and strongerrisk sharing financialmarket EMU stable more A role for theeuro, Juncker, asoutlinedby Jean-Claude andhow itmight goaboutdoingso euro the of Konstantinos Efstathiou andFrancesco Papadia assesswhethertheeuro area shouldpursueagreater international role international The CONTENTS www.worldcommercereview.com On populists, immigration and welfare democrats ofthemid-twentieth century and of'right-wing' Kokexamines therise populism inEurope,Niek andfindsthat theirpoliciesmatch thoseofthesocial immigration populists, On discuss WorthingtonHenrietta place hard a European statute. companies are andthenewEUblocking Oresman squeezed Matthew between USsanctions and and rock a Between indeepeningEU-Asia relations opportunity Fraser Cameron considers theunforeseen consequences ofglobaluncertainty, andhow theEUhasseized the Asia to pivot EU's The Brexit andhow theburdenestimated would budgetshortfall fallacross different memberstates no-deal a of Brexit would meantheUK’sA no-deal contributions to theEUbudgetfallto zero. calculates the ZsoltDarvas implications budget EU model growth could makeEuropethat lackofaction inclusive even more vulnerable Europe’s of Globalisation isplacingtheEuropean socialmodelunderstrain. Jacques BughinandChristopher Pissarides argue resilience the Testing CONTENTS www.worldcommercereview.com How Europe could yet take the lead in the global EV development race development EV global Veugelers consider how Europe might bestattempt to catch othercountries inthedevelopment andovertake race the in lead the take of Thevehicles hasbecome electrification akeytrend intheautomotive sector. Simoneyet TagliapietraReinhilde and could Europe How CONTENTS www.worldcommercereview.com The hourofEuropean the work to builda more united, stronger andmore Jean-Claude JunckersaysJean-Claude there can benorespite in sovereignty democratic Europe www.worldcommercereview.com defending ourcommunal way oflife more. We ofpatriotismthat isusedfor shouldembrace good, thekind and letusshowSo theEuropean Unionabitmore respect.Let usstop dragging itsnamethrough themudand start guardian ofpeace. We should bethankfulwe live onapeaceful continent, madepossibleby theEuropean Union. I speakofthesetimesnotbecausebelieve we are ofanothercatastrophe. onthebrink ButbecauseEurope isthe out amongstbrothers, engulfingthe continent. time by 1913,Europeans surprise. In to expected live alastingpeace. And yet, justayear later, abrutalwar broke nations theGreat during War in1914.Awar whichtook thesunny, starting optimistic andpeaceful continent of the canalsoshow up,History unannounced, inthelife ofnations andbeslow to leave. Suchwas thefate ofEurope’s Commission will continue to adopt. This iswhat isonouragendafor themonths to come. There ismuchstillto bedone. Noself-congratulating, noboasting. andhard thisistheattitude work: the Modesty passing day. will continue unabated. witheach We Unionthat littlebitmore to perfect render willkeepworking thisimperfect why Iwillnotpresent you ofthelastfour withanoverview years’ achievements. Instead, Isay to you that ourefforts But thetimehasnotyet come to passjudgement ontheCommission Ihave thehonourofpresiding over. This is oftheEuropean Union. long history mandatewith justafive-year to makea real difference. This Commissionismerely achapter,brief moment ainthe At moves times, forward history onlyhaltinglybutitisalways quickto passusby. Suchisthefate ofaCommission responsibility A perpetual www.worldcommercereview.com What istheState oftheUniontoday, in2018? Ten years Lehman after Brothers, Europe haslargely thepage turned The state that are ofourUnionin2018:efforts bearing fruit remain vigilant. Living upto Europe’s –never againwar –isoureternal duty, rallying cry responsibility. ourperpetual We mustall path. ofnationalism that pointsThe thefinger at othersinstead kind ofsearching for ways to better live together. never againstothers. We ofexaggerated thekind nationalism shouldreject that hate projects anddestroys allinits a strong perspective for the future the for perspective strong a 2019. Sibiu is the moment we must offer all Europeans Europeans all offer must we moment the is Sibiu 2019. Europe’s Leaders meet in Sibiu, Romania on 9 May May 9 on Romania Sibiu, in meet Leaders Europe’s www.worldcommercereview.com July, asPresident Iwas ableto speak, oftheEuropean Commission, onbehalf oftheworld’s biggestsinglemarket. When, amidstdangerous globaltensions, Iwent to Beijing, Tokyo and Washington inthespace ofoneweek last standards for food safety, workers’ rights, theenvironment andconsumer rightsfarbeyond ourborders. 40% oftheworld’s GDP. These agreements contested Europe’s –sooften butsounjustly–helpusexport high to share sovereignty. The European Union now hastrade agreements with70countries around theworld, covering Europe hasalsoreaffirmed itsposition as a trade power. Ourglobal trading positionistheliving proof oftheneed euro thisIamproud. area. Of continue to underestimate. Ihave always fought for Greece, itsdignity, itsrole inEurope, anditsplace inside the back onitsown two feet. IapplaudthepeopleofGreece for whichother theirHerculean Europeans efforts.Efforts social hardship –thoughalsoby unprecedented –Greece solidarity successfully exited itsprogramme andisnow And then there painfulyears, isGreece: what assomevery by canonlybedescribed after marked unprecedented in on400billion. call the ‘Juncker Fund’. AFund ofpublicandprivate that hastriggered investment. €335billionworth We are closing Investment thanksnotablyto ourEuropean isback, Fund for Strategic Investments, whichsome–lessandstill unemployment isat 14.8%. This isstilltoo highafigure butisthelowest ithasbeensince the year 2000. are peopleinBelgium. Never have somany menandwomen –239millionpeoplebeeninwork inEurope. Youth Jobs have returned, withalmost12millionnewjobscreated since 2014.12million–that ismore jobsthanthere now grown for 21consecutive quarters. on aneconomic whichcamefrom andfinancialcrisis outsidebutwhichcutdeep at home. Europe’s economy has www.worldcommercereview.com neighbourhood willbeshapedbyneighbourhood others. done. We whenit comes mustfindunity to the –once and Western Balkans for all. Should we not, ourimmediate will remain success stories –for we were ableto reconcile Europe’s andgeography. history Butthere ismore to be stability,Europe canexport aswe have donewiththesuccessive enlargements ofourUnion.For me, theseare and moment’s respite to buildamore inourefforts united Europe. than ever. challengesfacing ourcontinentThe external are multiplyingby theday. There cantherefore benota – Commission and Parliament –mustlookto thefuture. The world hasnot stopped ismore turning. volatile It the future for generations ofEuropeans. We ablindeye cannotturn to thechallengeinfront ofournoses. We This summer’s droughts are reminder astark that –notonlyfor work isto –ofjusthow safeguard farmers important and politicallyindispensable. conclusions whenitcomes to ourtargets for reducing CO Europeans, we want to leave ahealthierplanetbehind for thosethat follow. Ishare ourEnergy Commissioner’s We proved thiswhenrelentlessly defending theParis Agreement onclimate change. We didthisbecause, as A globalresponsibility that Europesurprise succeeds whenitspeakswithonevoice. When needed, Europe asone. mustact in Europe’s name. For some, theagreement IstruckwithPresident Trump cameasasurprise. Butitshouldbeno for citizens andbusinessesalike. United, asaUnion,Europe is aforce to bereckoned with.In Washington, Ispoke The strength ofaunited Europe, andinpractice, bothinprinciple gave methecloutIneededto gettangible results values andinterests. Ishowed Europe to beanopencontinent. Butnotanaïve one. On behalfofaUnionaccounting for of the world’s afifth economy. OnbehalfofaUnionwilling to standup for its 2 emissionsby 2030. They are bothscientifically accurate www.worldcommercereview.com global digitisation. can protect jobsinanopen,interconnected world. Onlyastrong and united Europe canmaster thechallenges of citizens againstthreats –from internal andexternal terrorism to climate change. Onlyastrong andunited Europe more autonomous andlive upto ourglobalresponsibilities. Onlyastrong andunited Europe canprotect our point: weAllow theEuropean willnotmilitarise meto oneimportant clarify Union. What we want isto become Structured Cooperation inDefence become fullyoperational. I willcontinue to work day andnight over months to thenext seetheEuropean Defence Fund andPermanent despite great resistance at thetime–Ireignited theideaof aEurope ofDefence as2014.And thisiswhy asearly strengthened. We willalways beaglobalpayer beingaglobal player butitistimewe started too. This iswhy – EuropeIf were to might unite ofitsnations, allthepolitical, economic itsrole andmilitary intheworld could be unilateralism anddasheshopes. that defies expectations Iwillalways championmultilateralism. relations,currency even assomebecome more prone wars. to trade andcurrency Iamnotinfavour ofaselfish The world today needsastrong andunited Europe. AEurope that works for peace, trade agreements andstable The hourofEuropean sovereignty alliances may notlookthesame tomorrow. today’sIn world, that Europe words cannolongerbecertain given yesterday canstillbecounted ontoday. That old being increasingly called into question. Syria isacaseinpoint for how theinternational Europeans order that served sowell theSecond after World War is remain silent inface disaster ofthisimpendinghumanitarian –whichappearsnow allbutinevitable. The in conflict Take alookaround. What ishappeninginIdlibSyria now concern mustbeofdeepanddirect to usall. We cannot www.worldcommercereview.com elections to proveelections to citizens asone, that, thisUnioniscapableofdeliveringandonwhat acting onexpectations This iswhat isat stakewhenEuropeans year. taketo thepollsinMay next We willusethedays before theEuropean must andwillchampionmultilateralism. The world we live few. in belongsto allandnotaselect Europe willnever beafortress, itsbackontheworld turning orthosesuffering withinit. EuropeIt isnotanisland. will remain so. European sovereignty cannever beto thedetriment ofothers. Europe isacontinent ofopennessandtolerance. It This belief that ‘united we standtaller’ oftheEuropean essence ofwhat Union. itmeansto isthevery bepart sovereignty –whenandwhere needed–makeseachofournation states stronger. relations. European sovereignty ofmember states’ isborn national sovereignty anddoesnotreplace it. Sharing to play arole, asaUnion,inshapingglobalaffairs. Europe has to become amore sovereign ininternational actor took itsdestiny into itsown istimeEurope hands. It developed what Icoined 'Weltpolitikfähigkeit' –thecapacity The geopolitical situation makesthisEurope’s thetimefor hour: European sovereignty hascome. is timeEurope It ifnotentirely,great part, thanksto Europe. NoEurope, noGalileo. We shouldbeproud. benefit of400millionusers worldwide. Nosingle memberstate could have donethisalone.Galileo isasuccess in that istoday keepingEurope inthespace race. State NosingleMember could have put26satellites for inorbit, the A strong andunited Europe iswhat allows itsmemberstates to reach forprogramme isourGalileo thestars. It But we canonly dosoifwe standunited. intelligence, andautomation. And that we are ableto upholdEuropeans’ values, rights andidentities indoingso. –thelargest isbecauseofoursinglemarket intheworld –that weIt cansetstandards for bigdata, artificial www.worldcommercereview.com should instead begeared towards thefuture. at leastmostofus–agreed that Europe’s socialdimensionshould begiven theCinderella treatment nomore, but climate policy,Union withaforward-looking acomprehensive Union. And we Migration Agenda, –or andaSecurity Union,afairer Union,aCapital anEnergy Markets SingleMarket, Union,aBanking deeper Economic andMonetary At thebeginning ofthismandate, we allcollectively promised to deliver amore innovative a Digital SingleMarket, we canjointly deliver onwhat we have promised –before theEuropean Parliament elections. this view. We are outoftime. This iswhy Iamcalling onallto work closelytogether over months, thenext sothat citizens live insummerorwinter isaquestion ofsubsidiarity. time. It theParliament Iexpect andCouncil willshare proposing to changethis. muststop. Clock-changing states Member shouldthemselves decidewhethertheir applause whenEUlaw that dictates Europeans have to ayear. changetheclockstwice The Commission istoday We allsay speechesthat insoap-box we want to bebigon bigthingsandsmallonthings. Butthere isno bans theseplastics, which iswhat the Commission hasproposed. plasticsto protect ouroceans litter againstmarine –theywillwant tosingle-use seeaEuropean law inforce that Europeans to thepollsinMay 2019willnotcare taking abouttheCommission’s goodintention to crack down on giants pay taxes where theycreate theirprofits –they want to seeithappening for real. And theyareright. Europeans to thepollsinMay 2019willnotcare taking that theCommission madeaproposal to makeinternet Delivering onourpromises halves orquarters. We mustshow that together we canplant theseedsofamore sovereign Europe. differencesSouth, Eastand and between North right. and West,Europe left is too small to letitselfbedivided in we promised ofthismandate. to achieve we theelections, at By thestart mustshow that Europe canovercome www.worldcommercereview.com have helpedrescue over 690,000peopleat seasince 2015. drastically reduced –down 97%intheEastern Mediterranean and80%intheCentral Mediterranean. EUoperations European Asylum System have beenagreed. to managemigration efforts Our have have fruit:arrivals borne been more progress acknowledged. Five thanisoften oftheseven Commission’s proposals to reform ourCommon Leadership ofcompromise andaspirit are much neededwhenitcomes to ofcourse migration. very We have made manipulation by third countries orprivate interests. fair elections. This iswhy theCommission isproposing newrulesto better protect ourdemocratic processes from proposed measures to fight more moneylaundering effectively across ourborders. Wemust our protect free and ourselves to become unwitting accomplices to cooperate. becauseofourinability thesamevein, In we have also to prosecute terrorists inamore coordinated way, across ourUnion. Terrorists noborders. know We cannotallow established European Public Prosecutor’s toincludethefight Office againstterrorist offences. Weneed tobeable windowcritical inwhichthegreatest damageisdone. And we are proposing to thetasksofnewly extend This iswhy theCommission isproposing newrulesto getterrorist content offthe web withinonehour–the Union.Europeans theirUniontocompleting keepthemsafe. rightly expect ourSecurity fewest inCommission andParliament. Leadership iswhat isneedednow. This isnotablythecase whenitcomes to all attempts to blametheCommission alone. There are scapegoats to befound inallthree institutions–withthe door. proposals Our are there for allto see. They needto beadopted andimplemented. Iwillcontinue to resist I cannotaccept that failure theblamefor –andthere every have beenafew –islaidsolelyat theCommission’s difficult discussion atthat. already beenagreed by Parliament andCouncil, 20%are onwell ontheway and30%are stillunderdiscussion– The Commission hasputall theproposals andinitiatives we announced in2014onthetable. Halfofthesehave www.worldcommercereview.com must now betakenup. We migrants. needskilled Commission proposals addressing thisissuehave beenonthetablefor sometimeand I would alsoliketo remind memberstates againoftheneedto openlegalpathways to theUnion.Irenew my call. accelerate thereturn ofirregular migrants. The Commission memberstates iscommitted indoingso. to supporting inprocessingEuropean Convention. asylumseekersinlinewiththeGeneva support And we are proposing to are develop alsoproposing theEuropean to further Asylum to Agency makesure States that Member getmore Coast Guard to better borders protect ourexternal withanadditional10,000European border guards by 2020. We Turning backto migration: theCommission istoday strengthen proposing theEuropean to further Border and coming to theiraid–Europe at itsbest. from thissummerwere notonlythoseoftheformidable fires butofthe Swedish people greeting Polish firefighters protection mechanism. When fires rage inone European country, allof Europe burns. images The most striking We notfor needmore solidarity solidarity’s sakebutfor thesakeofefficiency. Thisistrueinthecaseofourcivil is notgoodenough. We –today needlastingsolidarity andforever more. reform. We cannotcontinue to squabble to findad-hocsolutionseachtimeanewshiparrives. solidarity Temporary the Council to now presidency makethedecisive step to broker asustainablesolutiononbalanced migration The Commission andseveral Council presidencies have putnumerous compromise solutionsonthetable. Icallon removed. Failure to dosowould amount to anunacceptable step backfor theEurope oftoday andtomorrow. opposedto internalI amandwillremain borders. strictly Where borders have beenreinstated, theymustbe allmustshow ifwe andthesolidarity are to getbackto area aSchengen withoutinternal borders.own territory; However, memberstates have notyet found theright balance between theresponsibility eachmustassumeonits www.worldcommercereview.com partnership between equals. partnership numerous European-African trade agreements into acontinent-to-continent free trade agreement, as aneconomic compares to 16%for China and 6%for theUnited States. Butthisisnotenough.Ibelieve we shoulddevelop the Trade between Africa and Europe isnotinsignificant. 36%of Africa’s trade iswiththe European Union. This students andresearchers withourErasmus programme. 2027,thisfigure By should reach 105,000. We want to focus ourinvestment where itmatters 2020,theEUwillhave35,000African themost. By supported alreadyprojects in thepipelinewillunlock€24billion. Plan, launched two years ago, willmobiliseover €44billioninboththepublicandprivate investment. Alone the framework that more brings private investment to Africa. We from scratch: areInvestment notstarting ourExternal as we envision it–would helpcreate 5years upto 10millionjobsinAfrica inthenext alone. We want to create a We are proposing anewAlliance for SustainableInvestment andJobsbetween Europe andAfrica. This Alliance – forward. We withAfrica. want to build anewpartnership agreed that donor-recipient relations are athingofthepast. We agreed that reciprocal commitments are theway preparing my speech,Ispoketo my African friends, notablyPaul oftheAfrican Union. theChairperson Kagame, We Africa doesnotneedcharity, justasmuch.In And Europe itneedstrueandfairpartnerships. needsthispartnership through ofdevelopment thesole prism aid. Suchanapproach isbeyond inadequate, humiliatingly so. relationship withthe nations ofthisgreat andnoblecontinent. And we have to stop seeingthisrelationship willbeAfrican. population willnumber2.5billion.Oneinfour peopleonearth We needto invest more inour To speakofthefuture, onemustspeakofAfrica –Europe’s continent. twin Africa isthefuture: by 2050,Africa’s www.worldcommercereview.com such a partnership shouldbeafree trade area andtheEuropeansuch apartnership between the United Kingdom Union. for thefuture,partnership Brexit. after We agree point for withthestatement madeinChequersthat thestarting asallotherEuropeans.principles This iswhy Iwelcome Prime May’s Minister proposal to develop anambitiousnew thepastmonths,In whenever was we intheUnion,Britain at ourside, neededunity driven by thesame values and willalways closeneighbourandpartner,Kingdom beavery inpolitical, terms. economic andsecurity Thirdly, for third 29March willnever us. 2019,theUnited after country Kingdom beanordinary The United Ireland.the border more visibleinNorthern from itsresponsibilities Friday undertheGood Agreement. isnottheEuropean It Union,itisBrexit thatmaking risks Ireland. government outspokenshouldtheBritish a hard Butwe border walk willequallybevery away inNorthern border. withIrelandwhenitcomes to theIrish solidarity This iswhy we want to findacreative solution that prevents Secondly, theEuropean Commission, thisParliament andallother26memberstates willalways show loyalty and ofityou choose. notonlyintheparts and certainly positionasamemberstate.privileged you If leave theUnion,you of oursinglemarket, are ofcourse nolongerpart we government alsoaskthe British to understandthat someonewholeaves theUnioncannotbeinsame First ofall, we decisionto theBritish leave respect ourUnion,even thoughwe continue to regret itdeeply. But whichshouldguideourworkprinciples onBrexit inthemonths to come. a unanimouspositionconfirmed timeandagain by the27memberstates. However, allow me to recall three the negotiations, handledby Barnier. my whichare Michel friend beingmasterfully Heworks onthebasisof Another issuewhere Iseeastrong needfor theUnionfor leadershipisBrexit. Iwillnotenter into thedetailsof www.worldcommercereview.com come alongway isnow inthe world –despite thesecond with60countries itscritics. mostusedcurrency linking It year, next By we shouldalsoaddress theinternational role of theeuro. The euro is20years young and hasalready decide quickly. we If want to increase ourinvestment inAfrica by 23%,we mustdecidequickly. want to theEuropean –withoutmilitarising Union–to increase defence spendingbyof20,we afactor willneedto andprevent more opportunities, start-ups fundinggapscosting jobs, we have to decidebefore we If theelections. must –thenwe amongstothers, we mustdecideonthisaspect, ofthebudget. If want to give ourresearchers and weIf want to give to young makethemostofourErasmus programme Europeans –whichwe theopportunity 2020. after much economic asgeopolitical. then,we By shouldalsohave brokered anagreement ontheEUbudget inprinciple before theEuropean thenwe By elections. musthave ratified agreement theEU-Japan – partnership for reasons as This iswhat isat stakeonthe road to Sibiu–asummitthat willtakeplace justsixweeks Brexit after andtwo weeks measures. andconfused objectives. better thanuncertainty deserve ofintent, clarity notapproximationsThey deserve orhalf- on 9May 2019. Sibiuisthemoment we mustoffer all Europeans astrong perspective for thefuture. Europeans There ismuchwork to bedonebefore theEuropean andbefore elections Europe’s Leaders meetinSibiu, Romania A strong for perspective thefuture willnotbetheCommission that willstandintheway It there afterwards. ofthis, isstability Icanassure you ofthat. deal. We owe itto ourcitizens andourbusinessesto ensure theUnited Kingdom’s withdrawal isorderly andthat On thebasisofthesethree principles, theCommission’s negotiators standready to work day andnight to reach a www.worldcommercereview.com could notbereached. embargoour arms to on onBelarus ransom, orthat sanctions Venezuela were delayed for months whenunanimity Statesbecause notallMember could agree. isnotright that onememberstate was It ableto holdtherenewal of at theUnited Council Nations HumanRights whenitcameto condemning humanrightsabusesby China.And this to speakwithonevoiceour ability when itcomes to ourforeign policy. isnotrightthat ourUnionsilenced itself It Last butnotleast, by SibiuIwant to makevisibleprogress instrengthening ourforeign policy. We mustimprove Unionto makeEuropeEconomic andtheeuro andMonetary stronger. do. Without this, we willlack themeansto strengthen theinternational ofrole oftheeuro. We mustcomplete our first putour own houseinorder Union,as we haveby strengthening our EconomicMonetary to already and started of theeuro. The euro mustbecome theface andtheinstrument ofanew, more sovereign Europe. For this, we must This iswhy, before theendofyear, theCommission willpresent initiatives to strengthen theinternational role European companies buyEuropean planesindollarsinstead ofeuro. a year come –inUSdollarwhenonlyroughly from 2%ofourenergy theUnited States. imports isabsurd that It But we canand mustgofurther. isabsurd that Europe It €300billion pays bill–worth for 80%ofitsenergy import now await adoptionby Parliament andCouncil. deep andliquidcapitalmarkets. The Commission ofproposals hasmadeaseries to dojustthat –mostofwhich Recent events have brought into Unionandbuild focus sharp theneedto deepenourEconomic andMonetary role ontheinternational scene. their currencies to theeuro inoneway oranother. Butwe mustdomore to to allow play oursingle currency itsfull www.worldcommercereview.com Court decisions are notoptional.Court implemented. This isvital. The European oflaw. Unionisacommunity theruleoflaw andabidingby Respecting But we clearononepoint: judgements of Justice from needto must berespected and bevery theCourt personally, himfully. support lonelyjobofdefending butoften Timmermans theruleoflaw. isdoingaremarkable The wholeCommission, andI some ofourmemberstates. 7mustbeappliedwhenever theruleoflaw isthreatened. Article First Vice-President The Commission willresist allattacks ontheruleoflaw. We continue concerned by to bevery thedevelopments in values. to ofcompromise. revive thelostart Compromise our doesnotmeansacrificing convictions orsellingout onour murdered. We mustdo more anditsagents general, to –ourjournalists. protect In ourdemocracy we mustdomore a place where freedom ofthepress issacrosanct. Too many are ofourjournalists intimidated, attacked, oreven the way someseekto shutdown debate altogether by targeting mediaandjournalists. Europe mustalways be will notgetEurope anywhere. whenitcomesThe to politicaldiscourse. tone isalsotrueof isnotonlyworrying It exchanges amongstgovernments andinstitutionsare becoming more words andmore common. Harshorhurtful I would liketo say afew words way about theincreasingly inwhichwe worrying airourdisagreements. Heated taxmatters byto qualifiedmajority. decide oncertain and Ibelieve thetime hascome to makeuseof this treasure’‘lost oftheLisbon Treaty. Ialsothinkwe shouldbeable specific areas:rights human issuesandcivilianmissionsincluded. This ispossibleonthebasisofcurrent Treaties relations. Irepeat what Isaidlastyear onthismatter. We shouldmove tovoting notinallbut qualifiedmajority This iswhy theCommission isproposing to move tovoting inspecificexternal qualifiedmajority areas ofour www.worldcommercereview.com Gothenburg Social SummitintoGothenburg Social law. Europeanand smallbusinessesundermine unity. istimewe thegoodintentions turned It that we proclaimed at the European Unionto takebetter care ofits socialdimension. Those that ignore thelegitimate concerns ofworkers of adividedEurope. continent Our andthosewhobrought anendto theCold War better. deserve Iwould likethe I want usto domore to together bring theEastand West ofEurope. spectacle istimewe putanendto It thesorry must beall-embracing. competing andparallel national diplomacies. inthesingular. mustbecon- Europe ducted diplomacy solidarity Our Federica hasmadeEurope’s Mogherini more coherent. diplomacy Butletusnotslidebackinto theincoherence of with onevoice ofnations, ontheworld stage. theconcert Europe’s In voice clearinorder mustring to beheard. There isstrong demandfor Europe throughout theworld. To meet suchhighdemand, Europe willhave to speak tomorrow’s world. oramerebe aspectator commentator ofinternational events. Europe player, mustbeanactive anarchitect of strong for perspective thefuture. Iwant of Europe affairs.world to Europe getofftheside-lines cannolonger Europe’s Leaders meetinSibiu, on9May 2019.Sibiuisthemoment Romania we mustoffer all Europeans a become what itmust, there are several lessonsto belearnt. tomorrow. parliaments andCommissions come andgo, Europe Suchishistory: ishere to stay. But for Europe to of Europe. We are allresponsible for theEurope oftoday. And we mustalltakeresponsibility for theEurope of spoke ofboththeevents that have thisCommission’s marked writ large, History timeinoffice the andofhistory thisspeech–my lastStateI started oftheUnionthoughsurely notmy abouthistory. lastspeech–by talking I Conclusion www.worldcommercereview.com spot, Itold you that Europe was thelove ofmy life. Ilove Europe stillandshalldosoforever more. ■ orNorth. South To give themalltheyneedto grow andbreathe easily. Afew years ago, same standinginthisvery The trees we plant today mustprovide shade for ourgreat grandchildren whethertheyhailfrom Eastor West, from to ourselves. wePatriotism mustremain true short, Uncheckednationalism withbothpoisonanddeceit. isriddled In isavirtue. Europe mustmove forward asone. To love Europe, isto love itsnations. To love your nation isto love Europe. As theFrench philosopheBlaisePascal said:Ilikethings that gotogether. order In to standonitsown two feet, other. This article isbasedonPresident Junker’sThis article State oftheUnionAddress 2018,Strasbourg, 2018 12September Juncker isPresidentJean-Claude oftheEuropean Commission forget that thepatriotismof21 But above all, Iwould likeusto unhealthy reject nationalism andembrace enlightened patriotism. We shouldnever European in2024at thelatest. elections would bemade allthemore credible ifwe were to have transnational lists. Ihopethesewillbeinplace by thenext processSpitzenkandidaten –that smallstep forward for European –repeated. democracy For me, thisprocess I would year’s likenext to for bealandmark elections European democracy. Iwould liketo seethe st Century is two-fold: bothEuropean istwo-fold: Century andnational, withonenotexcluding the www.worldcommercereview.com having withonemoney, onemarket says Draghi, Mario outlining how the Single Market hasbenefitedoutlining how the theSingleMarket Europe andtheeuro We shouldconsider thegainsmadeasa result of people ofEurope over thepast20years 20 years on www.worldcommercereview.com I hands. added to theirsenseofbeing behind’‘left inaworld where thegreat wealth created hasbeenconcentrated inafew have Openmarkets distortions. heightened for economic insecurity peopleexposed to intensified competition, and is now clear that therules that accompanied thisprocess were notsufficient to prevent it from causingsevere Globalisation hasledto higheroverall welfare for alleconomies, andfor emerging inparticular. markets Butit eliminated exchange rate flexibility. and globalisationMarket are ButtheSingle not thesamething. seensimplyasanexpression isoften The oftheglobalisation Single Market process, whichover time haseven The rationale for onemarket, onemoney why to the peopleofEurope. theyare important benefit ofallmember countries. We need to makethesechangesassoonpossible, but we alsoneed to explain The way ahead, therefore, Unionwork for the isto to identify thechangesthat makeourMonetary are necessary led to insufficientcrisis. stabilisation the during Unionbeingincomplete, theresult which ofMonetary choices andpartly theresult ofdomesticpolicy This ispartly Unionhassucceeded inmany ways,Monetary butithasnotdelivered thegainsthat were inallcountries. expected n January 2019we celebraten January the20 they were, canteach thesetwo periods ussomeusefullessonsaboutwhat stillneedsto bedone. cycle,financial whilethesecond saw the worst economiccrisis since andfinancial the1930s. But, exceptional as has existed have beenexceptional. perhaps The first was theculmination ofa30-year upswing intheglobal th anniversary ofthelauncheuro. anniversary The two decadesinwhichtheeuro www.worldcommercereview.com Market. of untrammelled free markets. This was undoubtedly alsothevisionofJacques Delors, thearchitect oftheSingle its costs for themostvulnerable; to promote growth whileprotecting thepeopleofEurope from theinjustices From theoutset, however, was designed theSingleMarket to reap thebenefitsofopennesswhilealso tempering unity of purpose of unity that we will save it through our democracies, with a a with democracies, our through it save will we that individual energies but also fostering social equity, equity, social fostering also but energies individual It is only by continuing to make progress, freeing up up freeing progress, make to continuing by only is It [The] European project is even more important today. today. important more even is project European [The] www.worldcommercereview.com averaged just2.2%from 1973until 1985inthe12countries that would goonto form theeuro area wasThe conceived SingleMarket intheEuropean ofweakness aperiod during economy. Annual growth had rules could beusedto protect workers by puttingaflooron ‘social dumping’ andupholdinglabourstandards. consumers from laxstandards inothercountries, andprotect producers from unfaircompetition. And production integration –to that, build a market to the extent possible, was free butjust. Product rulescould beusedto protect Unlike thewiderprocess allowed ofglobalisation, theSingleMarket Europe to imposeitsvalues oneconomic environment for advancing theprocess of European integration, following thesetbacksof1970s. some ofthecosts ofthechangesthat would inevitablyarise. This, would inturn, create amore favourable political more peoplebackinto work. Yet was never alsoaimedto theSingleMarket justaboutthis. protect peoplefrom It offeredThe Single Market a way to remove thesebarriers, reverse thedeclineineconomic potential, andbring sectors with high R&D and skill content withhighR&Dandskill was bysectors restricted barriers, preventing non-tariff spillovers productivity because thecommon covered market mainlyintermediate goodswhere growth was already saturated. Trade in One reason that growth potential haddecelerated was that intra-EU trade growth 1970s, hadstalledintheearly tool at itsdisposaltoBut theEUhadapowerful raise growth: thecommon market. in 1973to 9.2% in1985for theeuro area Italy, 12.In itclimbedfrom 5.9%to 8.2%over thesameperiod. in theeuro area 12averaged 3.5%ofGDP, theaverage whileinItaly was 9% ofGDP. Unemployment rose from 2.6% responseThe typical ofgovernments to low growth was to increase fiscaldeficits. From 1973 to1985,publicdeficits 1970s to around 2%peryear by thebeginning ofthefollowing decade. 5.3% between 1960and1973.Growth potential hadalsofallenfrom about5%peryear at thebeginning ofthe 1 , down from 2 . www.worldcommercereview.com quartet” for economic policy.trade-offs These were bywell-articulated Tommaso inhisfamous“inconsistentPadoa-Schioppa requiredBut theSingleMarket greater exchange rate thanafree stability trade area, andthisresulted insignificant have andfixed capitalmobility, policy exchange rates. independent monetary 1980, althoughthishastailedoffin recent years the EU. Research findsaprocess ofupward convergence insignificant areas ofsocial expenditure intheEUsince the gapinlabourstandards across countries hasgradually narrowed, even aslower-income countries have joined EU legislation hasnotledto acomplete harmonisationoflabourprotections across Europe. Butithasmeant that andaccess conditions, to fairworking thelabourmarket, socialprotectionopportunities andinclusion. term employees. Lastyear theEUinstitutionsendorsedEuropean equal Pillar to Rights support ofSocial work in1997,whichsoughtOne example equaltreatment istheDirective onpart-time andfixed- for part-time legislation alsoprotects those inlesssecure employment. unfairlabourpractices,was suchastherevision adopted to ofthePosted curtail Workers Directive thisyear. EU ofFundamentalThe Charter hasprevented Rights a ‘race to thebottom’ interms ofworkers’ rights. Legislation the European socialmodelwere progressively embeddedin EUlaw, inareas where theEUhadpower to act. introduction ofthegeographical indication protections for specific foods, for example. And safeguards central to creation ofastrong European to safeguard authority faircompetition; standards product becametighter, withthe intheEUandofpowers ofjudicialreview.common rule-making The was openingofmarkets accompanied by the This iswhy agendainthemid-1980swent thelaunchofSingleMarket handinwithastrengthening of 4 . If European. If countries wanted to have thebenefitsofmanaged opentrade, they could not simultaneously 3 . The same cannotbesaidat theinternational level. www.worldcommercereview.com rates” a common market exchange about shouldsaddlethemselves withanewbarrierto trade intheformofuncertainty areas inthebeliefthat, ofoptimalcurrency “Icould notsee why countrieshis theory thatwere intheprocess offorming Indeed, theprevailing viewondevaluations was captured well Mundell, by whodeveloped Nobellaureate Robert that countries toSingle Market were build. trying interestGerman rate rises. At thesametime, devaluing repeatedly was becoming incompatible withthedeep to in1992-3,whenitceased anendwiththeERMcrisis to becredible for countries entering arecession to follow independence. policy andtheirmonetary of exchange-rate stability The socialcosts were high. This process came hadto makethesedecisions,Given somecountries withwhichpolicymakers lostboththebenefits thefrequency policy. monetary anddevalue, withtheDMandloseany orto policy maintain parity sovereigntyindependent monetary over their System (DM)withintheEuropean (EMS)hadto decideeitherto Mark periodically Deutsche maintain Monetary an toDue theinternational financialstorms raging at thetime, the countries that hadpeggedtheircurrencies to the unsustainable. deepened andcapitalcontrols were progressively eliminated the1980s, during fixed exchange rates became controls flows, autonomy. onshort-term whichallowed policy adegree ofmonetary Butasfinancial integration Governments initiallyresponded to thisconundrum by maintaining fixed exchange rates andintroducing capital competitiveness –ifonlytemporarily –by devaluing rather thanincreasing outputperhead First, itwould have weakened incentives for firms to raise productivity, becausethey could have lifted witnessed time and again that such actions didnotleadto lastingwelfarewitnessed timeandagainthat suchactions gains. 5 . Exchange rate two flexibility would have in Market ways. theSingle undermined 6 . Yet Europe had www.worldcommercereview.com growth DM, losingaround half ofitsvalue cumulatively currency. vis-à-vis theGerman Yet average annualproductivity From lira was devalued seven thelaunchofEMSin1979to in1992,theItalian theERMcrisis timesagainstthe consumer prices in Italy grewconsumer prices inItaly cumulatively by 223%,compared with103%intheeuro area 12 as that ofitsEuropean peers, anditsunemployment rate went upby 1.3percentage points. At thesametime, within the Single Market, whilemanaging asfar possibleitscosts.within theSingleMarket, resolve would allow them.It countries to maintain stableexchange rates andtherefore benefitfrom openness So, faced withan ‘inconsistent quartet’ choices, provided, asinglecurrency ofpolicy at leastin principle, a way to it was virtually impossibleto andtrade, avoid ofproduction relationsit was whichpoisonedintra-Community virtually distortions prices causedby abrupt adjustments inexchange rates. Butthesystem proved difficult toimplement andsustainas The issuewas smoothed over amounts to compensatory mitigate by introducing suddenchangesinfarm monetary franc in 1969,jeopardised affected asthefarmers trustinthe market, demanded compensation for theirlosses. of account. arevaluation Butsuccessive crises, oftheDMandadevaluation inparticular oftheFrench currency agricultural Absent market. asinglecurrency, was based onprices thecommon quoted agricultural inunits policy Europe hadexperienced theproblems created by exchange rate inthe1960swith the flexibility common devaluations inothercountries. would Openmarkets nothave lasted. could bedeprivedproductivity ofsomethebenefits by‘beggar-thy-neighbour’ behaviour through competitive for would that inthelongruniffirms didinvest theSingleMarket beundermined Second, support in raising 7 in Italy was lower inItaly thanintheeuro area 12over thisperiod, Italy’s GDPgrowth rate was roughly thesame 8 . 9 . www.worldcommercereview.com Single Market and were more resilient thecrisis, during withcountries compared outsidethe withtheirsupplychainlinkages between countries ofthe2000s, withintheEUhave supply chainlinkages Since intensified thestart at afaster pace ofEuropean economiesintertwining through thedeepeningofvalue chains. thegrowthBehind ofintra-EU trade aneven development, liesperhaps more whichisthemuchcloser important Intra-euro areaIntra-euro trade bothinabsolute hasrisen terms andasashare oftotal trade withadvanced economies to 20%today. tradeprotecting growth theSingleMarket, hasincreased, from rising 13%ofEUGDPin1992 withintra-EU exports We shouldconsider what gainshave beenmadeasaresult ofhaving withonemoney. onemarket With theeuro The ofonemarket, benefits onemoney today as therelatively low exchange rate pass-through ithadinthepast euro area. case, notonlyforThe isaparticular politicalreasons United Kingdom butalsofor reasons, structural such Finally, there theonlylarge istheUnited economy Kingdom, that choseto insidetheSingleMarket stay outofthe smaller economies have stayed outsofar. to theeuro. Five additionalcountries peggedtheirexchange ratesDenmark, to theeuro. For othercountries, represented theSingleMarket thegateway Not allcountries alsojoinedtheeuro, that had joinedtheSingleMarket ofcourse. countries, Some suchas Europe have alsogrown even asemerging economies market have entered Foreign the globalmarket. investment direct (FDI)flows within 15 . 13 , withinflows from the Italy increasingrest oftheEU to by 36%from 1992 to 2010 10 joinedtheeuro inits first decadeandthree more in itssecond, butother 11 . 14 . 12 , www.worldcommercereview.com in hourly compensationin hourly groups for allskill leadsto inturn higherwages.And higher productivity Integration withinvalue chainsisassociated withanincrease sector to survive andgrow. to survive sector aworld that In isincreasingly dominated to by retain scale, Italy oneofits thispermits thislinkto theSMEsthat isoften value are ofItaly’s chains that allows sotypical It inparticular manufacturing The imported inputsusedinvalue chainsgenerateThe imported atangible boostto productivity Participation inthesevalue chainshasbrought gainsfor allcountries, spillovers. especiallyinterms ofproductivity and settlements andofhedging exchange rate risk. enhanced theprocess by hasfurther eliminatingAnd thecosts thesinglecurrency offoreign exchange payments and thisispositively associated withlabourproductivity export-supported jobs are located in a country other than the one that exports thefinalproduct jobsare otherthantheonethat exports located inacountry export-supported the gains(andlosses)oftrade withtherest oftheworld to bemore evenly spread. Within theEU, closeto 20%of Moreover, integrating into value chainshasimproved risk-sharing amongEuropean countries, since ithasallowed production processproduction ofvalue chains that istypical inother for ofproduction countries andencouraging aboutthequality firms thefragmentationcertainty ofthe process. theproduction during standards Europe-wide have boosted intra-EU value chainsby providing more agendahasfacilitatedThe oftheSingleMarket multipleborder removal crossings aspart ofcustoms barriers countries that export to therestcountries oftheworld that export workersAround are halfamillion Italian involved processes intheproduction ofcompanies located inotherEU 18 . 20 . Italian firms themselves participate strongly themselves firms inglobal participate value chains . Italian 16 . 21 . 17 . 19 . www.worldcommercereview.com At thesametime, value chainshave benefitsof competitive blunted devaluations theshort-run to reduce volumes theresponsiveness to movements ofexport intheexchange rate offset intermediates.by higherinput costs from imported in value chainshasbeen As a result,found participation contain agreater any share demandassociated ofimports, boostto external withahypothetical devaluation isnow poorer householdstend to spendalarger share of theirincome ontradeable households goodsthanricher And studiesonnon-EUcountries suggestthat thewelfare losswould begreatest for thepoorest insociety, since the devaluation owing to thegreater negative itwould prices. have impact viahigher import existence oftheSingle Market. They would out alsoresult inasubstantial lossofwelfare carrying withinthecountry inpreviouslarger decades. extent thanwas necessary And devaluations ofsuchsize would notonlythreaten the So, to hypothetically any devalue to regain looking country competitiveness would have to do so to amuch misalignments have become smaller inthesecond decade ofEMUrelative actually to thefirstdecade area countries thanthosebetween advanced economies orcountries linkedby peggedexchange rates, andthese ECB analysis finds that misalignments of real effective exchange rates are smaller–albeitmore persistent – foreuro euro area countries. First, Unionhasfallen. thecost ofnotbeingableto devalue withinMonetary ofEuropeanThe economies closerintertwining hashadtwo significant effectson exchange rate relationships for European process. production fundamental characteristics. Italy, through andthesinglecurrency, theSingleMarket isdeeplyintegrated into the also typically thecase ineuroalso typically area countries. 24 . 23 . Since exports . Since exports 22 . 25 . This is . This www.worldcommercereview.com term benefits financingofgovernment debtdidnotlead hasshown,to monetary anyreal long- ofItaly In case, asthehistory excluded), compared with89%for countries that usethesinglecurrency. Such countries have aweighted average is publicdebtof68%GDP(44%iftheUnited Kingdom butnottheeuro.the SingleMarket financingofgovernment spending–donotappear to be monetary valued highly by countries that are membersof sovereignty notingthatSecond, thesupposedadvantages to ofmonetary engage in itisworth –suchastheability spillovers, even asglobalfinancialintegration hasaccelerated. among alleuro area countries. And thesize ofeuro hasmadetheeuro financialmarkets area lessvulnerable to US policy, over whicheffectively monetary Decision-making belonged Germanyto undertheEMS,isnow shared fixed exchange rate regimes ofthepast. obvious. First, allowed hasactually sovereignty countries to thesinglecurrency regain monetary compared withthe sovereignty?But doesbeingoutsidetheeuro policy provide additionalbenefitsin ofmonetary terms This isnotso countries various benefitsthat were from expected EMUhave not yet materialised. that hasbeenobscured bybelong to time and thedramas amemory oftherecent crisis, itisalsotruethat insome But ifitistruethat Union thesupposedadvantages associated withthefreedom ofbeingoutsideMonetary Convergence and divergence intheeuro area hit themostvulnerable insociety. growth rate similarto itsEuropean peersrequired repeated devaluations. Inflation reached unsustainablelevels and 26 . In periods where periods debtmonetisation. In was more common inItaly, suchasinthe1970s, maintaining a www.worldcommercereview.com has beenreduced since by 1999 around one-third andSlovenia.a lesserextent, Malta thesecountries, In the gapbetween real GDPpercapitaandtheeuro area mean Several euro area countries have achieved significant convergence, theBaltic countries, and, Slovakia to particularly long-term process whichisdriven by suchasrates growth factors ofFDI,productivity andinstitutionalquality. Such the euro? Convergence canbethought ofintwo ways. The firstis convergence of real GDPper capita levels. This isa what hasdrivenSo thedifferent convergence of countries, andhow muchisit trajectory related to membershipof the dispersionacross USstates. growth rates across euro area countries hasfallenconsiderably over timeand, since 2014,hasbeencomparable to around that twice ofthe poorest state, whichisroughly thesamegapasineuro area But suchdivergences are notexclusive to theeuro area. state GDPpercapitaintherichest intheUnited States is unable to closethegapconsiderably. farfrom theeuro that alsostarted area averageOthers –suchasPortugal andGreece –have onbalance been in the19 some regions profiting more thanothers.Germany unificationItaly and after This hadbeenthe experience ofboth gradual process. experience suggested Historical that could openingmarkets leadto differentiated gains, with To thefounders ofEMU, unionwould bealongand itwas clearthat monetary establishingawell-functioning would besufficient toachieve this. Weneededand continue toneedmuchmore. stability’ Unionwould Unionalone about. Butitwas bring inconceivable that that Monetary joiningMonetary was notmistaken,andnorisittoday,It highergrowth to expect andemployment to emerge from the ‘culture of th century 27 . 28 . 29 . And thedispersionof www.worldcommercereview.com slowdowns Unionremains incomplete thanothers;andsecond, insomekeyrespects. that ourMonetary points. highlights First,crisis two important weaker that structurally countries are more vulnerable to economic –and othercountries fromAt –diverged theeuro that thesametime, Italy area further thefact average the during regions.richer business index compiled by the World thevalues for Bank: thepoorer regions are generally lower thanthoseof differentItalian indicators,regions andsomestructural suchas–just to takean example –the easeofdoing problem, whichisclearifonelooksat regional performance. There isacorrelation between GDPpercapitain So, low growth longtime before isaphenomenonthat dates backavery inItaly theeuro. This isasupply-side generations to bear. the growth we saw inthe1980swas borrowed from thefuture, having for beenbasedondebtthat was left future From 2008to 2017,itrecorded thesecond lowest cumulative growth, behindGreece. back, And, ifwe lookfurther members. From 1999to 2008,itagainhadthelowest percapita GDPgrowth ofalleuro area members. alreadyintroduction oftheeuro hadthelowest –Italy cumulative percapitaGDPgrowth oftheoriginal euro area thecaseofItaly,In at we play. factors seebothlong-term andcyclical 1990and1999–that Between is, before the of countries unionaffects thecapacity to adjustandstabilisedemandduring recessions.design of amonetary synchronised, especiallywhenmajorshockshit. This unionmembership, isdetermined more by since monetary the The second concept ofconvergence relates to growth rates, ie. across how muchbusinesscycles countries are and institutionalreforms, andcontributions from fundsare EUstructural what play acrucialrole here. canbefosteredfactors by asinglecurrency, sharing buttheyare notdetermined by policies, it. Domestic structural www.worldcommercereview.com government into debtturn acredit withmajorrepercussions crisis for employment andgrowth weakened by decadesoflow growth andhadnofiscalspace began,saw whenthecrisis of acrisis confidence in and counteract theireffect ontheeconomy. Ihave talkedbeforeItaly, abouthow countries like whichhadbeen weaker itisthestructurally countriesSo that mostneedEMUto have instruments to diversify ofcrises therisk stabilisation thatbothgrowth harmed andfiscalsustainability. integrated financial markets, whereas intheeuro area theshare isonly25% recurring. theUnited States, In around 70%ofshocksare mitigated andshared across theindividualstates through privateDeepening risk-sharing through isonekeyelement financialmarkets inpreventing suchevents from genuine capitalmarket. of theweaker countries intheeuro area to unionandto complete proceed ofa banking withtheconstruction euro area GDPsaw theirborrowing costs become positively correlated aversion withrisk Typically, sovereign borrowing costs shouldfallinarecession, butat that timeeconomies representing of one-third downturns, innational fiscalpolicies, inducingprocyclicality as we saw in2011-12. to self-fulfilling dynamicsinsovereign debtmarkets. Such overshooting canaggravate adverse debtdynamicsin Without appropriate backstops at theeuro area level, unioncanbeexposed individualcountries inamonetary different layers ofprotectionto ensure are that necessary countries canstabilisetheireconomies crises. during the crisis thanothers. countriesthe crisis that In madesuchchanges, isnow thelabourmarket more responsive to growth There isafairamount ofevidence that countries that implemented decisive policiesrecovered structural faster from and theimproved economic conditions have ledto gainsinemployment 31 . But alongside structural policies,. Butalongsidestructural 34 . It istherefore. It alsointheinterest 32 . The result was alackof 33 . 30 , www.worldcommercereview.com and the fiscal capacity of theEUbudgetonother–need to interact ina and thefiscalcapacity complete andefficient manner. through theprivate financialsystem ontheonehand, through andpublic nationalcountercyclical budgets support However, future crises, thetwo cyclical layers to tackle ofprotection againstshocks– thediversificationrisk of European level by therecent decisions to launch aninstrument for convergence andcompetitiveness. thesemeasures have at thenational large level, at part the In to beundertaken buttheycanbesupported andemployment andtoproductivity ourwelfare underpin state. own reform agenda,butsuchreforms are theonlyway to create theconditions for sustainablegrowth in wages, that reforms hasledmeto frequently ofstructural inrecent mention theimportance years. hasits Eachcountry isnotatechnocratic desireIt to see convergence Union across ofMonetary countries and thesmoothfunctioning Conclusion consolidation, reforms letalonethefundamental structural neededfor areturn to growth. a permanent transfer between countries, whichwould result inafailure fiscal to putinplace thenecessary behaviourmarket downturns. during anddoesnotconstitute istemporary This willonly bepossibleifthesupport to ensure thatthat theireconomies gives support are notexposed allcountries to thenecessary procyclical Yet national fiscalpoliciesalsoneeda complement at the European level. We needaninstitutionalarchitecture canbemadeintheeventinterventions ofacrisis. being constrained by fiscalspace theirdebtlevel. willhave thenecessary So to becreated againsothat budget significantly more thanintheUnited States around 50%of an unemployment through shockisabsorbed theautomatic stabilisersinnational publicbudgets, But national asthemainstabilisation budgetswillnever theeuro tool crises. during lose theirfunction In area, 35 . The useofautomatic stabilisers, however, dependsoncountries not www.worldcommercereview.com is spreading; we are seeing littlesteps back inhistory. that we are emerging from thecrisis. Elsewhere intheworld, thefascination withilliberal prescriptions andregimes created by bythem hasbeenundermined themisery thegreatIt doesnotmatter ofthepast decade. financialcrisis Yet today, for many, that thememories inspired thosechoices seemdistant andirrelevant, andtherationale behind butrelativelywhole: rich small;strategically exposed, weak. militarily And this iseven more truefor Europeans, both at thelevel oftheirindividual nations andfor thecontinent asa challenges that have have arisen become ever more globalinnature together, andneed to betackled notalone. The years intervening have confirmed the ofthechoicesrationality made at the European andthegloballevel. The ofthat world order,was part itselftheresult ofexceptional circumstances, whichfollowed theSecond World War. seen dictatorships, war andmisery, andinthat was respect notdissimilar to previous centuries. Aunified Europe It was anexceptionalIt Kagan response –orto paraphrase Robert freedom, peace, and prosperity. democracy –withitssymbolsandconstraints whosecentralaspect –ofthepoliticalproject aimisaEurope that isunited in consequence hasbecome anintegral oftheSingleMarket, Union,anecessary complete. anddefining Monetary Unionisthebestway to prepare isclearthat completing Monetary It thetransition to aform ofunionthat ismore divergence between countries increases. Unionintimesofgreat onbothfronts andthe stabilisers. heightens crisis Inaction thefragility ofMonetary –itbecomes afiscalcapacity, to construct still necessary which to could complementat timesserve national The more progress union,thelessurgent unionandcapitalmarkets we –although make incompleting thebanking 36 ananti-historical response that had –to acentury www.worldcommercereview.com 8. Reference is1979-1991,excluding period Italy. hourworked.7. RealGDPper Press.University European Economy Eichengreen, B(2007),“The since6. See 1945,Coordinated Capitalism andBeyond”, Princeton 5. Mundell, R,“Optimum Currency Areas”, atTel luncheonspeech Aviv University, 1997. 5December UnioninEurope (Oxford:The Road to Monetary Clarendon Press).) Padoa-Schioppa, Why istheTreaty4. See T(1982),“Capital Mobility: NotImplemented?”, inPadoa-Schioppa, T(1994), European Research StudiesJournal, vol. 0(2), pp. 79-96. A, Chapsa,XandMichailidis, A(2015),“Investigating Protection Social Convergence intheEU-15:APanel Analysis”, Data State Indicators inEurope: Evidence from Panel Data”, Working Paper Athanasenas, ofSalzburg; No201204,University Convergence?”, ofCommon Journal Market Studies, 48(3),pp. 529-556;Paetzold, Convergence J(2012),“The ofWelfare Goudswaard, Caminada, K, 3. See Kand Van O(2010),“Patterns Vliet, ofWelfare State Indicators intheEU:Isthere astrategy fortheevolutionequity: oftheeconomic system areport”. oftheEuropean community: StudyGroup appointed by2. See theCommission andpresided by Padoa-Schioppa, T(1987),“Efficiency, stability, and 1. Austria, Finland, Belgium, France, Germany, Greece, Ireland, Italy, Luxembourg, theNetherlands, andSpain. Portugal Endnotes DraghiMario isPresident oftheEuropean Central Bank ofpurpose. ■ unity freeing upindividual energies butalsofostering socialequity, that we willsave itthrough ourdemocracies, witha And thisiswhy ourEuropean iseven today. project more important isonlyby continuing It to makeprogress, www.worldcommercereview.com Journal ofInternationalJournal MoneyandFinance, 49(PA), pp. 104-128. 23. Devereux, MandYetman, J(2014),“Globalisation, pass-through response to exchange andtheoptimalpolicy rates”, Series, No. 2108,ECB. 22. Fidora, M,Giordano, M(2017),“Realexchange CandSchmitz, rate misalignmentsintheeuro area”, Working Paper Knowledge” 21. Agostino, M,Giunta,A,Scalera, DandTrivieri, Firms F (2016), "Italian inGlobalValue our Chains:Updating MeanJobs, Italy” 20. European Commission (2018),“Exports 19. European Commission (2018),“Fact Sheet” etal.18. Schmitz (2017), op. cit. Review, 105(12),pp. 3660-3703. 17. See, forexample, L,Koren, Halpern, InputsandProductivity”, MandSzeidl, A(2015),“Imported American Economic Market”, ReviewofInternational Political Economy, 25(1),pp. 28-48. Mangelsdorf,16. Blind, A,Niebel, CandRamel, K, F(2018),“Standards intheglobalvalue chainsoftheEuropean Single the euro area” M,Fidora, ofglobal value impact 15. Schmitz, chainsonthemacroeconomicanalysis MandGunnella,V(2017),“The of 14. Percentage increase offive-year centered average. Economic Bulletin,Issue 4,ECB. 13. Carril-Caccia, FandPavlova, E(2018),“Foreign direct investment anditsdrivers: aglobalandEUperspective”, 12. Euro area plusAustralia, Japan,Sweden, Canada, andUnited States. United Denmark, Kingdom Micro Phenomenon?”, NBERWorking Paper, No. 8934. 11. See, for example, Campa, JMandGoldberg, LS(2002),“Exchange Rate Pass-Through Prices: AMacro into or Import 10. Greece was oneoftheoriginalsignatories oftheMaastrichtTreaty butonlyjoinedtheeuro area in2001. Supplement 6/80. 9. European Commission onthe (1980),“Reflections Common Agricultural Policy” , Rivista diPolitica, Rivista Economica, vol. VII-IX/2016. , Economic Bulletin,Issue8,ECB. , 27November. . , BulletinoftheEuropean Communities, www.worldcommercereview.com Institute, Florence, 11May. Union”, Draghi, andrisk-sharing inourMonetary M(2018),“Risk-reducing 33. See attheEuropean speech University measured32. As by theVIXindex(ECBcalculations). market”, dieconomia Questioni efinanza (Occasional No.Papers), 325,Banca March. d’Italia, (2016), “Hiringincentives and/orfiring cost reduction? Evaluating Italian labour policies onthe ofthe2015 theimpact Markov-switching analysis”, Beveridge curve Working Paper Series, No. 2043,ECB, andSestito, April; PandViviano, E 2, pp. 39-63;Vansteenkiste, scar thecrisispermanently I.(2017),“Did market? labour thePortuguese Evidence from a Banco deEspaña(2015),“Competitive31. See adjustmentand recovery intheSpanisheconomy”, Box Annual Report, area employment?”, Economic Bulletin,Issue8,ECB, 2015. therecent isbehind rebound ineuro entitled“What thearticle of2015.See of2013to thesecondsecond quarter quarter of of2015.period The recovery analysedisfrom of1999andthesecond the quarter thefirstquarter between period 30. Basedonastaticrelationship changesintheemployment between rate andpercentage changesinGDPforthe 29. Adjusted forpurchasing power ineuro area countries andexcluding Luxembourg andIreland. perspective”, Occasional Paper Series, No. 203,ECB, December. delHoyo,28. Diaz E, J,Dorrucci, Frigyes, FHandMuzikarova, S(2017),“Realconvergence intheeuro area: along-term Group appointed by theCommission andpresided by Padoa-Schioppa, T(1987),op. cit. Toniolo,27. See G(1990),“Economic Problems oftheUnification” ofLiberalAn Italy,Economic in History Routledge;Study 26. Fratianni, MandSpinelli,F, ofItaly, History Cambridge AMonetary Press, University Cambridge, 1997. Review, Vol. 107,No. 11,November. Cravino,25. See JandLevchenko, Consequences Distributional ofLarge Devaluations”, A(2017),“The American Economic Competitive Devaluations andFirm Dynamics”, mimeo. the exchange rate ofexports”, elasticity The B.E. ofMacroeconomics, Journal 17(1),pp. 1-24;Rodnyansky, A(2018),“(Un) Economic Review, 104(7),pp. 1942-1978;Swarnali, A,Maximiliano, AandMichele, R(2017),“Global value chainsand andExchange O andKonings, Exporters, Rate Disconnect”, J(2014),“Importers, M,Itskhoki, Amiti, 24. See American www.worldcommercereview.com December 2018 December delivered isbasedonaspeech atLaurea HonorisCausaThis article inEconomics by ofSant’Anna, University Pisa, 15 36. Kagan,R(2018),The JungleGrows Penguin Back, Random House. European Economic Research, Mannheim. State attheMember and oftheirEffectiveness AreaEuroAnalysis Level andinInternational Comparison”, Centre for M,Fuest,35. Dolls, J,Peichl, C,Kock, A,Wehrhöfer, NandWittneben, C(2015),“Automatic Stabilizers intheEurozone: from theeuro area andtheUnited States”, ontheEuro Vol. Area, Report Quarterly 15,No. 2. 34. European Commission estimates. Nikolov, See P(2016),“Cross-border evidence asymmetricshocks: risksharingafter www.worldcommercereview.com A newvisionfor trade The Foundation for European Progressive Studies forward-looking progressiveforward-looking model for trade and present avisionthat canform thecore ofanew, investment www.worldcommercereview.com O contribution to trade anddevelopment. reinforces themultilateral trading system whileimproving for itsfairness thepoorest andenhancing Europe’s and investment at themultilateral policy andthebilateral level. To achieve thisgoal, we propose anagendathat To address thesechallenges, we believe that theEUmustuseitseconomic weight to advance aprogressive trade Europe asaleaderfor aprogressive agenda the interests ofthoseinthetop income brackets. which thesecomprehensive trade andinvestment agreements have beennegotiated, designed often to advance in relation to unregulated capitalflows andinvestments. We alsoneed to redress opaquemanner, theoften in We of economic under agreements,these new types the issues arising and tackle need to acknowledge in particular environmental repercussions. like investment social, rights, economic and withimportant liberalisation andprotection, property andintellectual The focus oftrade agreements hasmoved away from trade liberalisation to covering arange issues, oftrade-related Changing nature oftrade agreements a visionthat canform thecore ofanew, progressive forward-looking modelfor trade andinvestment. ofemployment,principles broad-based prosperity, equality, andsustainability. transparency What follows presents goingforward mustbeforgingA keyobjective anewconsensus ontrade andinvestment contingent onthe our societies. linked to a form ofunregulated globalisation, causinguneven andunjustresults of for significant parts creation andbetter livingstandards at thegloballevel. At thesametime, international trade hasbeen ver thelastdecades international trade role hasplayed inpromoting animportant economic growth, job www.worldcommercereview.com consequences ofglobalisation. international trade governance, we propose theestablishment ofanewEuropean fundto address thenegative regime. property oftheintellectual the fairness To complement theseelements ofanew progressive visionof flows to advance sustainabledevelopment, as well asdevelop rules to govern thedigital revolution andensure Further, we propose to better integrate trade withlabourandenvironment, andrethink investment andcapital multilateral and the bilateral level bilateral the and multilateral a progressive trade and investment policy at the the at policy investment and trade progressive a ... the EU must use its economic weight to advance advance to weight economic its use must EU the ... www.worldcommercereview.com 17.2. 2. Finally, the EUmustlive upits commitments regarding Development Aid Official (ODA) in accordance withSDG agriculture markets.” Accordingly, reform oftheEUCommon further Agricultural Policy (CAP) willhelpachieve SDG To achieve SDG2onendinghunger, we needto “correct andprevent inworld trade restrictionsanddistortions This would allow for thecreation ofjobs, increased incomes, andultimately, to reduceandaiddependency. poverty own regional integration. to the region Africa, alllow-and inorder its countries prioritising lower inSub-Saharan to support middle-income ofthepost-Cotonou negotiations, theEUmustexpandpart unilateral trade preferences andpreferential treatment role toThe play EUhas animportant initsbilateral economic relationships, especiallywithdeveloping countries. As The EU’s role ontrade anddevelopment frameworkWTO inareas ofgrowing importance. a review ofthe ‘special anddifferential treatment’ inorder principle to adapt to present realities, the andmodernise favour ofdeveloped countries. They shouldalsostrengthen disciplinesinareasWTO suchassubsidisation, conduct They shouldrebalance thespecifictrade disciplinesthat govern theagricultural that iscurrently sector tilted in states shouldconclude thenegotiations Development ontheDoha Agenda. providing environment astableandpredictable to amaximumnumberofoperators. For thesereasons we believe Multilateralism isfairer withawidediversity ofstrong bigandsmalleconomies. ismore andweak, efficient in It We seethemultilateral trading system asthepreferred optionfor buildinginternational rulesontrade. Multilateralism www.worldcommercereview.com should bedesigned oradapted accordingly. capita are low. Policy space for green policiesandgreen industrial subsidiesshouldbepermitted, andagreements differential treatment countries whose and exemptions from poorandmiddle-income CO to exports design ofclimate measures withtrade whetherborder impacts, adjustments carbon orothermeasures, mustapply At ofmeasures, types thesametime, suchasfossil trade rulesshouldhelpdiscipline certain fuelsubsidies. The prohibited underinternational trade andinvestment rules. states that shouldclarify strong, potentially disruptive, non-protectionist isneededandnot climate action biodiversity loss, andwater scarcity. thearea In ofclimate change, to avoid any potential chillingeffect, regulatory Trade andinvestment to solvingenvironmental rulesshouldnotposebarriers challenges, suchasclimate change, Environment innovative collective complaint procedure. Finally, labourprovisions shouldbecomplemented dispute settlement aswell withtraditional state-to-state asan suitable framework for continuous andguidedcooperation aimedat progressively advancing labourprotection. successful execution oflabourprovisions intrade agreements. Aprogressive labourchapter shouldalsoprovide a Further, thecomprehensive andeffective involvement isessential andcivilsociety for the ofsocialpartners country’slabour standards must beadapted to thepartner level ofdevelopment, andcoupled withsupport. Parties mustfirmly commit to implementing core labour standards.Implementation andenforcement of core must therefore play avitalrole to inencouraging implement ILO andhelpingtrade partners core labourstandards. All areas covered by trade andinvestment agreements employment andlabourconditions. impact Trade policy Labour 2 emissionsper www.worldcommercereview.com capital account management. spaceThis to erosion implement suchpoliciesmustbeavoided. ofpolicy trade andinvestment agreements prohibit suchcapitalaccount regulations orlacktheappropriate safeguards on create, countries shouldusecapital flow management measures alongside other macroeconomic policies.Many andmajor economic may costs capitalflows instability crises that external andensuingcurrency macro-economic light oftheincreasingIn evidence infavour ofregulating excessive capitalflows to respond to concerns about Capital flows 1000 outdated investment treaties ofEUmemberstates. investor-state dispute settlement. EUmemberstates shouldproceed withterminating andredesigning theover The EUshould continue leading onreforming investment-related dispute settlement andexplore alternatives to responsibilities for investors, to includingwithrespect responsible globalvalue chains. right to regulate. Moreover, theyshouldalsoberebalanced to includenotonlyinvestment protection butalso Second, EUtreaties shouldensure that investment protection provisions donotlimitthestate’s legitimate requirements.prohibition ofperformance access andmarket rulesandthe andadaptitsapproach toEU shouldaccordingly pre-establishment re-examine First, thetreaties space shouldguarantee neededto regulate thepolicy incoming andoperating investments. The these treaties shouldbereoriented to promoting investment quality that advances SDGs. focused oninvestment protection, investment liberalisation, andinvestor-state disputes settlement. The focus of comprehensiveMost trade agreements today includechapters andprovisions oninvestment. These chapters have Investment www.worldcommercereview.com in focus given current must beredesigned needs. It bothinterms ofbudget andscope. transformation inEurope because ofglobaleconomic changes. The EGFremains too modestinsize andtoo narrow Ten years ago, theEuropean Globalisation Adjustment Fund ofindustrial victims (EGF)was establishedto support European Transformation Fund (ETF) digital andareconsideration singlemarket, ofinvestment screening mechanisms. implies revising policiesondata provisions, data localisation, research anddevelopment, national taxsystems, the and upholddemocratic andastrong principles commitment to achieving theSustainableDevelopment Goals. This Specific policies regarding digital trade, rights, data flows, mustembody andnetneutrality intellectual property ofsocialorganisation.old andnewstructures or cultural realms lieoutside the reach oftechnological innovation andsome, likeemployment, grapple to reconcile tech advancements spawned aglobalcommunity, reaching themost remote regions oftheworld. Few economic Technological innovation isdeeplyinterwoven inourglobalisedworld. Fuelling cultural andeconomic exchanges, Digitalisation a permanent basis. Existingtreaties shouldbepromptly amendedaccordingly. allow countries to implement capitalaccount regulations for prudential orbalance ofpayments reasons, ideallyon thereIf are commitments to capitalaccount liberalisation, appropriate andsufficient safeguards mustbeinplace to that limitanindividualcountry’s to freely ability manageitscapitalaccounts andregulate capitalflows. future,In neitherthe WTO, norinvestment treaties andchapters infree trade agreements shouldcontain provisions www.worldcommercereview.com Pascal Lamy, General Director and formerEUCommissioner formerWTO forTrade Eveline ,Former Herfkens Cooperation forDevelopment Minister oftheNetherlands Stephany Jones, Griffith Professor, Columbia University, FinancialMarkets Program Director, Initiative for Dialogue Policy Carles Casajuana, SOLIDAR Board andformerSpanishAmbassador Member (IISD) Sustainable Development Nathalie Bernasconi, Executive IISDEurope, Director Group Director, Economic Law &Policy, International Institute for AUTHORS ABOUT THE few. ■ vision ofglobalisation, avisionwhichguarantees that global trade andinvestment benefitthemany andnotthe and nationalist visionsoftheworld, there politicalspace isacritical for progressive forces to defend a regulated between thefaithfulandunconditional promoters of free trade defending andthepopulistcritiques protectionist is outdated. today’s In changing world, asusual’‘business doesnotwork. We believe that insuchanewcontext To conclude, the traditional approach, whichargues that ‘trade isgood, butwe needto work onthesideeffects,’ investments to prevent negative consequences oftrade andinvestment treaties inEurope. analysis of economic andtechnological changes, includingtheeffects oftrade, allowing strategic for thenecessary therestorationdesigned to policy, support ofanambitiousindustrial one basedonpermanent, prospective The newGlobalization Adjustment Fund, to berenamed asthe ‘European Transformation Fund’ mustbe (ETF), consequences andchangesondifferent andon economic sectors European regions. new trade andinvestment agreements. This analysis shouldbeasaccurate aspossibleandidentify the For theEGFto beeffective, soundandtransparent assessments theEUmust beforeconduct impact concluding www.worldcommercereview.com The Foundation forEuropean Progressive Studies Enrique Guerrero MEP, co-President oftheGlobalProgressive Forum Alessia Mosca, MEP, andDemocrats’ coordinator Socialists intheEuropean Parliament Committee onInternational Trade Linda McAvan, MEP, ChairoftheEuropean Parliament Committee onDevelopment Paul Magnette, Mayor ofCharleroi andformerMinister-President ofWallonia (Belgium) Lange,Bernd MEP, ChairoftheEuropean Parliament Committee onInternational Trade , (FEPS)istheonlyprogressive thinktankatEuropean level www.worldcommercereview.com policy goin promoting policy promote European values butnotat theexpense ofits The EUcanandshouldusetrade agreements to How farcantrade European values? economic interests, argues Luisa Santos www.worldcommercereview.com T This debate isinlarge fuelledby three interconnected perceptions: institutions andcivilsociety. Since could then, thedebate andshouldseekhasintensified onwhat trade objectives withinthe policy European explicitly states that 2015.It theEU’sOctober should“not onlyproject trade ourinterests, policy butalsoourvalues.” for juncture A critical theEU’s was theEuropean trade policy Commission’s Trade forAllStrategy publishedin objectives. leverage to achieve goalsthat initstrade gobeyond theabove-mentioned policy “traditional” access market 3. As theworld’s largest common theEUwields considerable market, economic power andshouldusethis their policiesinthedesired dueto direction) insufficient incentives and weak avenues forenforcement. 2. These instruments are seenashaving failedto achieve (ie. theirobjectives compel third countries to alter labour rights. sufficient resultsina oftimein reasonableperiod rights,areas suchashuman environmental or protection like theUnited Nations andInternational LabourOrganization (ILO) are perceived by someasnotdelivering 1. Europe’s traditional foreign tools, includingdevelopment policy inforums aidandmultilateral diplomacy globalisation. suchastransparency,aspects inclusiveness andtheneedto mitigate negative consequences oftrade and from trade asameansto increase access market andpromote EUcompanies’ competitiveness to new havehe discussionsaround trade policy seentheemergence ofanewnarrative. The focus was shifted www.worldcommercereview.com conventions andcorporate socialresponsibility guidelines, andadoptionofhighenvironmental standards. to, oftheParis respect climate accord, ratification prior ofILO conventions, implementationrights ofhuman trade canbesigned. agreement Examplesofsuchdemandsinclude, between thetwo parties butare notlimited this meansthat theEUisaskedto increase itslistofdemandsvis-à-vis agiven before third country apreferential states to callfor anexpanded listofforeign goalsto beachieved through policy theEU’s trade policy. Concretely, This lineofreasoning hasledmany actors, membersoftheEuropean civilsociety Parliament, andsomemember also to a level playing field for European companies European for field playing level a to also contribute to global sustainable development but but development sustainable global to contribute standards, since higher standards abroad not only only not abroad standards higher since standards, such as improving labour, environmental and health health and environmental labour, improving as such The EU’s free trade agreements can support goals goals support can agreements trade free EU’s The www.worldcommercereview.com like China,have already become leading trade powers. Europe cannotafford to benaïve andleadthisbattle on anera ofglobalsupply chains,In theeconomic growth ishappeningmostlyinemergent markets. Many ofthem, complement thework oftheConference oftheParties (COPs) on climate arrangements. work oftheInternational LabourOrganization. Similarly, we believe shouldnotduplicate that but EUtrade policy on theseobjectives. For instance, theEUcannotandshouldnotduplicate andconsequently the undermine goalsoftheEU’sthe primary trade policy. JustasFTAs instrument for delivering shouldnotbeseenastheprimary However, labourrights, environmental protection, climate shouldnotbe changemitigation andgenderequality to globalsustainabledevelopment butalsoto alevel playing field for European companies. such asimproving labour, environmental andhealthstandards, since higherstandards abroad notonlycontribute are facingawave ofprotectionism andincreased barriers. market The EU’s free trade goals agreements cansupport andimprovingmarkets trade andinvestment conditions for companies. This isevennow that more we important For theEuropean shouldremain focused trade businesscommunity policy onitscore that objectives are opening ineffective, neither projecting European economic interests nor European values. in questionfrom concluding any trade dealwiththeEU. thelatter In case, theEU’s becoming risks trade policy economic concessions from theEU. The second isthat suchexcessive demandscould deter thethird country The firstisthatcould usetheEU’s apotential negotiation partner non-trade largerrelated demands to extract agreement (FTA) negotiations increase inbothscope andintensity, two detrimental outcomes are more likely. However, theEU’s thisapproach overloading agenda.If risks thetrade policy to demandsprior any free trade thisview,In theEU’s foreign goals. policy isseenascapableofdelivering onallofthesevalue-driven trade policy www.worldcommercereview.com Luisa Santos for isDirector International Relations at BusinessEurope economic interests. ■ its own. The EUcanandshouldusetrade agreements to promote European values butnotat theexpense ofits www.worldcommercereview.com Protectionism isthewrong solutionto address concerns about the distributional effectsofglobalisation,the distributional saysBenoît Cœuré, and theEUisvehicle to maketrade more equitable The consequences of protectionism www.worldcommercereview.com I Americans’ welfare, therespondents were split between disagree andstrongly disagree for economists. arecent In pollinwhich economists were askedwhethertheannounced tariffs would improve These steps are takendespite thebenefitoftrade for aggregate welfare beingoneofthe rare points of consensus measures have already beenannounced by someeconomies. represent thefirststep towards a‘trade war’, potentially leading to abroader reversal ofglobalisation.Retaliatory Many commentators have expressed concerns that thetariffs recently announced by theUSadministration measures. policy actual sentimentthe anti-globalisation that hasbecome since more hasbegunto thecrisis betranslated pervasive into is atofbeingderailed risk by theintroduction ofimpediments to globaleconomic integration. There are signs that than 5%,thestrongest rate for seven years, againstlessthan4%for world GDP. Yet, thenascent recovery intrade More recently, world trade hasshown tentative signs ofrenewed vigour. Lastyear, world goodstrade grew by more accommodation. policy monetary economic expansion intheeuro area hasbeendriven largely by by substantial domesticdemand, supported barely keptpace withoutputgrowth, andhaseven laggedbehinditinanumberofyears. As aresult, thecurrent Since the crisis, however, trade to hasprovided economic growth. noticeably lesssupport Trade growth has millions ofpeopleoutpoverty. economies into globaltrade, inglobalvalue chains, notablythrough boosted participation incomes and lifted worldwide, growing withworld at imports roughly therate twice ofoutput. The integration ofmany emerging n thetwo decadesbefore trade thefinancialcrisis growth was amajor contributor to higherlivingstandards 1 . www.worldcommercereview.com the world According to aseparate survey, only40%ofpeopleintheUnited States thinkglobalisation isaforce for goodfor adequate training andeducational measures –have nothappenedinsufficient scale to compensate everyone. suggests that lumpsumtransfers from thewinnersoftrade canensure that allare better off, suchtransfers –or something that economists have notgiven sufficient consideration foralongtime. Whileeconomics textbook At thesametime, thebenefitsofglobalisation have notbeenspread evenly, neitheracross norwithin countries, 2 . that individual countries on their own cannot dispel cannot own their on countries individual that over open markets and fair competition – doubts doubts – competition fair and markets open over of globalisation by addressing people’s concerns concerns people’s addressing by globalisation of progressive model we have for taking back control control back taking for have we model progressive The European Union... represents the most most the represents Union... European The www.worldcommercereview.com global modelandtheIMF’s model. As involved withallmodels, theuncertainties multi-country meanprecise to mediumterm. For illustration, Iwillusetheresults out by ofsimulations ECB staffusingboththeECB’s carried Let mefirstlook at thechannelsthrough whichincreasesshort intariffs may outputandinflation inthe affect to mediumtermImplications for theshort onlong-runpotential outputgrowth,possible impact policy. andhow that may ofmonetary influence the conduct changes to financial andconditions andeffects on confidence. expectations The second mainimplication isthe There channelsto consider, are anumberofimportant oftariffs onprices and impact growth, including the direct significantly. tariffsThe first isthe higher effects would have on growthand inflation inthenear tomedium term. I wouldtwo like to flag main implications should impediments to the free movement increase of goods and services regime –onewhere to trade restrictions are managedthrough multilateral agreements. Today Iwould liketo share acentral banker’s onpotential changesto perspective thecurrent structural globaltrade equitable fromdirectly globalisation. Ihave previously spokenabouttheneedto makeglobalisation efficient, and enduring thereforeand policymakers have aresponsibility to propose anddesign policiesthat helpthosenotbenefiting ofthosebenefitsandthedisruptivedistribution effects that comewiththemhas tobeanswered. Economists But to defend opennessby listingitsaggregate benefitsisnolongerfully convincing. The questionofthe in trade wars, justdifferent degrees oflosers. toconsequences reduce ofglobalisation whileitiscertain aggregate globallivingstandards. There are nowinners Protectionism isnottheright answer to thesechallenges, however. isunlikelyto solve It thedistributional 3 . www.worldcommercereview.com threefold: the United States could beupto 2½%lower thaninthebaselinefirst year alone. The reasons are essentially including, andinparticular, ontheeconomy that raises tariffs inthefirstplace. Specifically, in activity real economic According to ourmodelsimulations, suchascenario would have significant adverse effectsontheglobal economy, impose theequivalent onUSexports. where theUnited ofgoods Statesby 10percentage raises tariffs onallimports points, anditstrading partners currently being discussed. This would missthebiggerpicture. Irather want to consider ahypothetical scenario To illustrate thepotentialrising protectionism, Idonot effects of want to dwell onthespecificsoftariffs at work. estimates from thesescenarios shouldbetreated withcaution,buttheyare usefulto explain thedifferent channels • • reduces wealth, increases the cost discourages ofinvesting demand. andfurther by selling equities,to reducing uncertainty credit anddemandinghighercompensation for risk. This inturn could account for oftheoverall around one-third effect inthe first year. Inaddition, financial investors react andconfidenceconsumers effects andbusinessesreact, butECBsimulations suggestthat suchuncertainty cause consumers to delay expenditure andbusinessesto postponeinvestment Second, inadditionto adverse about thedirect growth price effects, islikely theuncertainty prospects to investment andemployment, resulting inamaterial overall negative onGDP. impact firms’ production costs and reduce households’ purchasing power. These effects weighon consumption, First, goodscannotbeeasilyandreadily prices increase substituted, ifdomesticandimported higher import 4 . Much willdependonhow. Much www.worldcommercereview.com a result oftheincrease intariffs –withthesign andscope dependingonthe exchange rate as well as the reaction These developments would ultimately also weigh prices would onprices andwages. as likelyrise Although import world GDPby upto 1%.Euro area GDPwould alsodecline, butby lessthanintheUS. staff simulations, tradeworld ingoods could fall by up to 3%alreadyafter inthefirst thechangeintariffs yearand otherwords,In theoverall anetnegative scenario isclearly for the world economy asawhole. According to ECB gain asaresult ofincreased competitiveness inthird markets. global economy asawhole. Onlyafew openeconomies withlittleexposure may to thetariff-imposing country threatens thisintegration, withpotentially negative serious consequences for thosecountries andprobably for the related from trade at many more EastAsian thanhalfofexports South economies integratedparticularly into global value chains. For example, oneestimate putstheshare ofglobalvalue chain- But theeffects could alsobematerial for thoseeconomies that, despite having alessdirect exposure, are would bethemostnegatively affected. with thetariff-imposing country. Naturally, theeconomies that have theclosesttrade relations withthat country The effectsonothereconomies dependontheirsize,would primarily trade opennessandhow muchtheytrade retaliated by othercountries would beworse clearly off.Its livingstandards would fallandjobs would belost. effect oneconomic activity, qualitatively the results are unambiguous:aneconomy whichis imposingatariff even thoughonemay argue short, abouttherelativeIn contributions ofeachthesechannels, andtheoverall • by lower imports. are hitbyAnd third, thetariffs offset declinesasUSexports abroad, economic whichisonlypartially activity 5 . The oftrade erection barriers www.worldcommercereview.com tariffs were amongstthebiggestlosers. with theS&P500down affected directly by 5%ontheday sectors theannouncement. nearly by the after Industrial announcement. exacerbated market concerns, tariffs on Chineseimports The USdecisionon22March offurther Germany andJapan,for example, themajorstock indices market were down by more than 4%ontheday the after aluminium tariffs. prices market Equity fell more in markedly countries withlarge current accountIn surpluses. The S&P500 index fell by more than1%ontheday oftheUSannouncement ofitsintention to imposesteel and conditions. onthescope ofanyand prevailing measures, retaliatory uncertainty have already contributed to tighter financial to materialise, prices inresponse fallsinequity to theUSannouncement to onsteel imposeatariff and aluminium, These are notjusttheoretical considerations. While theeffects ofany tariffs onoutputandinflation maytaketime and have madetheglobalfinancialsystem safer of theinternational agreements financial regulatory that were reinforced inthe crisis wake oftheglobalfinancial could beevenThe impact worse ifthedeterioration intrade relationships would becompounded withaweakening worldwide have succeeded inrestoring many after years counteracting ofactively theeffects ofthecrisis. confidence that andanimalspirits are currently thestrong driving economic momentum –andthat policymakers Perceptions ofameasurable deterioration incurrent trade relationships could therefore potentially dent the in theUnited States andglobally. to decelerate astheeffectsoflower aggregate demandandhigherunemployment canbe to prevail,expected both choices made by foreign abouttheirprofit margins exporters – consumer price inflation and wage growth are likely 6 . www.worldcommercereview.com productivity gainsthan similarbusinessesthat donotexport productivity becomealso becausefirms more productive through exporting. post intheirfirstFirms greater yearof exporting the samesector. Moreover, are firms more productive thisisnot simply becauseexporting inthefirstplace, but firms in confirms that are moreEuropean that firms export and productive pay higher wages than non-exporting at themicroeconomicThis issupported level aswell. Data by collected theCompetitiveness Research Network fifth lowerfifth intheabsence oftheintegration since 1950 These effects are out alsoborne by thedata. According to oneestimate, EUGDPpercapita would beasmuch asa productivity. oftheEuropeanThis iswhy integration isat theheart theEUSingleMarket process. of labourandcapitalacross andacross sectors firms. This improved innovation andhence allocation supports Competition from trade, andthebenefitsoffered bylarger markets, canencourage amore efficient allocation run potential outputofoureconomies. to belonger-term effects on theeconomy too. growth andhence thelong- Trade inproductivity opennesssupports from arising apotential factors cyclical transition to amore short-term Besides protectionist regime, there are likely Longer-term influences growth andemployment. ‘trade war’ have addedto thevolatility already thisyear markets. witnessedearlier Noneofthissupports inequity maythat earlier thescenario Idescribed occur. fears participants, amongmarket ofa And by fuellinguncertainty measures announced to date. They seemto anticipate measures theeffects of andprice insomechanceretaliatory Such movements appearmore pronounced thanwould beconsistent economic with thedirect effects ofthe 7 . 8 . www.worldcommercereview.com policies that achieve fairer outcomes. This requires astrong politicalandinstitutionallandscapewhichcanensure The andsocialeffects of distributional greater economic integration should rather beaddressed by targeted the poorest insociety. And itwould breed for distrustamongnations, amore making unstable international order. undisputed economic advantages that trade andintegration andthereby bring exacerbate economic hardship for prices rise, goodsbecome dearermore asimport andreal inequality incomes would fall. deprive It peopleofthe Winding backglobalisation isthewrong solutionto address theseconcerns. Aretreat from opennesswillonlyfuel ultimately provides thepoliticalmotivation for theprotectionist moves we observe. Yet, bothacross andwithincountries impacts have itsdistributional notbeenadequately addressed, that afact Greater globaleconomic integration hasboosted livingstandards worldwide millionsoutofpoverty. andlifted Conclusions measures. effective lower boundonnominalinterest rates and to increase to unconventional theneed to resort policy mayadverse shockto leadusto productivity structural bemore constrained often inthelongerterm by the unconventional measures putinplace following policy theglobalfinancialcrisis. And second, becauseafurther at atimewhensomecentralto bankshave global uncertainty onlyjustbeguntheprocess ofunwinding the toSo sumup, why doesprotectionism matter for central banks?First, becausea ‘trade war’ scenario would add number offactors, includingtheageingpopulation to decline. The potential growth rate ofadvanced economies hasalready slowed over recent decades, a reflecting process to tradeBarriers andthereby would andpotential thisvirtuous undermine output causebothproductivity 9 , as well as declining productivity growth., aswell asdeclining productivity www.worldcommercereview.com 9. See Nerlich, C and J Schroth (2018), “The economic impact of population ageing and pension reforms”, economic ageingandpension ofpopulation impact (2018),“The Nerlich,Cand JSchroth 9. See Economic ECB(2017), “Firm8. See andcompetitiveness heterogeneity intheEuropean Union”, Economic Bulletin,Issue2/2017. Economics, 141(1):50-78. Badinger,7. See H(2005),“Growth ofeconomic effects integration: evidence from States”, theEUMember Reviewof World ofisolation”, perils Cœuré,6. See B(2017),“The attheCouncil speech ofForeign Relations, NewYork, 19April. (2017),GlobalValue 2017. WTO 5. See Report ChainDevelopment shocks”, ofuncertainty impact eg.4. See N(2009),“The Bloom, Econometrica, 77(3):623-685. Cœuré,3. See B(2017),“Sustainable Globalisation: Lessons from Europe”, Revued’économie financière,April. 125, World2. See Economic Forum: https://www.weforum.org/agenda/2017/11/what-your-country-thinks-of-globalization ofChicago, University 1. See Panel IGMEconomic Experts Endnotes CœuréBenoît oftheExecutive isaMember Board oftheECB doubts that individualcountries ontheirown cannotdispel. ■ backcontroltaking ofglobalisation by addressing people’s concerns over andfaircompetition openmarkets – while protecting themagainstuntrammelled globalforces. represents It themostprogressive modelwe have for European Unionisavehicle that thebenefitsofeconomic brings openness to the greatest numberofitscitizens allowingBy memberstates to recover that someofthestate have functions beeneroded by globalisation, the This isalandscapewhichinEurope isbestprovided by theEuropean Union. andpoliticaldebatesthat coincide action thegeographical withthescope integration. ofmarket scope ofpolicy . www.worldcommercereview.com This article isbasedonapanelcontribution atthe29 This article Bulletin, Issue2/2018. Finance”, d’Este”, “Villa Cernobbio, 2018 6April th edition of the workshop “The Outlook fortheEconomy Outlook and editionoftheworkshop “The www.worldcommercereview.com international role for theeuro, asoutlinedby Jean-Claude assess whetherthe euro area shouldpursueagreater The international role Konstantinos Efstathiou andFrancesco Papadia Juncker, andhow itmight goaboutdoingso of theeuro www.worldcommercereview.com E the dollarandeuro, however, have changedover timeandwhat onehasgainedtheother lost. of theeuro andsomeother European –whenthedeutschmark currencies were internationally used. The shares of unchanged intheforeseeable future, andcanbe seen asacontinuation ofthesituation preceding theintroduction between thedollarandeuroThe likelyto hasnotchangedinthelasttwo ranking decades, remain isvery the dollar, whileothercurrencies cover minimalshares. international uses, whetherintheprivate orintheofficialdomain. byagood currency margin Thefirst-ranking is inallpossible isthat currency theeuro clearfact isthesecond-most important andvery important One very the two decadesofitsexistence? international roleactual oftheeuro, ie. itsuseoutsidetheborders oftheeuro area, andhow hasit changed over Any planaboutincreasing theinternational from role thecurrent oftheeuro situation: shouldstart what isthe This statement issues: raises two important • • What are thetools that theeuro area could deploy to pursue thisobjective, ifindeeditisdeemeddesirable? Should indeedtheeuro area international pursueamore role important for itscurrency? September 12 uropean Commission president Junckerraised, Jean-Claude inhislatest State oftheUnionaddress on the euro” before theendofyear. euro. Indeed, heannounced that theCommission would present strengthen plans“to theinternational role of th , anissuethat hasbeensomewhat dormant over recent years: theinternational role ofthe www.worldcommercereview.com bonds orforeign reserves, instead offlows asin Figure 1.Butthephenomenonisstillvisible. The shares ofthetwo currencies are ofcourse muchmore stableifonelooksat stocks, for instance ofinternational usesaforeignone country to issuedebt. currency clearest intherole ofthetwo currencies to denominate foreign bonds, asinFigure currency 1,ie. whenaresident of This isvisibleinallpossibleinternational usesofthetwo currencies by theprivate orthepublicsector, butis attitude towards it towards attitude promoted if the ECB would surpass its ‘neutral’ ‘neutral’ its surpass would ECB the if promoted A larger international role of the euro could be be could euro the of role international larger A www.worldcommercereview.com Note: the series are 4-quarter moving averages.Note: theseriesare 4-quarter Source: Decalogic viaECB(2018). Figure 1.Foreign–currency-denominated debtissuance by currency www.worldcommercereview.com as thedegree ofeuro area financial integration, ascaptured intheindex calculated by the European Central Bank. This isdocumented inFigure theshare debtissuance offoreign-currency-denominated ineuros 2,reporting aswell the euro that took place before, theGreat andafter during Recession. inthe significantlyinternational isthat caseinthis ofthefluctuations useof respect over important time. One very international useofthecurrencies that have takenplace over theyears. The lasttwo, instead, canmove quite The first andtherefore are four factors characterised by strong inertia cannot explain thechangesin determining therelative international role ofdifferent countries: Theoretical considerations aswell regularities asempirical allow factors for theestablishment ofthemostimportant • • • • • • A policy by the issuing country to assist, by ordeter, theissuingcountry A policy theinternational useofitscurrency Financial oftheissuing country, stability relative ofothercountries to thestability Political power oftheissuing country andmilitary Freedom ofcapitalmovements Development financialmarket oftheunderlying issuingtheinternationalSize currency ofthecountry www.worldcommercereview.com Figure 2.Foreign-currency-denominated debtissuedineuro andindex offinancialintegration Notes: Share of EUR in bonds issuance is a 4-quarter moving average.Notes: Share issuance ofEURinbonds isa4-quarter Source: Decalogic viaECB(2018)andECB. www.worldcommercereview.com While seignorage was estimated at anon-negligible 1%for theUS the international demandfor thesovereign issuingtheinternational currency. paperofthecountry from by theuseofzero-yielding foreign banknotes entities andfrom thelower liabilitiesdueto yieldonexternal International seignorage isthefirstitem underthisgeneral advantage term, deriving referring to thepecuniary ‘home’ ininternational finance. currency As for seignorage, theadvantage for European banks to conduct mentioned for often Another aspect, theUS,is ‘denomination rents’ that banksderive from theuseoftheir liketheeuro area,jurisdiction, withlarge current account surpluses. borrowingthe cheaperexternal allowed by theissuance ofliabilitiesin one’s for a islessimportant own currency bonds –covering thesamerole as Treasuries –makethisadvantage muchlesssignificant for theeuro area. Also, outside theeuro area to –withrespect theforeign circulation –andtheabsence offederal ofdollarbanknotes euro dollar inmind, takestheevocative nameof ‘exorbitant privilege’ advantageOne often-mentioned ofissuinganinternational currency, mostlyelaborated withtheexample ofthe the share oftheeuro asaninternational currency? role for theeuro canbeformulated shouldeuro more area precisely: pursuepoliciesthat authorities would increase Taking into account theevidence inFigure international ofamore 1,thequestionaboutdesirability important changes initsintegration). between theinternational useoftheeuro andthestress intheeuro area (asmeasured financialmarket by the substantially inthecourse ofthat arecovery recession around andstarted 2012. This shows ahighcorrelation increased series Both between thelaunchofeuro andthebeginning oftheGreat Recession, decreased 1 . 2 , themuchlower circulation ofeuro banknotes www.worldcommercereview.com currencies would beenhanced. multilateral set-up, inwhichtheoutsized role ofany would bereduced singlecurrency andcompetition between hasrecently sanctions as thecaseofIran shown. Onecould alsolinkawiderinternational role for theeuro to a This hasbecome more relevant astheinterests oftheUSappearmore frequently different from thoseof Europe, international use. and policiesgranted extensive international by thevery role ofthedollar, would bereduced iftheeuro hadawider call ‘financial autonomy’. The influence over the extraterritorialEU, deriving from the reachofUSrules, decisions benefit Thefor mostimportant Europe from alarger international role oftheeuro canbe found inwhat one could policy. ofmonetary the conduct interest aggregates rates rather thanonmonetary substantially attenuate thefear shocksmay that external affect the muchlarger size oftheeuro area economy, to withrespect that ofGermany, andtheemphasisofECBon are likelyto have of“neither hinderingnorpromoting ledtheECBto theinternational itspolicy useoftheeuro”. But These disadvantages madetheBundesbankreluctant to allow to thedeutschmark beusedinternationally and limited, however, are thedisadvantages that could policy. derive from suchusefor ofmonetary theconduct Overall, thefinancialadvantages stemming from theinternational useoftheeuro are quite limited. Analogously business, European banksuseforeign thedollar)more banks. thanAmerican often currencies (inparticular have significantlycrisis. Inaddition, thefinancial during reduced fortheir international theirinternational activity asfor US banks, isnotasimportant international since theformer business intheirdomesticcurrency banks www.worldcommercereview.com that willinevitablybewrought by Brexit, andthe creation ofacommon ‘federal’ bond–whichwould cover inthe So, for instance, union,progress thecompletion ofbanking oftheshock union, thesurpassing oncapitalmarket oftheeurodepends onthegeneral stability area and, specifically, ofitsfinancial system. onthesmoothfunctioning union,whichaccompanied theonsetofGreatmonetary Recession, shows that substantial progress critically More importantly, thereversal ofthegainsininternational role oftheeuro accumulated inthefirstdecadeof was consistent withits ‘neutral’ towards policy theinternational role ofthe euro. decisive step inthisrespect. oftheECBingranting swapsThe central policy to lessforthcoming non-euro banks from theFederal oftheUnited States Reserve to anumberofcentral banks, including prominently the ECB, was a and central may bankintervention beneededto repair broken intermediation. market The openingupofswaps The experience theGreat during Recession hasindeedshown that international canseize moneymarkets up policy.on theswaps, lesttheyaffect monetary with central banksofcountries that are extensively usingtheeuro, whilemaintaining underitscontrol thedrawings A possibleoperational development would beiftheECBwould show willingness to enter into ofswaps aseries unionandprogressbanking union. oncapitalmarket it. messageandcould belinkedto therepeated animportant This requests would oftheECBto complete carry A larger international role oftheeuro could bepromoted iftheECBwould its surpass ‘neutral’ attitude towards are the tools thattheeuro areathis piece could isrelevant: deploy to pursuethisobjective?” “What Given ofincreasing thedesirability theinternational role oftheeuro, thesecond questionaskedat thebeginning of www.worldcommercereview.com 2. Combining evidence from US Treasury, 2006andCohen, 2012 McCauley 2015forarecent1. See formulation. Endnotes Konstantinos Efstathiou isanAffiliate Fellow and Francesco Senior Papadiaa Fellow atBruegel broader, policies. ■ bring, would beanadditionaladvantage to betakeninto account whilepursuingtheaforementioned, much The isthat rightperspective thebroader international role oftheeuro, andthe ‘financial autonomy’ that this would enhancing theinternational role oftheeuro. they are noteasyto beachieved. The choice to onthemdependsbroader embark considerations thanjust These policies would have effects well beyond theinternational useoftheeuro and, desirable, whileinprinciple defence policy. use oftheeuro would beexpanded iftheEUwould pursueamore united, andthusmore effective, and external components, would favour alarger international useoftheeuro. astillbroader In perspective, theinternational abroaderIn perspective, progress alsointheset-up ofeuro area economic policy, initsfiscalandstructural the euro. euro area therole that Treasuries play intheUnited States steps to –are increase necessary theinternational role of www.worldcommercereview.com This article was originallypublishedonBruegel This article 807ofPL104–132,September’ Section oftheTreasury,the Secretary inconsultation withtheAdvanced Deterrence Steering Counterfeit Committee, pursuant to US Treasury ofUnited abroad. States currency useandcounterfeiting to 3.Final theCongress Part by (2006)‘The report 1-14 McCauley, theUS dollarconfer R(2015)‘Does anexorbitant privilege?’, ofInternational Journal MoneyandFinance, 57, 23(1), 13-31. Right’,Getting the and Benefits Calculus Costs ofanInternational Currency: Cohen, B(2012)‘The Open Economies Review, References www.worldcommercereview.com not require acentral fiscal A more stableEMUdoes Michel Heijdra, Michel Tjalle Aarden, JesperHansonand Toep sharing andmoresharing effective useoffiscalstabiliserswill van Dijkargue that strongerrisk financialmarket mean no additional fiscal risk sharing mean noadditional fiscal capacity www.worldcommercereview.com A already acts aslenderoflastresort. already acts thebuild-up ofbuffersUnion, andensuring innational budgetswilldeliver amore stableEMU, whiletheESM andmore sharing risk effective useoffiscalstabilisers. Union, buildingthe Markets Capital CompletingtheBanking canbeachievedfiscal capacity withoutany namely, risksharing: additionalfiscal through strongermarket financial developedAnother intheremainder objection, ofthiscolumn, isthat thepotential benefitsofa central stability outweighed by itsdisadvantages. transfers across memberstates (Feld etal.2018),theadvantages 2018,Beetsma ofacentral are fiscal capacity throughrisks of moral hazardof euro andpermanent area (ECB2018),andnegative businesscycles side-effects the Eurogroup recently (Centeno reported isthat inlight ofahighdegree 2018).Oneobjection ofconvergence However, there isnoconsensus ofacentral abouttheusefulnessandnecessity fiscalcapacity, asthe President of (eg.fiscal capacity European BergerCommission 2018a, etal.2018). if oneorseveral alsoargue memberstates that experience theEMUneedsacentral alarge Others economic shock. intheEMU, reduction andrisk sharing support suchacentral canprovide fiscalcapacity muchneeded budgetary ofmeasures to enhance ofapackage risk etal.(2018)argue Union(EMU).Bénassy-Quéré that, aspart Monetary The needfor acentral isa element inthediscussionon fiscalcapacity recurring reform ofthe Economic and stabilisers, withoutanyrisk sharing. additionalfiscal capacity canbeachievedcapacity through andmore strongerrisk sharing effective financialmarket useoffiscal ofthe part Vox debate oneuro area reform, argues that thepotential benefitsofa central stability fiscal hasbeenreached.but noconsensus ofasuchcapacity ontheusefulnessandnecessity This column, central isa Union, topic indiscussionson fiscalcapacity recurring reform ofthe EconomicMonetary and www.worldcommercereview.com another 17%. border income andcapitaldepreciation) factor 48%andcredit absorb provision to theprivate absorbs sector shows that fiscaltransfers across (cross- states shocksintheUS,whilecapitalmarkets 9%ofasymmetric absorb However, intheUSare for capitalmarkets thanfiscal transfers. muchmore shockabsorption important Figure 1 The argument for acentral intheeuro fiscalcapacity area inspired isoften by cross-state fiscal transfers intheUS. Strengthening financialchannelsisthemosteffective way toimprove stabilisation to use automatic stabilisers in a downturn a in stabilisers automatic use to and ensuring that its members have the fiscal space space fiscal the have members its that ensuring and Banking Union, developing a capital market union, union, market capital a developing Union, Banking [T]he euro area should focus on completing completing on focus should area euro [T]he www.worldcommercereview.com 2007 and2009.Despite therelatively low degree integration, ofcapitalmarket Cimadomo etal.(2018)show that acrisis.contracts during Adrian etal.(2013)document suchsubstitutionfrom loansto bondsintheUSbetween provide addition,well-developed capital markets In borrowers withalternative financingoptionsifbanklending contributemarkets through to sharing risk cross-border assetholdings. shocksintheUS,compared ofasymmetric of absorption to only12%intheeuro area (Figure 1).Integrated capital Unionwillstrengthen CapitalBuilding aCapital account shockabsorption. markets Markets capitalmarket for 48% exposures onbankbalance sever sheets, thelinkbetween sovereigns would further andbanks. a European Insurance Scheme, Deposit whichislinkedto treatment discussionsontheregulatory ofsovereign the establishment ofacommon backstop to Fund. theSingleResolution through sharing risk Plans for further measures loans. to address non-performing through byrisk sharing Unionwillbeunderpinned fiscal The Banking through adequate canbeincreased buffers sector andresilienceThe further stability ofthebanking for bail-inand to shocks. absorb sector banking of interbank theeuro lendingduring area crisis. Unionwillstrengthen ofthe Completing theability theBanking limited contribution ofcredit credit in theeuro markets flows area andthebreak-down canbelinkedto pro-cyclical on average shocksintheUSversus 17%ofasymmetric anegligible contribution intheeuro area (Figure 1). The Unionwillenhance by shockabsorption creditThe Banking markets. Credit provision to theprivate absorbs sector the euro area (Butietal.2016). compared to theUS.Strengthening thesefinancialchannelsisthemosteffective way toincrease the resilience of to through 12%.Shock absorption financialchannelsistherefore more thanfive timesassmallintheeuro area theeuroIn area, thecontribution ofcapitalandcredit shocksislimited to ofasymmetric markets absorption www.worldcommercereview.com more than0.6(Figure elasticitieshave states 2).Member withlow relatively budgetary more room to enhance the between memberstates are ofmember states rather elasticity varies from pronounced: 0.3to thebudgetary While thedegree ofnational automatic stabilisation intheeuro area ismuchhigher thanintheUS,differences 30% intheUS. stabilisation intheeuro area roughly absorbs 47%ofcombined income andunemployment shocks, versus only shocks intheeuro area. at Looking total stabilisation across levels ofgovernment, etal.(2015)findthat Dolls fiscal aroundin theUSabsorb 10%ofregional shocks, whilenational automatic 20% ofcountry-specific stabilisersabsorb channelforbudgets are fiscalstabilisation. themostimportant Alcidi and (2017)showThirion that federal transfers theeuroIn area, disbursements anticyclical from theEUbudgetprovide stabilisation, someindirect butnational budget, whilestabilisation through state limited andlocallevel (Follette budgetsisvery andLutz 2010). US withthenational level intheEUisrelevant. theUS,fiscal stabilisation mainlytakesplace In through the federal provides asmuchstabilisation twice compared to federal transfers inthe US.Comparing thefederal level inthe Fiscal canalsoprovide stabilisation policy intheeuro inthewake ofadownturn. area National fiscalpolicy currently Automatic stabilisation at thenational level ifsufficient powerful buffers be can beenbuilt have effect that issimilar to thefulleffect offiscal transfers intheUS. integration. However, ofthe36%-point gapwiththeUSwould narrowing already onlyaquarter have astabilisation promising may avenue sharing. takealongtimeto risk converge It for further to USlevels ofcapitalmarket This iswhy cross-border andFDIflows, thedevelopment equity Union,supporting ofaCapital Markets isa crisis. cross-border andFDIholdingsintheeuro equity area thesovereign were during shockabsorbers powerful debt www.worldcommercereview.com fluctuations. can deviate from that inpractice follows theelasticity from models, for example inthecaseoflarge cyclical developmentsbusiness cycle –isavolatile indicator revised that isoften ex post. Moreover, elasticity thebudgetary shouldbenoted that balance theoutputgap–whichisusedincalculation to ofthestructural It for correct effective shockabsorber,a very ofbuilding-upfiscalbuffers. theimportance andunderline Figure 3shows theseresults for sixmemberstates. This simulation illustrates that buffers innational budgetscanbe through theEFSFandESMwas provided are excluded). stabilisers canoperate the3%limitin96%ofallcases (98%ifcaseswhere fullywithoutbreaking financialassistance post outputgapsoftheEA12between 1965and2016. The results show that for countries at theirMTO, automatic the3%nominaldeficitlimit.breaking elasticitiesandThe simulation inthefigureex- isbasedoncurrent budgetary Figure 3shows that countries at theirMTO allshocks withautomatic stabiliserswithout virtually canabsorb they provide asafety margin againstbreaching theSGP’s 3%nominaldeficitlimit(European Commission 2018b). The MTOs are setto ensure sustainabledebtlevels andenoughroom to manoeuvre for automatic stabilisers, as Pact (SGP)iscentredMedium-Term around acountry-specific (MTO) Objective budgetbalance.for thestructural so removes fiscaltightening. theneedfor pro-cyclical This iswhy thepreventive andGrowth ofthe Stability arm asufficientEnsuring build-upofbuffers cycleenables automatic alongthe stabilisationduringa Doing downturn. benefit systemscycle. to theeconomic frameworks, for oftheirbudgetary stabilization example by properties better aligning domesticunemployment www.worldcommercereview.com Source: Alcidietal. (2017) Figure 1.Channels absorption(decomposition ofshock absorption) asymmetricshock www.worldcommercereview.com Source: Mourre etal. (2014) Figure 2.Automatic stabilisation across states member www.worldcommercereview.com Source: Ameco andMourre etal. (2014). Figure ifat 3.Shock MTO absorptioncapacity www.worldcommercereview.com Source: Ameco. Figure 4.Distance to MTO in2017 www.worldcommercereview.com activity andassetprices (Lane2012). activity effect ongovernment finances wassignificant oftax due toahighsensitivity revenues todeclinesin construction The burstingofthereal estate boominSpainandIreland hadapermanent negative effectonfiscal revenues. The liabilities through policiesto prevent macroeconomic Union. imbalances andtheestablishment oftheBanking ofpreventingcases ofIreland andSpainillustrate the importance theemergence andmaterialisation ofcontingent confronted withcontingent liabilitiesstemming from areal sector. estate boomand thebanking anything, If the position canruninto trouble 2015, European (Dullien Commission 2017).However, bothSpainandIrelandwere argueSome that thecasesofSpainandIreland provide anexample that even memberstates withasoundfiscal The ofIreland for cases and Spain call macro prudential and orderly policies bankresolution ofnational policiestoability stabilize theeconomy. rate environment provides ampleadditionalfiscalspace to buildthesebuffers in national budgets, andbolster the is requiredeffort as 12 euro area memberstates hadnot reached their MTO in2017(Figure 4). The low interest thepastyears,Over have efforts beentakeninmany memberstates to reduce theirbudgetdeficits, butafurther stabilise inbadtimes. any framework mustensure that memberstates buildsufficient buffers ingoodtimes, becausethisallows them to design of suchaframework would alsorequire inorder to abalancingact takeaccount theend, ofthecycle. In An expenditure rulecombined withadebt target ismore control makers, underthedirect althoughthe ofpolicy European Fiscal Board inthefirsthalfof2016,amongothers). 2018,andtheDutch presidency (for andfiscalsurveillance et al.2018,the instance, decision-making etal.2018,Darvas Bénassy-Quéré by budgetary Different proposals have beenmade to give prominence to an expenditure ruleasanoperational target for national www.worldcommercereview.com ESM programmes to focus lessonfiscal adjustment and more on growth enhancing reforms. unsustainable debtlevels andprevent adjustment a disproportionate dueto debtoverhang. This would alsoallow framework for ofunsustainablesovereign orderly restructuring debtwould enhance private incase of loss-sharing countries. analogyto thebankresolution In framework through withloss-sharing bail-in,astrengthened by theESMiseffect on A downsidegovernment ofsubstantial financialsupport debtlevels in programme the euro area between 2007and2014. (2017)findthatReichlin loans by theESManditspredecessors shocksin stabilisednolessthan55%ofasymmetric at theeuro asalenderoflastresort area level (ESM)canact Mechanism to provide financialassistance.Milano and memberstatesIf cannolongerstabilisetheireconomy dueto access, a lossofmarket theEuropean Stability theESMprovidesAs a last resort, funding, to conditionality to subject countries needs withliquidity significantly lowersrisks the for publicfinances. private investors andthentheprivatelyResolution filledSingle losses incaseofabank Fund absorb resolution. This ofbail-in,whichisacentral Union,prescribesprinciple that instead element oftaxpayers, oftheBanking first increased governmentGDP inIreland, andfurther debtthrough effectonsovereign anindirect bondyields Moreover, hadanupward sector effect ongovernment ofthedomesticbanking debtofup bail-outs to 49%of that theMIPisusedto itsfullpotential. thislight,corrective itisimportant In actions. theemergencethe MIPisto detect stageandcould ofimbalances inanearly recommend onthehousingmarket ProcedureImbalances (MIP)andthemacroprudential by theEuropean surveillance Systemic Board. Risk The aimof governance framework oftheEUdidnotincludepreventivepre-crisis frameworks, suchasthe Macroeconomic adjustment. Instead, preventing budgetary structural theemergence ahighpremium. ofimbalances carries The The infiscal reduction revenues was permanent, hence afiscalcapacity would not have alleviated theneed fora . The www.worldcommercereview.com 4. InAmeco, states outputgapsforthemember thatadopted theeuro 2007are after notavailable from 1965onwards. 3. MTOs are definedinstructural terms. measures. 2. The structuralcycle deficit developments ofcorrects thenominalbudgetforbusiness temporary andtheeffects resolution framework that ensures anefficient and orderly private loss-sharing sector in caseofserious problems. andacommon thatenhances rulebook theresilienceEuropean supervision oftheEuropean sector, banking anda 1. However, absorptiononcredit Union,shock markets withtheestablishmentofBanking isstrengthened through Endnotes 2018). and represents was theauthors’ views. publishedinEconomisch Asimilararticle StatistischeBerichten (Aarden etal. Authors’ note: This column was prepared when allauthorswere ofFinance employed attheMinistry ofThe Netherlands Advisor at theEuropean AffairsMinisterDutch of Division ofthe Finance Advisor to the Executive of the Dutch-Belgian Director Constituency, IMF, and Toep van is a Policy Dijk Social European of Affairs andEmployment, AffairsMinistry Division, JesperHansonis Dutch at the HeijdraMichel is Director, Foreign Financial Affairs, Dutchat the Treasury, Tjalle Aarden Head, is Deputy strengthen both financialandfiscalstabilization mechanismsand obviate theneed fora central fiscalcapacity. ■ thatensuring itsmembershave thefiscal space to useautomatic stabilisersinadownturn.Doing so would To conclude, theeuro area shouldfocus Union,developing union,and acapitalmarket oncompleting Banking www.worldcommercereview.com Berger, H,GDell’Ariccia (2018), “Revisitingtheeconomic andMObstfeld case forfiscal unionintheeuro area”,IMF constructive approach to euro area reform” Rey, ISchnabel, NVeron, BWeder diMauro andJZettelmeyer (2018),“Reconciling risksharingwithmarket discipline:A A,MBrunnermeier,Bénassy-Quéré, HEnderlein, EFarhi, MFratzscher, CFuest, JPisani-Ferry, Gourinchas, P-O PMartin, H world trade”, ECBWorking Paper, 2137. R,SCimaandJCimadomo(2018),“ABeetsma, minimalmoral hazard central stabilisationcapacity fortheEMUbasedon Working 2017/07. Doc. Alcidi, CandGThirion (2017),“Fiscal risksharingandresilience to lessonsfortheeuro shocks: area from theUS”, CEPS acomprehensiveArea: comparison”, CEPSWorking 2017/04. Doc. andconsumption andGThirion patterns (2017),“Risk-sharing smoothing intheUSAlcidi, C,PD’Imperio and theEuro NBER Macroeconomics Annual 2012. Adrian, T, financialfrictions? Parsing theevidence from thefinancialcrisisof2007-09”, PColla andHSShin(2013),“Which sterk”, Economisch StatistischeBerichten 103(4764):348-351. Aarden, T, Tvan argumenten andJHanson(2018),“De voor Dijk eenEuropese zijnhelemaalnietzo stabilisatiefunctie References costs wereservicing below historical averages.” taxrevenuesalso boosted through thenon-indexation ofmany taxcategories. Finally, low interest rates meantthatdebt expenditure taxes. Faster-growing euro countries member alsohadinflation rates above theeuro area average, which high construction activity, andcapital inflowsboosted thetake from capital gainstaxes, assettransaction taxes and (Ireland and Spain),thecredit directly generated andhousingbooms extra taxrevenues, since risingassetprices, 5. Lane nature (2012)explainsthepermanent oftheincome reduction inIreland andSpain:“Insomecountries For Greece, we assumeanMTO of0. , CEPRPolicy InsightNo91. www.worldcommercereview.com Lane, PR (2012), “The European Sovereign Crisis”,Lane, Debt PR(2012),“The ofEconomic Journal Perspectives 26(3):46-98. Economies Review26(4):683–710. Furceri, Euro DandAZdzienicka Crisis:Need for aSupranational Area Fiscal (2015),“The SharingMechanism?”, Risk Open and theeconomy”, Federal Working Reserve Paper, 2010-43. Follette, GandBLutz (2010),“Fiscal intheUnited States: automatic stabilizers, fiscalactions, policy policy discretionary Feld, afiscal inEMU” capacity L(2018),“Whither European Fiscal 2018. Board (2018), Annual Report COM(2018) 387,31May. European Commission (2018a),“Proposal fortheEstablishmentofaEuropean Investment StabilisationFunction”, European Commission theEMU”, (2017),“Reflection Deepening on Paper COM (2017)291,31May. ECB (2018),“Growth synchronisation ineuro area countries”, ECBEconomic Bulletin,05/2018 CouncilDutch Presidency (2016),“Improving andtransparency oftheSGP”, predictability Informal ECOFIN, 2016. 23April Working Papers onMoney, Finance, Trade anddevelopment, 02/2015. fiscal forthe euro area: capacity different cyclical S(2015),“Which Dullien, transfer schemesin comparison”, Berlin State intheMember and Effectiveness AreaEuro Level andinInternational Comparison”, Mannheim. M,CFuest,Dolls, APeichl, JKock, andCWittneben (2015), “Automatic Stabilizers intheEurozone: oftheir Analysis Économique, 47. andXRagot (2018),“European fiscal Z,PMartin rules Darvas, require amajor overhaul”, Les notes du Conseil d’Analyse 2148. Cimadomo, (2018),“Private J,OFurtuna andMGiuliodori andpublicrisksharingintheeuro area”, ECBWorking Paper Centeno, M(2018),Letter Tusk, Donald to Mr President oftheEuro Summit,Brussels, 25June. financial union” Buti, M,JLeandro andPNikolov (2016),“Smoothing economic intheEurozone: shocks The potential ofthe untapped Paper.Research Department , VoxEU.org, 25August. , VoxEU.org, 31July. www.worldcommercereview.com VoxEU.org This intheVoxEU column isaleadcommentary “Euro Debate Reform” Area European Economy Economic Papers 536. Mourre, andSPrincen G,CAstarita (2014),“Adjusting thebudgetbalance theEUmethodology”, forthebusinesscycle: January. Milano, sharingacross theUS VandPReichlin(2017),“Risk andEMU:therole ofpublicinstitutions” , andwas originallypublishedon , VoxEU.org, 23 www.worldcommercereview.com union andaeuro area fiscalstabilisation are substitutes in Marco Carnot argue ButiandNicolas that whilstfinancial normal times,normal inbadtimes theyare complementary fiscal capacity inEMU fiscal capacity The casefor acentral www.worldcommercereview.com T central issometimesputindoubt (Heijdra etal.2018,Feld fiscalcapacity 2018). However, whiletheachievement ofafullfinancialunionis relatively consensual inprinciple, the value addedofa complementary. –theyarestabilisation infact function And,introduction ofastabilisation function. asargued inthiscolumn, afinancialunionisnotsubstitute to a to overcome union(CMU) unionandcapitalmarkets thesegapsare aswell thecompletion ofbanking asthe the incomplete nature ofthefinancialunionandabsence of common fiscalinstruments. Keyingredients general theremainingIn ‘problem’ asalack ofadjustment canbedescribed channelsto large shocks, given integrity. Further progress istherefore neededfor astableEMU(eg. Quéré Benassy etal.2018). acceptance that current setupremains prone to andeven shocksthat its could imperil shakeitsfunctioning European However, (ESM),andstrengthening framework. Mechanism thesurveillance Stability there isbroad Union(EMU). Economic andMonetary union, establishingthe The changesinclude puttinginmotionabanking Following governance steps important thelastcrisis have beentakento bolster theresilience oftheEuropean times. financial unionandaeuro area fiscalstabilisation are substitutes times, innormal inbad they are complementary The authorsofthiscolumn begto disagree thecasefor andre-state acentral fiscalcapacity.In essence, whilst with soundnational fiscalpolicieseliminate instruments. theneed for common budgetary have union) argued unionandcapitalmarkets together that thecompletion ofafinancialunion(banking he debate continues over theneededingredients authors Union.Some for astableEconomic andMonetary www.worldcommercereview.com stabilisers, provided that memberstates properly adhere to andGrowth fiscalrulesofthe Stability (SGP). Pact suffice to provide considerable iii)fiscalstabilisation shockabsorption; canin any event relyon nationalbudget ii) private risk-sharing mechanisms, includingasenhanced unionandCMU, by thecompletion ofbanking could makeseveral ofthefiscalcapacity Critics points. They claimthat: i)sizeable shocksare asymmetric infrequent; complement and reinforce each other each reinforce and complement effective common budgetary instruments. They They instruments. budgetary common effective union as well as the introduction of targeted and and targeted of introduction the as well as union the EMU are the completion of the financial financial the of completion the are EMU the Looking forward, the two priorities to deepen deepen to priorities two the forward, Looking www.worldcommercereview.com decompositions of the cycle suggest that output fluctuations botha suggest thatcomprise decompositionscommon output fluctuations ofthecycle component and country- have fluctuations Business cycle remained sizeable since theinception oftheeuro.Interestingly, simple Q1: Is there evidence inEMU, oflarge fluctuations cyclical including country-specific components? forward by tabling abalanced proposal. We finally recall, in conclusion, how together withother contributions, the Commission hasproposed to move therestIn ofthiscolumn we Hence, takethepoints inturn. ofthecritics we examine three analyticalquestions: (eg.introduction ofafiscalcapacity Lagarde 2018,Draghi 2018, OECD2018). We begto disagree withthisanalysis. too So dotheinternational organisations, whichstrongly favour the legitimised permanent transfers. They outweigh itsadvantages. conclude that ofafiscalcapacity therisks Finally, claimthat critics any common fiscal tool could onlybeanincentive to moral hazard andadoor for non- Q4: Does acentralQ4: Does necessarily entail moral fiscal capacity hazard andpermanenttransfers? nationalQ3: Do automatic stabiliserswithintheSGPsuffice tosmooththe remainingshocks? fiscal capacity? unionandCMUeliminate private thecasefor viathecompletionQ2: Does sharing ofbanking risk acentral Q1: Isthere inEMU, evidence oflargefluctuations cyclical components? including country-specific www.worldcommercereview.com from an aligned fiscal policy from analignedfor fiscalpolicy counteracting large shocks, 2010s. theearly ashappenedduring the overall euro area fiscalstance, at leastincircumstances suchasthelower boundwhere theECBmay benefit The presence ofarelatively large component common businesscycle justifies alsohasimplications.attention It to positions thantheaverage andvice versa. may contribute differentials, to cyclical asitislikely to be for too supportive countries inmore favourablecyclical stance countries, policy. whichby themonetary definitioncannotbeaddressedIn fact, by thesinglemonetary Overall, there remaincyclical significant shocks, developments, asymmetric or at leastasymmetric across EMU consider that developments large cyclical asymmetric are irrelevant. addition, there evidence isnoempirical ofgreater convergence cyclical over time. otherwords, In to itisincorrect of idiosyncratic transmission shocks oroftheasymmetric ofcommon shocks(European Commission 2018).In canbeascribed thatto the atcommon most60%offluctuations component, andthus, at least40%isthe result fluctuations. This is confirmed byamore analysis formal principal relyingona component method, whichfinds Cyclical inEMU countries therefore fluctuations aboutasmucha common componentreflect and country-specific considerably differ. gap isover 2%ofGDP. correlated are and whentheyare, National businesscycles imperfectly theiramplitudesmay Moreover, whenmeasured relative to theaverage ofthezone, theaverage standard deviation ofrelative output gaps isabout3%ofGDP(Figure 1),implyingthat outputgapsbiggerthanthat are notinfrequent. specific developments,two withthe weighing aboutsimilarproportions. The average standard deviation ofoutput www.worldcommercereview.com Source: AMECO database, authors’ calculations. Figure 1.Standard deviations ofoutputgaps, 2000-2017(%ofGDP) www.worldcommercereview.com Source: Butietal. (2016). Figure 2.Cross-border risksharing(%ofoutputshocks) www.worldcommercereview.com remains limited. Butmore fundamentally, thequestioniswhetheracomplete financialunioncanbeseenasa This alonecould beenoughto justifyacentral at leastaslongthedegree fiscalcapacity offinancial integration persist even inthelongterm inthepresence information. ofasymmetric changes. For instance, itwilltake time to diversify cross-border degree holdings, ofhomebiasmay andacertain Full financialintegration oreven isunlikely medium asit to be term, requiresreached intheshort deepstructural also more developed intheUS. is better understood asconsumption sensu(Alcidi smoothingrather stricto sharing than risk and Thirion 2016), is is therefore large, CMUwould andawell-functioning definitely contribute to this. The credit channel, whichactually shocks,6% ofasymmetric compared withover 40%intheUS(Figure 2). The potential for improvement in thisarea theeuroIn area theeffect ofcross border incomes (capital andlabour)hassofarbeen factor to smoothameagre compensation aswell ascredit (saving markets andborrowing). (Buti etal.2016).Private works sharing by risk thecombined effects ofcross-border ownership ofassetsandlabour Private remains sharing risk underdeveloped intheEU, ashighlighted by comparisons withthesituation intheUS capacity? fiscal privateQ2: Does risksharingviathecompletion unionandCMUeliminate for ofbanking thecase acentral from national fiscal policies. shocks,symmetric thereby alsoovercoming thelimitations ofcoordinating the aggregate euro area fiscalstance common may stabilisation notjustbefocused capacity shocks, onasymmetric butmay alsousefullycater for large in theenvironment ofthe2010s, anditislikelyto remain relevant inthefuture. This meansthat conceptually, a wasWhile largely thispossibility ignored at EMUinception, theexperience hasdramatically shown itto berelevant www.worldcommercereview.com actually foster byactually reduction risk preventing excessive volatility market andfull-blown financialcrises. a catalyst thiscontext, for theexistence etal.2014).In confidencerisk-sharing ofafiscal (Kalemli-Ozcan tool can The experience inEurope andelsewhere suggeststhat are theserisks attenuated as withapublictool that acts experienced seemhardly inthepastcrisis negligible. and suddenstops are behindusintheeuro ofmechanismssimilarto area.theones Instead, ofare-run therisk help. At thesametime, itwould to be perilous assumethat financialboomsandbusts together withflights tosafety of debtversus equity. And progress andmore effective macroprudential infinancialsupervision policiesshould beexplained by aninadequate may offinancialflows, structure inpart suchasthe Theproportion pro-cyclicality proper inlarge ensuring sharing risk shocks (Fahri ofportfolios to holdthekinds and Werning 2017). sharing. risk studiesalsopoint outthat aresector Some financialmarkets not private as agentsPareto-efficient fail reverse (Furceri 2015).Private andZdzienicka ismore withpublic sharing risk in effectiveconjunction when working otherwords,In thecredit channelfor smoothingshocksfroze theeuro worked during in area andactually crisis of EMU, cross-border financialflows increased somewhat intherun upcrisis before to the afterwards. collapsing Specifically, there entirely isevidence whenleft Inthecase that ontheir privateown. behave markets pro-cyclically financial unionwilldependonthe existence ofacredible andeffective central fiscalcapacity. need eachotherinbadtimes. otherwords, In intimesofacute stress, ofthe market function theshockabsorption The evidence suggeststhat financialandfiscalunions timesbut may substitute innormal asshockabsorbers case intheUS. substitute to atargeted fiscalcapacity, as twocomplements that orwhetherthe act strengthen eachother, asisthe www.worldcommercereview.com also reinforce theshock-absorbing role ofthefinancialunionthrough private channels. sector reducingBy offlight- therisk andsuddenstops stress, intimesof market to-safety sucha common safe asset would to takeacentral role inthefinancialsystem (Butietal.2017). credible backstop to theSRF, thesettingupofEDISandintroduction ofasuitablecommon European safe asset Should suchaproposal becontemplated, onewould alsoneedto consider abroader setofmeasures includinga sovereign exposures. to avoid when anyconsidering offinancialinstability therisk changes treatmentto the regulatory ofbank measures would, ironically, leadto increasing risks. For instance, there are goodreasons to proceed cautiously very thisdoesnoteliminateimpact, theneedfor apublicbackstop. thisrespect, anexcessive In focus onrisk-reduction While prudential and bail-inruleswillhelpto contain andreduce andprevent risks themfrom having afiscal sharing. shocksviaprivate risk asymmetric sector system robust by strengthening financialstability, to smooth andmaximisingitscapacity reducing pro-cyclicality, Insurance Scheme.Deposit The introduction oftheseforms iscrucialinorder sharing ofpublicrisk to makethe Unionneedsto becompletedThe Banking withthebackstop for Fund theSingleResolution andtheEuropean onaEuropeanshould allow Insurance politicalnegotiations Scheme. Deposit to start going aheadto Unionasthere complete isnoagreement theBanking yet oneven thetechnical elements which authors, includingHeijdra etal.(2018). The recent experience indicate anddiscussionsclearly thedifficultiesin Moreover, moving to agenuinefinancialunionwill require amore comprehensive approach thanimplied by some www.worldcommercereview.com and shortfalls that come inadditionto conventionallyand shortfalls measured deficits. cyclical economic shockscanbeconsiderably greater. As anillustration, Figure oftaxwindfalls thedistribution 3reports practice,In growth composition effects and ofthebudget implythatresidual to thesensitivity technical factors values for fiscalelasticities (Mourre etal . 2014). conventionally measured. The standard measurement deficits basedontheoutputgap ofcyclical relies on average Second, thegyrations inthepublic finances triggered by exogenous shocksare farstronger often thanas is especiallytruefor themore volatile economies oftheeuro area. The Balticeconomies offer agood example. First, shocksis andmagnituderelatively ofcountry-specific thefrequency large, asnoted above. Admittedly, this we believe that thesceptics missthree points that tiltthecase. defence againstdemandshocks Hence there isingeneral agreement that fiscallineof national automatic stabilisersshouldconstitute theprimary prudent fiscalpositionsincluding by constituting buffers inthegoodtimesisessential for this work. situations withoutbreaching cyclical the3%referenceplay outinordinary value for excessive deficits. Preserving terms,budget ruleinstructural (MTO), themedium-term objective provides room for theautomatic stabilisersto stabilisation rolemanner that aimsat ofnational preserving fiscalpolicy.In principle, adherence to thebalanced The rulesoftheSGP, focused whileprimarily fiscaldiscipline, onensuring have beencraftedandevolved ina budgets withsignificant stabilisation capacities. its allocative andredistribution At functions. thesametime, memberstates oftheEMUhave large national very toContrary theUS,EMUdoesnothave alarge central budgetwhichprovides stabilisation asa ‘by product’ of Q3: Donational stabiliserswithintheSGPsuffice fiscal smooth the to shocks? remaining 1 . The disagreement isontheneedfor acentral fiscal tool inaddition to that. Here, www.worldcommercereview.com respect (eg.respect Carnot etal.2018,Lenarcic etal.2017,Arnold 2018). andKorhonen ofdegeneratingagainst therisk into ahiddentransfer union.Several proposals worthy have beenmadeinthis design ofsuchaninstrument needsto bewell conceived inorder to betimelyandeffective, whilepreserving commonto fiscalcapacity top upthenational automatic stabilisersintheevent oflarge shocks. To besure, the These considerations makethecasefor completing theeconomic architecture ofEMU, a includinginparticular the benefitofwholeUnion. orafull-blown austerity meltdown. materialisation ofself-destructing This isnotmutualisation butinsurance for cantipbothpoliciesand towardsexpectations risk sharing of fiscal abetter andprevent equilibrium the markets and risking aself-fulfillingspiral ofhigher deficits and interest andrisking markets costs These countries may befacinganunpalatable at choice thewrong between tightening timeto policy reassure to adhering theagreedactually spendingpolicies. accompanied come by underthesuspicionofmarkets, large even revenues quickly when theymay very shortfalls, statesMember withhighlevels ofdebtare inanespeciallyfragile position. When faced with a significant slowdown Third, ofhighdebtsinsomecountries greatly thelegacy complicates theuseofstabilisingnational fiscalpolicies. windfalls,times bycycles. flattering as was thecaseinprevioustemporary This goesbeyond theprotection offered by medium-term objectives, especiallywhenthelatter are metingood typically headline fiscalbalancesexceed 10 20 years, 3%ofGDPevery years. and5%ofGDPevery the changeinconventional balances. cyclical Putting together, thesefactors theevidence changesin isthat cyclical together with adownturn changesinheadlinebalancesIn willreflect variations inthesewindfallsandshortfalls 2 . In thosecircumstances,. In an element www.worldcommercereview.com Source: AMECO database, authors’ calculations. Figure oftaxrevenues 3.Distribution (-)ineuro area states member windfalls(+)andshortfalls (%GDP) www.worldcommercereview.com Function (European Commission 2018a),whichwas tabledlastMay, includesstrong safeguards: The design features are essential inthisrespect. The Commission proposal for aEuropean Investment Stabilisation acentralQ4: Does necessarilycapacity entail fiscal moral hazardpermanent and transfers? also besimplifiedandstrengthened, for example by focusing onadebtanchorandproper operational target. to implement rulesof fiscaldiscipline(European BoardIn duetime,Fiscal 2018). thefiscalrules framework could contribute toactually strengthen it, by encouraging iteasier thebuild-upoffiscalbuffers ingoodtimesandmaking to alsostress would that isimportant astabilisation capacity complement thefiscalrulesframeworkIt and could • • • transfers onlyundertheextreme assumptionofadefaultby amemberstate visàtheUnion. but admittedly would openmore ofpermanent transfers. risks definitionloans By would entail permanent involve outright transfers. The provision transfers ofdirect could interms ofstabilisation bemore powerful Third, takestheform oftheprovision thesupport ofloans, possiblyat concessional rates, but doesnot Procedure. recommendations underthecorrective procedures oftheSGPandMacroeconomic Imbalance Second, memberstates onlyiftheyhave are eligible to delivered support on effective action payments are tiedto changesinunemployment rates, precluding by indefinite support. construction must at thesametimebehistorically highandstrongly increasing (by over 1percentage point). Moreover, relies criterion triggering ona ‘double condition’ unemployment rates onobserved whereby unemployment First, are targeted therulesfor support exclusively activating onlarge nature. shocksofacyclical The www.worldcommercereview.com complemented by acrediblerisk-sharing fiscal setup. underestimated. Indeed, recent evidence shows effect intimesofstress ifnot that canhave markets apro-cyclical mechanismshave of financialmarkets was Market notbeenareliable eitherandtheimportance shockabsorber but have alsoexhibited limitations. serious developmentscyclical inmemberstates. National fiscalstabilisers have at timesandinsome countries, functioned remainbusiness cycles sizeable inEMU. They botha reflect common component andsubstantial idiosyncratic However, theexperience suggeststhat theseassumptionswere too optimistic. Even synchronised, iftheyare partly specific shocks. addition,national fiscal policies withintheunion.In remained business cycles available inorder to absorb country- The was initialunderstanding at that Maastricht thislossmight be ‘compensated’ by anatural convergence of ofnominalexchange andthepossibility rate policy shocksby changes.asymmetric giving upanown monetary stabilisation. unionlosechannels ofadjustment toThis naturally questionarises ascountries inamonetary From theinception oftheeuro ithasbeenaskedwhethertheEMUset-up offered enoughspace for macroeconomic Conclusions area at peakpoints, that is, in2009-10and1993-94(Figure 4). would have beenconcentrated inthemostsevere downturns andwould have to extended amaximumhalfofthe been timelyandwould have potentially benefited point. allmemberstates at a certain They show that thesupport Simulations usingreal time data over thepastthree decadesconfirm that theproposed mechanism would have www.worldcommercereview.com Source: European Commission (2018b) Figure 4.Share ofeuro area undertheEISFproposal countries (%) supported www.worldcommercereview.com comments. Giudice, oftheirinstitution.Thethe position authorsthankGabriele Leandro, José GillesMourre andLucio Pench fortheir Authors’ note: The viewsexpressed inthiscolumn are those oftheauthorsandshouldnotnecessarily seenasreflecting be Affairs, European Commission Marco General, Buti is Director and Nicolas Carnot is an Adviser, at the DG Economic and Financial sound implementation ofthefiscalrules. ■ exclusive becombined. andmight actually financialintegrationThey shouldgohandinwithfurther anda in theevent oflarge shocks. cyclical These various proposals from memberstates andtheCommission are non- The latter hasbeendesigned to prevent any of mutualisation risk andto complement national fiscalstabilisersonly Investment Stabilisation Function. Programmefor 2021-2027,includingaReform Support to promote reforms for national resilience andaEuropean reinsurance funds. FinancialThe Multiannual Commission ofthenext hasproposed Framework newtools aspart convergence, competitiveness, ideas have andstabilisation. Other alsobeenevoked suchasunemployment recently proposed intheMeseberg declaration thesettingupaeuro area budgetwithintheEUto support instruments isgradually Germany andFrance gainingtraction. The debate budgetary onthenature have offurther introduction oftargeted instruments. andeffective common budgetary They complement and reinforce eachother. forward,Looking to deepentheEMUare thetwo priorities thecompletion ofthefinancialunionas well asthe www.worldcommercereview.com European Commission (2018a),“Proposal foraRegulationoftheEuropean Parliament andoftheCouncil onthe European Fiscal 2018. Board (2018),Annual report November. Draghi M(2018),HearingoftheCommittee Affairs onEconomic ofthe European andMonetary Parliament, 26 N°17-025, Université Libre deBruxelles. andGMourreCarnot (2017),“Fiscal N,MKizior stabilisationintheeuro area: Asimulation exercise”, CEBWorking Paper, S,GiudiceButi M,Deroose GandJLeandro (2017),“Completing EMU”, VoxEU.org, EU,13July. financial union”, VoxEU.org, 25 August. Buti M,Leandro JandPNikolov (2016),“Smoothing economic intheEurozone: shocks potential ofthe theuntapped fiscal forsteady, (2015),“Designing policy Buti MandVGaspar enduringgrowth”, VoxEU.org,December. 10 constructive approach to euro area reform” Rey, ISchnabel, NVeron, BWeder diMauro andJZettelmeyer (2018),“Reconciling risk sharingwithmarket discipline:A A,MBrunnermeier,Bénassy-Quéré HEnderlein,EFarhi, MFratzscher, CFuest, JPisani-Ferry, Gourinchas, P-O PMartin, H discussion notes, N°18/03. B, N,Barkbu Arnold Ture E, Wang HandJYao (2018),“A central fiscal stabilisation fortheeuro area”,capacity IMFstaff A comprehensive comparison”, CEPSWorking N°2017/4. Document, andconsumption-smoothing PandGThirion patters (2017),“Risk-sharing intheUSAlcidi C,D’Imperio andtheeuro area: References fundamentally changetheterms ofthisdilemma. 2. Note thatwhiletheSGP provides forescape clausesinexceptional circumstances, activating thosewould not usefulto mayalsobe enhance1. It 2015). nationalautomatic stabilisers(ButiandGaspar Endnotes , CEPRPolicy Insight No91. www.worldcommercereview.com This article was originallypublished onVoxEU.orgThis article OECD (2018),Economic oftheeuro area, survey OECDPublishing, June. European Economy Economic Papers, N°536. Mourre andSPrincen G,CAstarita (2014),“Adjusting thebudgetbalance theEUmethodology”, forthebusinesscycle: Paper, N°5. Lenarcic AandKKorhonen (2018),A” case foraEuropean rainy dayfund”, Mechanism Discussion European Stability Institute forEconomic Research, 26March. Berlin, Lagarde C(2018),“A steps ofeuro The next area compass economic to integration”, prosperity: attheGerman Speech Scandinavian ofEconomics Journal 116(1). crisesandrisksharing:The S,ELuttini roleKalemli-Ozcan ofmarkets (2014),“Debt andB Sorensen andsovereigns”, org, 30November. Heijdra M,TAarden, HansonJandTvan (2018),“A Dijk more notrequire stableEMUdoes acentral fiscal capacity”, VoxEU. Economies Review26(4). Furceri euro DandAZdzienicka area crisis:Needforasupranational fiscal (2015),“The risksharingmechanism?”, Open afiscalFeld inEMU”,capacity L(2018),“Whither VoxEU.org, 31July. Fahri EandIWerning (2017),“Fiscal Unions”, American Economic Review107(12). Investment Stabilisation Function”, SWD(2018)297. document, Staff working European Commission assessmentaccompanying (2018b),“Impact theproposal ontheestablishmentofaEuropean establishment ofaEuropean Investment StabilisationFunction”, COM(2018) 387. www.worldcommercereview.com fostering convergence to explain how completion ofEMU canaccelerate Benoît CœuréBenoît focusses ontheCESEEeconomies European Unionin convergence andfoster cohesion inEurope The role ofthe www.worldcommercereview.com I many oftheseeconomies, relative livingstandards increased by half, from 40to 50%oftheEUaverage in2000,to And before thecrisis, convergence was noticeably faster ineconomies that were oftheeuro area. already In part in2008–thisisthe differencefinancial crisis between the yellow dotandtheupperendofbluebar. Clearly, for most countries, convergence towards theEU28average stalledsince theoutbreak has practically ofthe in Figure 1. But thiscatching-up process hasbeenneitherlinearover timenorhomogeneousacross countries. You canseethis candidates progress incatching upto theEUaverage compared with1.4%for theEU28.As aresult, we have seentheseeconomies makemeasurable andwelcome absolute andrelative terms CESEE economies have seensignificant improvements inlivingstandards overtwo thepast decades, inboth The current state ofconvergence targeted useofEUfunds–canhelpaccelerate convergence andthereby alsofoster cohesion inEurope. areaskey European unionandthe thelaunchofatruecapitalmarkets –thecompletion oftheSingleMarket, policy review withabrief ofthecurrent stateI willstart ofconvergence ofCESEEeconomies, andthenexplain how three cohesion elements are neededto accomplish what the Treaty onEuropean Unionpromises: economic andsocial would liketo focus precisely onthree topics: growth, Europe andtogetherness. Iwillargue that thesethree those that oftheEuropean are already Union(EU)andthosethat are part EUcandidate countries orpotential 2 . 1 . Iwillfocus ontheeconomies ofcentral, Europe eastern andsouth-eastern (CESEE), covering both 3 . Since 2000,growth inreal GDPpercapitahasaveraged 3.8%intheregion asawhole, 4 . www.worldcommercereview.com Figure 1.Uneven income convergence inCESEEcountries Sources: World Indicators) Development Bank(World andECBcalculations www.worldcommercereview.com theory would suggest, thelesscompelling strongtheory convergence becomes. onemovesaround to therightonthisfigure, 70%in 2016. Butthefurther to what neoclassical and growthcontrary and mutually reinforcing mutually and opportunity and peaceful societies are closely linked linked closely are societies peaceful and opportunity is a recognition of history that economic prosperity, prosperity, economic that history of recognition a is continent should speak to our highest aspirations. It It aspirations. highest our to speak should continent Achieving similar standards of living across our our across living of standards similar Achieving www.worldcommercereview.com capital to growth. growth and, to alesserextent, inthecontribution (TFP) of drop asharp productivity intotalmain factors: factor What you canseehere isthat, since thecrisis, growth inallCESEEeconomies hasessentially slowed becauseoftwo that havefactors recently beenholdingthemback. You canseethisinFigure 3. To bothchallenges, understandwhat needsto bedoneto itisusefulto tackle lookat thedrivers ofgrowth andthe convergence pathcrisis and, second, to jump-start inEUcandidate countries andpotential candidates. isthereforeAction neededontwo mainfronts: first, to bring convergence inEUmemberstates backonto itspre- We needtheEUto remain aforce for change, asource ofgrowth anddevelopment andananchorofstability. unstable world we are currently livingin. inthe worrisome union.Suchdoubts would beparticularly benefitsofmembershiptheEUorcurrency very lower-income countries catching upsoon,there that isarisk peoplelivinginthosecountries begin questioningthe varied anduneven for aconsiderable oftime, period even withintheEU. And ifthere isnocredible of prospect Clearly, thispace ofconvergence isdisappointing. impliesthat livingstandards inEurope It willremain highly Montenegro. years to even reach halfoftheEU28average 20years withinthenext orso, withthepossibleexception of These economies, andthisyou canseeinFigure 2,would needmuchhigherGDPgrowth rates thaninprevious candidate countries orpotential candidates. slower pace. At current growth rates, fast convergence towards theEU28average for many willremain illusory EU the In Western for Balkans, example, whilerelative income levels have increased, theyhave donesoat amuch www.worldcommercereview.com Note: This assumespurchasing-power adjusted capita per GDPgrowth inthe EU-28of1.2%,whichistheaverage growth rate over observed 2010to 2016. andECBcalculationsSources: World Bank(WDI) Figure 2.Stronger income growth required for faster convergence www.worldcommercereview.com in theWestern Balkan countries assumedto equal be to the average states. innewEUmember function. production Calculations assumestandard Cobb-Douglas Note: Labour share inAlbaniaandMontenegro assumedto equal be to theaverage inFYR Macedonia, andCroatia. observed andHerzegovina, Average Bosnia Serbia hours worked Sources: Penn World Table version 9andECBcalculations. Figure 3.Growth slowdown mainlydueto afallin TFP growth www.worldcommercereview.com on perspiration andonlylater oninspiration as awhole, FDIinflows accounted for just3.4%ofGDP over thisperiod. processes.global production These inflows accounted for around 6%ofGDPintherun-up In theEU28 to thecrisis. –whichyou period canseeontheright-hand side–have promotedin thepre-crisis therole ofCESEEeconomies in integrated inglobalvalue chainsthantheirEUpeers, for example. Sizeable foreign investment direct (FDI)inflows You inFigure canseethisclearly 5.CESEEeconomies are someoftheworld’s mostintegrated. They are farmore This growth modelrelies, by and large, ondeepintegration chains. inglobalproduction ofthe growthupswing andinthedownturn, modeladopted islikelyto by beanartefact mostCESEEeconomies. to contribution growth, highlighting ofproductivity isthat theremarkable The worth bothinthe second fact economies. You canseethisontheright-hand side. with similarpercapitaincome levels. And, worse, investment rates since inallCESEE havethecrisis fallenfurther CESEEeuroIn area memberstates, italsoremains well below otheremerging economies, Korea, suchasSouth side.on theleft-hand employed remains substantially below theEU28average inalmostallCESEEeconomies. You canseethisinFigure 4 The flipsideisthat theseeconomies are now faced withanotablecapitalshortfall. The capitalstock perperson and labouraccumulation, andonlylater on TFP growth reflected technological progress andinnovation. thetransitionDuring phase, growthtypically basedoncapital is There highlighting are here. two thingsworth convergenceThe firstisthat itishighlyunusualthat pre-crisis largely 6 . 5 . Or, to borrow thewords ofPaul itisbasedfirst Krugman, www.worldcommercereview.com Note: EU-15refers to countries thatjoinedtheEUpriorto 2004. Sources: Penn World Table version 9,World BankandECBcalculations. Figure 4.Capital stock remains comparatively low inCESEEeconomies Note: The 45-degree lineisshown ingreen.Note: The 45-degree Economic andECBcalculations.Sources: Outlook) IMF(World www.worldcommercereview.com Figure 5.CESEEeconomies are someoftheworld’s mostintegrated via, Lithuania, Poland, Romania,Slovakia andSlovenia. Note: EUCESEEcountries are Bulgaria,Croatia, Republic, Czech Estonia, Hungary, Lat- Sources: WIOD(2016)andECBcalculations. gates. ingross terms.Note: Data Simpleaverages datafor ofcountry-specific regional aggre Sources: Wiiw (FDIdatabase)andECBcalculations. - www.worldcommercereview.com networks integrateddirectly into globalvalue chains, to butalsoextends theirdomesticsuppliersvialocalproduction facilitates thetransfer oftechnology andexpertise. The transfer oftechnology, moreover, doesnotstop at firms The role of FDI in supporting The role ofFDIinsupporting TFP growth iswell known slowdown transfer oftechnology hascontributed to bothstrong TFP growth in therun-upto andto thecrisis itsmore recent growth EU countries. innon-CEE This thescaleandscope linklikelyreflects of technology spillovers You canseethismore inFigure clearly 6. There closelinkbetween isavery TFP growth inCEEeconomies and TFP value chainformation may well persist the recent isalsolikelyto developments reflect shift ofamore nature structural –that is, the slowdown inglobal ofthecollateral damagefrombeen part thecrisis. As we leave behind, headwindsshouldfadetoo. this legacy But I would besomewhat more cautious, however. intrade istruethat and investment, weakness It worldwide, has up economies, rebooting TFP growth. law ofdecliningmarginal returns oncapitalcontinues to hold, wecapitalto flow shouldstillexpect into catching- The easyanswer, ofcourse, isto brushaway phenomenon. in FDIinflows all,After weakness ifthe asa temporary reliance processes. onglobalproduction sum,therefore,In CESEEeconomies thisdiagnosis have highlights two keyfacts: alackofcapital, andastrong valueGlobal chainsasasource of TFP growth inthefuture abated too. inflows decelerated rates inglobal value chainslevelled andparticipation off, TFP growth inCESEE economies 8 . Empirical evidence. Empirical shows that, inthecaseof central andeastern European (CEE) economies, this 9 . 11 . 7 . By integrating. By into localfirms global value chains, it 10 . So, asFDI www.worldcommercereview.com annual changes. are EE, HU,LV, countries are AT, andSI.The PL,RO, non-CEE SK, FI,FR,DE, IT, BE, DK, PT andES.For FDI,theregional aggregate isobtainedfrom thesimpleaverage ofcountry-specific pair. EU EU intermediatescountries,country-sector pairfrom ofeachCEE-sector ductive firmsinnon-CEE with eachnon-CEE weights basedontheshare ofimported The CEE countries EUfrontier representNote: firmsinthe80 CEEandnon-CEE Sources: ECBstaff calculations basedon CompNet, WIOD(2016)and Vienna Institute for International Economic Studies(wiiw)(FDIdatabase). Figure 6.Close linkbetween TFP, GVCs and FDIdevelopments th and90 th percentiles interms ofTFPineachcountry-sector-year. CEEGVC frontier isaweighted average ofthemostpro - www.worldcommercereview.com is projected to fallconsiderably further someestimates,By theaverage robots price ofindustrial hasdeclinedby about40%over thepastten years and across countries. cheaply, more efficiently andcloser tothe consumer,firms then may have fewer reasons to spread production The second andthird may factors bethemostpressing ones. Put simply, ifrobots candeliver thesameoutputmore production executivesof seniormanufacturing intheUnited States thinkthat robotics canimprove theeconomics oflocal firms firms to rethink thelengthanddesign of their value chains to mitigaterisks of the costly supplydisruptions There are three mainreasons for this. First, natural disasters andincreasing climate-related disruptionshave led economies more generally, willneedto thinkaboutdeveloping othergrowth models. outsourcing processes ofproduction lessprofitable, inCESEEeconomies, andinemerging policymakers market The implication isthat, to theextentthat growing automation andnarrowing wage differentials makethe their head and cause firms their headandcausefirms to reconsider offshoring practices And, third, intelligence theincreased useofrobots hasthepotential andartificial global to turn valuechainson theEU28,realthan 50%since 2000. In wages grew by 18%over thesameperiod. economies have grown richer. theEUCESEEeconomies, In for example, real wages have increased by slightly more processesproduction worthwhile. ofthesewage differentials Some have narrowed considerably asemerging Second, inthepast sizeable wage differentials labourmadetheinternational fragmentationfor unskilled of becoming increasingly visibleandmay stillamplifyasclimate changetakesits toll onoureconomies. 15 . 14 . A survey by theBoston Consulting. Asurvey Group revealed that more than70% 13 . 12 . This is . This www.worldcommercereview.com income levels is, more than not, theresult often ofalack ofconvergence ininstitutionalquality A keyingredient for this is efficient administration atalllevels of government. Indeed, alackof real convergence in ground. to strengthen itsenforcement initiatives sothat SingleMarket translate into concrete andpositive effectsonthe To exploit itsfullpotential, andto accelerate convergence, two thingsneedto bedone. First, memberstates need a positive impact on exports, investment, onexports, a positive impact innovation andproductivity andsafetyproduct standards that are usedworldwide. There iscompelling evidence hashad that theSingleMarket isthelargest intheworld, market It offering thebenefitsofenormous economies ofscale, andhashelpedestablish other economies at similarstagesofdevelopment. valuable source ofcompetitive advantage for located when firms competing with inCESEEeconomies, in particular dimension. withthemarket Let metakeeachofthesepoints starting inturn, The EU’s canbea SingleMarket Market oftheSingle Reaping thebenefits providing financialassistance direct to foster convergence national reform efforts. andsupport Second, by andcountries channellingfundsto where sectors capitalcanbeusedmostproductively. And, third, by help, inthree mainways. First, by providing that themarket makesthedevelopment profitable. ofnewindustries These shouldbejoint efforts, however, of me my whichbrings to thesecondremarks. part Europe canandshould average accelerate. and helpnew, innovative to industries grow anddevelop. Onlyinthisway willconvergence towards theEU28 To reboot TFP growth anddeepencapitalaccumulation theywill needto stimulate domestic investment spending 16 . 17 . You canseethis www.worldcommercereview.com services sector are far behind the productivity frontier, are sector farbehindtheproductivity services inCESEEeconomies particularly Research by theESCB’s Competitive Research (CompNet) Network shows, for example, that many intheEU firms automation. global GDPandemployment, andrepresent many ofthepotential growth intheageofdigitalisation sectors and isthereforeThe firstpriority to completeMarket whichalready theSingle for services, account two-thirds of for have backtracked, inrecent years. over time, butinotherstheprocess ofgradually catching upwiththeirEUpeersappearsto have stalled, or even to classified asmodestormoderate innovators. There have beensomenotable improvements countries in certain relevant forThis isparticularly CESEEeconomies. As you canseeinFigure 8,mostofthesecountries are still thatindustries are drivers prime ofinnovation andcatalysts for future growth. Second, mustbebroadened. thescope oftheSingleMarket For theEU, thismeansexpanding itsreach into institutional reforms intheyears to come. exchange rate mechanism(ERMII)andtheadoptionofeuro. This could become afundamental catalyst for EUmemberstatesSome have recently renewed theirinterest intheprocess inthe leadingto participation the EUasawhole. meaning there remains asignificant gapin overall compared institutionalquality withthe average in level observed between institutional quality andincome levelsbetween institutionalquality in Figure 7–afigure that makesa theusualcaveatcompelling point, notwithstanding two-way onthe causality labour to more productive firms would helpboost overall employment. competitiveness andsupport 18 . Most CESEEeconomies. Most are stillinthelower corner, left-hand 19 . Reallocatingcapitaland www.worldcommercereview.com tations are distorted by eg.tations are distorted thehighnumber ofcross-border workers. Note: The Worldwide Governance Indicator isthecomposite rank ofaverage insixbroad positions institutionaldimensions. Luxembourg isexcluded because capita GDPper compu- Sources: Eurostat andWorld Bank. Figure 7.Asignificant gapininstitutionalquality remains www.worldcommercereview.com Note: Data are availableNote: Data onlyforsomeCESEEeconomies. Sources: European Commission (European Innovation Scoreboard). Figure CESEEeconomies 8.Most ormoderate onlymodest innovators www.worldcommercereview.com growth rates There offinance iscompelling evidence oftheimportance for technological innovation and, ultimately, long-run funds to where theycanbeusedmostproductively. The second keyarea where ofthisconference Europe canhelp–whichiscloseto theheart –isby channelling Convergence andtherole markets ofthecapital union deindustrialisation. adopt newtechnologies by faster thanthem, thereby reshoring andpremature mitigating ofbeinghurt therisk for catching-up promising economies to opportunity leapfrog morea particularly advanced economies and finance area sovereign debtcrisis, capitalmisallocation increased substantially that amongfirms were more reliant onbank growth, in particular ascountriesgrowth, grow inparticular richer Evidence isgrowing systems globallythat large are banking associated withmore systemic andlower risk economic economic development andlivingstandards insimilarways. particular,In research isincreasingly challenging theviewthat bankandmarket-based finance tend to support market, asalsoadvocatedmarket, by theEuropean Commission initscommunication inNovember A second, andmore direct,avenue isto increaseto builda efforts ‘European data economy,’ oradigital single significant implications for economic growth and, hence, inbringing economies closer to thetechnological frontier research are markets Other suggeststhat more deeperequity effective inpromoting innovation andproductivity 24 . 21 . Differences offinancial intermediation inthequality across countries have been found to have 22 23 . . In addition,recent. In work by ECBstaffhighlights that, theeuro during 25 . Recent ECBresearch, for example, suggests 20 . Digitalisation offers www.worldcommercereview.com growth intheEuropean Union but alsothehopethat deeperandbetter-integrated innovation andproductivity willsupport markets equity union,formarkets example, notonlytheneed reflects for increased cross-border union, risk-sharing inacurrency But recent findingsare discussion. increasingly intheongoingpolicy reflected The European push towards acapital continue to play theirkeysocialrole ofpoolingsavings transformation. andrisk andengaging inmaturity the 75 source ofgrowth and, at thesametime, foster ofnewfinancial theuseanddistribution technologies that may themselves become a thefundingofinvestments,can bothsupport thereby helpingovercome thecurrent lackofcapitalaccumulation, technologies have otherwords, not yet In gainedmuch traction. progress towards union atruecapital markets On Figure 9you canseethat inEurope more generally, andinmostCESEEeconomies inparticular, these scope for suchtechnologies, ifusedprudently, to alsofoster growth andconvergence intheEU. higher income levels. Although EUdata requirements are more stringent –for goodreason –there isconsiderable China, ofcourse, growth example of newfinancial isaprime technologies inthetransition supporting towards account information withnewcontenders. example, hasbeenrevised to introduce more competition infinancialintermediation by banks requiring to share conventional technologies. Europe thisprocess. isspearheading Europe’s Payment Directive (PSD2),for Services newinnovativeThis alsoincludes making financial technologies available they andensuring to firms are as safe as that ifanEUmemberstate were to increase itsratio ofstock capitalisation market to bankcredit from the25 percentage points, elsebeingequal everything th percentile, theaverage growth could to rate beexpected increase by ofitsmosthigh-tech industry 3.1 28 . 27 . 26 . Noneofthisisto say that bankswillbecome redundant. They will th to to www.worldcommercereview.com other alternative finance intermediaries across 45 countries in Europe. are basedoninformationgatheredNote: Data from 344crowdfunding, P2Plendingand by theCambridge Centre forAlternative Finance (2016). Source: ExpandingHorizons –the3 Figure 9.New financial havetechnologies not yet in found muchtraction Europe rd European Alternative Finance Industry Report, reports European reports Alternative Finance Report, Industry Source: FinTechs inCESEE(Stern, and theiremergence 2017). services inbanking www.worldcommercereview.com training Such patterns are for even more socialpolicies, visiblewhenconsidering education EUfundingopportunities and effectively absorb available transfers andsecure newfundingopportunities. right-hand side, which suggests there is a positive correlation anda country’s between institutional quality to ability ofinstitutionalquality,linked to theimportance whichImentioned earlier. You onthe canseethisonthechart One problem, however, isthat notallcountries are equallysuccessful inaccessing them.Onereason for thisis are notnegligible. average annualGDP, withtheallocation ofresources linkedto prevailing income levels. otherwords, In these funds sideofFigurecan seeontheleft-hand 10,the cumulated available fundsfor CESEEcountries range from 8to 21%of regions andmemberstates, was thesecond largest item intheEU’s thisperiod, 2014-20budget. Over andthisyou Such transfers are already happening, ofcourse. Cohesion policy, designed to reduce among disparities structural states to foster convergence intheEU. The third area where Europe canhelpisarguably themostcontentious relates one. It to transfers between member Using EUfundsto foster convergence several important suggestions inthisrespect, withasinglerulebookplannedtoseveral cover important several EUfunds, lessred Second, EUallocation rulesshouldbemadeassimplepossible. The European Commission hasalready made ofthebroaderto improve effort This shouldbepart institutionalquality. This means two things. First, we need to strengthen ofreceiving theability economies to access funds. andabsorb able to lessthan5%oftotal attract fundingallocated to socialinfrastructure projects. 29 . UndertheEuropean Fund for Strategic Investments plan,for example, CESEEeconomies have onlybeen www.worldcommercereview.com 2013 average isused. forERDF, Data CF, andESF. Luxembourg isnotshown. EU11, bluediamondsfortheEU15.For capita nominalandper GDP, 2010- forthe2014-2020programmingNote: Data red period; diamondsrefer to the Sources: European Commission, AMECI,andECBcalculations. Figure 10.Cohesion fundssizablebutnotallcountries equallysuccessful inaccessing them CF andESF. Croatia isnotshown. caled 0and10,indicating between low andhighinstitutional quality, respectively. forERDF, Data forthe2007-2013programmingNote: Data period. indexfor2015isres The institutionalquality Sources: World European Commission, Bank, andECBcalculations. - www.worldcommercereview.com growth initiatives. ■ union. capital markets Transition andfeed economies andthecapitalto needboththemarket domestic nurture aboutdeveloping buildinganewdigitalincludes completing andbeingserious market theSingleMarket, atrue Accelerating convergence alsorequires theEU, andtheeuro area inparticular, thisprocess. to helpunderwrite This vehicle foris apowerful growth. the transition process. Convergence mustbebuiltonstrong institutions. to And adhering standards, EUstandards, ground, andcandidate countries andpotential candidates to achieve institutional excellence aspossiblein asearly requiresIt memberstates to translate EUinitiatives andrecommendations into concrete andpositive effectsonthe I have highlighted that we mustbegin by that acknowledging convergence requires and jointresponsibility. efforts convergence canbeaccelerated, andwhat role Europe itself shouldplay inthisprocess. the foreseeable future istherefore to thinkinnewways shouldurge policymakers awarningsign. abouthow It The that prospect relative income levels willremain inEurope, unacceptably action, large for withoutfurther that economic prosperity, andpeacefulof history societiesare closelylinkedandmutuallyreinforcing. opportunity Achieving similarstandards oflivingacross ourcontinent shouldspeakto ourhighestaspirations. isarecognition It Conclusion are essential ifwe want that peopleandcompanies theEUprovides. to takefulladvantage oftheopportunities Benoît CœuréBenoît ofthe Executive isaMember Board oftheECB tape andlighter control procedures for businessesand entrepreneurs benefitingfrom EUsupport 30 . Suchinitiatives www.worldcommercereview.com investment”, Economics, ofDevelopment Journal Vol. 112, pp. 56-71. 8. See, forexample, Kee, HL(2015),“Local intermediate inputsandtheshared supplier spillovers offoreign direct approach”, function production ECBOccasional Paper No61. ofgrowthR Serafini andT Zumer (2007),“Determinants inthe central andeastern European States EUMember –a firms”, Reviewof World Economics, 142(4),pp.Arratibel, 695-719;and L Rawdanowicz, M Przybyla, O, FHeinz,RMartin, evidence from Japanese Dynamic 32(1), pp. FDI,andproductivity: 111-135;Kimura, (2006),“Exports, FandKKiyota Vol. 2014/1;Alfaro, andfinancialdevelopment”, (2009),“FDI,productivity andSSayek L,SKalemli-Ozcan World Economy, investment andreverse technology spillovers: on Thetotal effect productivity”,factor Journal: OECD Economic Studies, analysis”, Oxford BulletinofEconomics andStatistics, 67(3),pp. EandSVirmani 281-306;Amann, (2014),“Foreign direct 7. See, forexample, Girma,S(2005),“Absorptive spillovers capacity andproductivity from FDI:athreshold regression ofAsia’s Myth P(1994),“The Krugman, 6. See Miracle”, Foreign Affairs, November/December. 5. See, forexample, European BankforReconstruction (2017),Transition andDevelopment 2017-18,November. Report Issue 3. Zuk etal.4. See (2018),“Realconvergence incentral, Europe”, eastern andsouth-eastern ECB Economic BulletinArticle, Lessons andChallengesforCESEECountries Europe”, andaModern Edward ElgarPublishing. alsoNowotny,3. See (2018),“Structural ReformsforGrowth E, DRitzberger-Grünwald andCohesion andHSchuberth – ofJustice’sCouncil Resolution1244andtheInternational Court opiniononKosovo’s declaration ofindependence). tois alsoincludedsubject dataavailability (withoutprejudice to onstatus, positions inlinewithUnited NationsSecurity former Yugoslav RepublicofMacedonia, Montenegro (alsoreferred andSerbia to here Balkans”). asthe“Western Kosovo Slovenia andSlovakia. EUcandidate countries orpotential candidates comprise andHerzegovina, Albania,Bosnia the comprise2. EUmembers Republic, Bulgaria,theCzech Estonia, Lithuania, Croatia, Latvia, Hungary, Poland, Romania, states.” amongmember cohesion, andsolidarity 3oftheTreaty Union]shall promote economic,1. Article andterritorial social onEuropean Unionstates that“[The Endnotes www.worldcommercereview.com CEPS Special Report No96. Report CEPS Special Economy, Vol. 25(1),pp. 28-48;andPelkmans, EUregulation hinderorstimulate JandARenda(2014),“Does innovation?”, Ramel (2018),“Standards intheglobalvalue chainsoftheEuropean SingleMarket”, ReviewofInternational Political following implementation”, European Commission Economic Papers AMangelsdorf, and F No456;Blind, CNiebel K, Directive:16. See, Afirstassessment forexample, economic oftheServices Monteagudo impact etal. (2012),“The Executives”, December. Boston Consulting Group15. See (2015),“Made inAmerica, Again: ofU.S.-BasedManufacturing Fourth Annual Survey Group, September. 14. See, forexample, H,MZinserand JRose(2015),“How Will Sirkin, Robots Redefine Competitiveness”,Boston Consulting Countries”, Policy BriefNo50. alsoUnited NationsConference13. See onTrade and IndustrializationinDeveloping (2016),“Robots andDevelopment the Council onEconomic Policies, 8November. Berlin, The Role ofCentral Banks”, organised by forGreening theNetwork theFinancial System, Bundesbankand theDeutsche andclimate change”, alsoCœuré, policy 12. See B(2018),“Monetary ataconference speech on“Scaling upGreen Finance: International Conference Policy Management,Skopje, and Asset onMonetary 16February. Cœuré,11. See B(2018),“Trade asanengineofgrowth: Prospects andlessonsforEurope”, attheNBRMHighLevel speech ofnationalfirms to absorbthenew technology.ability growth inCEEcountries roughly depends equally ontechnology creation attheglobalvalue chainfrontier andonthe exploring therole ofGlobalValue Chains”, ECBWorking Paper No2143.This research alsosuggests thatsectoral TFP Chiacchio,10. See F, TFPgrowth slowdown KGradeva post-crisis inCEEcountries: andPLopez-Garcia (2018),“The Vol. 101, No1,pp. 304-340. and Technology Upgrading: Evidence ofMERCOSUR ontheImpact onArgentinian Firms”, American Economic Review, from France”, Review ofWorld Economics, Vol. 150(2),pp. 241-275;andBustos, P(2011),“Trade Liberalization, Exports, 9. See, for example, Firm-level more inputsraise Bas, exports? evidence MandVStrauss-Kahn importing (2014),“Does www.worldcommercereview.com Paper; andECB(2017),contribution to theEuropean Commission’s consultation onCapital Markets Unionmid-term ECB(2015), BuildingaCapital Markets27. See Union–Eurosystem contribution to theEuropean Commission’s Green financing ofinnovation andTFPgrowth. role inthe markets than incapital theideathatequity playanimportant productivity accumulation, supporting in Europe, May. Moreover, highergrowth invalue foundto driven added has been be by faster growth inlabour ECB(2018),“Financial26. See development, financial structure and growth: evidence from Europe”, Financial integration Financial Economics, Vol. 112(1),pp. 116-135. Hsu,25. See P, XTian andYXu (2014),“Financial development evidence”, andinnovation: Cross-country of Journal E, PLopez-Garcia andGPresidente Bartelsman, (2017),“Factor24. See reallocation inEurope”, ECB, mimeo. markets”, World BankEconomic Review, Vol. 27(3),pp. 476-490. 31(85), pp. 51-106;andDemirgüç-Kunt, A,EFeyen ofbanksandsecurities evolving andRLevine importance (2013),“The Langfield,23. See SandM Pagano (2016),“Bankbiasin onsystemicEurope: riskand effects growth”, Economic Policy, Vol. for economic development”, Economics, ofMonetary Vol. Journal 30(3), pp. 409-432. Boyd,22. See JHandBDSmith(1992), “Intermediation andtheequilibriumallocation ofinvestment capital: Implications Economic Growth, pp. 865-934,Elsevier, Amsterdam. Levine,21. See R(2005),“Finance andEvidence”, andGrowth: Theory inAghion, (eds.), PandSNDurlauf of Handbook political commitment”, Brussels, 22November. SingleMarket European inachangingworld Commission20. See –Auniqueassetinneedofrenewed (2018),“The ECB(2017),“Firm19. See andcompetitiveness heterogeneity intheEuropean Union”, Economic Bulletin,Issue2. Investigation”, American Economic Review, Vol. 91,No. 5,pp. 1369-1401. Acemoglu,18. See Colonial ofComparative D, Origins Empirical andJRobinson(2001),“The An SJohnson Development: 30 June. (CompNet) conference on“Innovation, firmsize, andimbalances intheageofde-globalization” productivity inBrussels, Cœuré,17. See B(2017),“Convergence policy”, matters formonetary attheCompetitiveness speech Research Network www.worldcommercereview.com November 2018 delivered isbasedonaspeech attheConferenceThis article onEuropean Economic Integration (CEEI), Vienna, 26 release, 29May. European Commission30. See andCohesion (2018),“EUbudget:RegionalDevelopment Policy beyond 2020”, press statequotas atmember level. 29. Here mostof theEUfundsare allocated viatenders andcompetitive calls, grants notviapre-allocated onthebasisof Integration, IssueQ3/17,pp. Nationalbank, Oesterreichische 42-58. alsoStern, C(2017),“Fintechs28. See inCESEE”, andtheiremergence services inbanking Focus onEuropean Economic review 2017. www.worldcommercereview.com to globalcompetitors. Debora Revoltella calls for a European are firms investing too little compared Retooling Europe’s 'retooling' oftheEuropean economy economy www.worldcommercereview.com E finance in Europe.firms of12,500 Building onthelatestacross findings ofauniqueannualsurvey Europe 2018/2019 (EIB2018)providesThe EIBInvestment acomprehensive Report analysis ofinvestment andinvestment andequipment between theEUandUS. rates inmachinery constraints (Cedefopsuch asskills size, 2018),market andtherecent, less well-knowndivergence intheinvestment (2017)discusscausesandcostsRogerson ofcapitalmisallocation. Butthere are alsomany to beconsidered, factors within countries (Andrews etal.2015,Cireraet al.(2017)andRestuccia 2017),whileGopinath and andMaloney (Haskel and Westlake 2017).Recent work hasalsoexamined therole ofthediffusioninnovation between and etal.2008,Moncada-Paternò-Castello Ark etal.2010,Cincera(Van and Veugelers 2014)andotherintangibles growth. Well-known andrelatively well-studied gapbetween theEUandUSinR&Dinvestment istheenduring explains Europe’s factors A range ofstructural relatively low rate growth ofproductivity andoverall potential conditions. moderate(2018) projects economic growth that faces significant downsiderisks, financing despite supportive potential growth” that have onlytemporarilycyclical beenoffset factors. Likewise,by the European Commission itslatest In forecast,economic outlook. the IMF(2018)draws attention to structural “powerful on headwindsacting thelastyear,Over we ofconcerns have with regard seenanotablere-emergence to themedium-andlong-term of the weaknesses oftheEU economy,of theweaknesses andwhat a thelikelycost ofinaction, ‘retooling’ shouldentail. influencinginvestment factors andcyclical analyses structural in assetsclasses,various opening awindow onsome business environment, infrastructure, anddeepeningtheSingleMarket. to theUS. callsfor a This article ‘retooling’ ofEurope’s economy inrelation toinnovation skills, finance, the European are firms investing too little, withagapbothintangible andintangible investment compared urope isat offalling behinditsglobalcompetitors. risk ofradical aperiod technological In transformation, 1 , it www.worldcommercereview.com access to finance asamajorimpediment to investment islow anddeclining at 17%. borrowing for businessesisstillhistorically low, andtheshare intheEIBInvestment (EIBIS)that offirms name Survey the cost of andfinancial conditions havethis up.recovery: nowand structures alsopicking supported Monetary recovery hasbeendriven by investment andequipment andintangibles, inmachinery withinvestment indwellings conditions. The intensity ofinvestment intheEU, relative to GDP, isnow closeto itslong-term average level. Its Investment recovering hasbeenclearly andfinancing inEurope, policy ontheground monetary ofsupportive After astrong investment recovery, headwindsare strengthening, challengesremain andstructural an inclusive and cohesive society cohesive and inclusive an digitalisation, achieving sustainability, and creating creating and sustainability, achieving digitalisation, competitive in the face of rapid innovation and and innovation rapid of face the in competitive urgent challenges of the future: remaining globally globally remaining future: the of challenges urgent Europe’s economy still lacks the ‘tools’ to meet the the meet to ‘tools’ the lacks still economy Europe’s www.worldcommercereview.com compared to theUS,hasmore that firms donotinnovate at allorthat onlyadoptinnovations. Where Europe is innovators’‘leading whoare bothdoingR&Dand introducing globallynew products. What we seeisthat theEU, we cancategorise according firms to whether theydonotinnovate, justadoptinnovations, R&D, conduct orare At theforefront oftheinnovation process, theEUalsoshows aconcerning lackofdynamism.BasedonEIBISdata, sectors. elements inthenewdigital andtheservice world, bothinthemanufacturing intangible investment. Investment insoftware, andorganisational skills, transformation are allbecoming essential to internalise complementarities across different ofinvestment.forms of form R&Disnottheonlyimportant in investment inintangibles. European stillfail firms to seetheneed to invest indifferent of forms intangibles This gapin tangible investment iseven more worrisome whenviewed in combination withthewell-knowngap able to keepupinterms oftechnological transformation, withwidespread adoptionofnewtechnologies. While some ofthiseffect is related to theshaleboomin US,italso raises questionsaboutwhethertheEUwillbe in relation to theUSexperience. Since thecrisis, agaphasopenedupininvestment andequipment. inmachinery ofdisruptive aperiod technologicalIn transformation, Europe’s beenrelatively recovery hasactually at least weak, Structural weaknesses intheEUeconomy increasing economic contributing risk to uncertainty. rising This indication isanearly ofchanging sentiment, withBrexit, socialtensions, rising politicalpolarisation, and share politicaland conditions asnegative offirms considering regulatory for investment hassubstantially increased. considering thegeneral economic for climate investment assupportive hasdeclinedrelative to 2017,whilethenet asks firms to assessthe relevance ofdifferent ininfluencing factors activities.investment Thenetshare firms of However, headwindsare strengthening, addingto long-lastingconcerns aboutlow potential growth. EIBIS www.worldcommercereview.com Central andEastern Europe. At level, thefirm itisthemore innovativeskills limited that often firms more report requirements,technology andskill exacerbated by atight inmany labour market EU countries andmigration in to beanimpediment to investment.skills process astructural gapreflects ofadjustment Thisto changing skills present anotherconstraint:Skills 77%ofEuropean firms consider thelimited ofstaffwithappropriateavailability would for investing expect firms inintangibles property. suchasintellectual constrained. with thecollateralTheir dissatisfaction requirements marked, for asyou bankcredit isalsoparticularly the innovators and financialhealth, show betteryet are performance significantly more likely tobefinancially The effects ofthisare visiblein EIBIS data. When we compare innovating withnon-innovating firms, weseethat and weakening resilience to financialshocks. the USandadvanced Asian countries onseveral fronts, leaving European more firms dependent onbanklending and debtisstilllarger thanbefore thecrisis. Private equity, venture fundingalllagbehind capitalandlisted equity hasnotfallento suchanextent.of equity premium risk The remains equity elevated andthespread between equity investments. While thecost level, ofdebtnow Crisis standsat around thecost 400basispoints below itspre-Global islargelyfinancial sector bank-based, withbanks being relatively unsuited to financinginnovation and intangible One oftheconstraints facinginnovation andtechnological transformation inEurope isfinance. The European the US. This isalsoaccompanied by themuchlower presence ofEuropean inhigh-tech firms sectors. also arelative lackofdynamisminEurope, withfewer newentrants since 2011amongthetop firms, compared to When we lookat thetop globally firms for R&D expenditure, what we see isnotonlythedramaticrise ofChinabut static system, where fewer young succeed firms rivals. indisplacingolder really lagging behindisinterms ofleading innovators, amongyoung firms. particularly This isasymptom of amore www.worldcommercereview.com Source: EIBIS2018. negative) Figure 1.Headwinds are strengthening (firms supportive, minus firmsconsidering eachfactor consideringit www.worldcommercereview.com Source: Ameco. Figure 2.Investment gap, &equipment EUvs andintangibles, US(machinery %ofGDP) www.worldcommercereview.com Source: EIBIS2018. Figure 3.European firmsinvest lessinintangibles (%of total firm investment) www.worldcommercereview.com Note: Innovation profiles are definedbasedonfirms’ spendingonR&Dandfirms’ and of products introduction processes new or tothefirm, country world. Source: EIBIS2018. Figure 4.Europe haslessleadinginnovators (innovation profiles by ageofthefirm,%) www.worldcommercereview.com Note: %firmsinthe in2006and2017,%ofnewentrantstop 2,500R&Dglobal spenders to thisgroup 2011. after Source: EUIndustrialR&DInvestment Scoreboard. Figure 5.Europe hasfewer ‘new’ globalleaders(share oftop 2,500 R&Dglobalspenders, %) www.worldcommercereview.com Source: EIBIS2018. defined asnon-patenting firms) Figure 6.Differencebetween innovating andnon-innovating firms(% deviation from non-innovators, www.worldcommercereview.com Source: EIBIS2018. impediment to investment, %) Figure ofskills, by 7.Lack firms’ innovation profile (firms that skillsan considerlackofstaffwiththe right www.worldcommercereview.com Note: *Provisional estimate. Source: EIBInfrastructure database. Figure 8.Infrastructure investment remains low (investment ininfrastructure, %ofGDP) www.worldcommercereview.com Source: EIBIS2018. Figure 9.Long term barriersto investment impediment to investment) (%firms reporting www.worldcommercereview.com expect competition toexpect decrease (netvalue). Note: Firms are grouped by quintileinterms oftotal factor productivity. The graph shows thepercentage digitalisation to increase offirmsthatexpect minuscompetition thosethat 2018. Survey andSkills Source: EIBISDigital fully digitalfirms) Figure 10. Will digitalisation increase competition? quintiles (expectations for by productivity fullyandnot- www.worldcommercereview.com market regulationsmarket to besignificant impediments to investment. regions that score well onindicators ofinstitutionalquality. Meanwhile, firms consider both business andlabour We alsoseethat are firms three timesmore likely to innovate andninetimesmore likely to introduce apatent in meanthat incentives public-private partnerships forstructuring private operators sector are unclear. regard for technical capacity generation planningandproject asamajorobstacle. Difficultiesin properly addressingIn theseweaknesses, theinstitutionalframework willbekey. Forty-three percent ofmunicipalities the private to cooperate. andpublicsector ispooraswell generationcapacity asproject capacity. Anewnarrative isneeded, aswell asclearer incentives for of thepublicsector, thecapabilitiesto generate has beendeclining. projects Finance isnottheonlygap. Planning inpublicinvestmentInstead, ashift itreflects away from thecrisis. infrastructure during Along witha retrenchment needs. andoneinthreeinfrastructure quality large municipalitiesinEurope say that infrastructure investment isstillbelow an upturn. This doesnotappearto bearesponse to needsaturation: thefallininvestment isnotcorrelated with recovery. At 1.7%ofGDP, itnow standsat about75%ofitspre-Financial level Crisis andshows onlylittlesign of infrastructure isanothervitaleconomic enabler,Quality butinvestment ininfrastructure intheEUislagging the benefits from inthisarea. training, of publicaction pointing to theimportance recent investment intraining hasbeensufficient. firms face internalising thedifficulty in reflect This may partially availability asaconstraint. percent Seventy-one invest ofEUfirms intraining, butonly21% consider that their www.worldcommercereview.com society. This requires aresponse at alllevels, andnotleastat theEuropean level. European cooperation isneeded in theface ofrapid innovation anddigitalisation, achievingsustainability, andcreating aninclusive andcohesive Europe’s economy stilllacksthe ‘tools’ to meettheurgent challengesofthefuture: remaining globallycompetitive We needto retool Europe’s economy evident. (internet ofthings, development), bigdata, andsoftware thedigital gapbetween Europe andtheUSismore sector,in theservice are EUfirms lagging.Moreover, whenonelooks at themostadvanced ofdigitalisationforms sector,manufacturing European have firms in ofdigital keptpaceterms adoption,but with theirUS counterparts thecontext ofthegrowingIn relevance ofdisruptive technologies, there isacost ofinaction. Thus far, inthe effects on competitiveness. These dynamics suggestthat late adoptionof digital technologies could have andlong-lasting disproportionate standoutin expecting,firms onbalance, that digitalisation willlead to adecrease inthe competition theyface. is associated withhighermarkups, suggestingalackofcompetition. Ontheother, themostproductive digitalised More worryingly, digitalisation appearsto becreating winner-takes-all dynamics. Ontheonehand, digitalisation believe60% more that theirsaleswould inservices have beenlower, hadtheynotadopted digital technologies. also credit theadoption ofdigital technologies and withincreasedover sales:50%more inmanufacturing firms adopt digital technologies tend to bemore productive, invest more, andengagemore ininnovation activities. They comparison ofachievement indigitalisation intheEU andtheUS. The suggestthat firms results ofthesurvey moduleondigitalisation covering andskills, EIBISsurvey Our intheEUandUS,isafirstdirect 1,700firms ishigh inaction thefaceIn ofdisruptive digitaltechnologies andaglobalrace for leadership, technological thecost of www.worldcommercereview.com Our analysisOur alsopoints to keyareas for attention: EU instruments suchastheEIBandEUbudget. fulluseof This meansadvancing financialintegrationIt alsomeansmaking Union. through theCMUandBanking to facilitate theallocation ofEuropean savings towards themostproductive use, overcoming investors’ homebias. • • • • at theEUlevel. address bothcompetitiveness andsocialinclusion,where there ispotential for more coordinated action Working gap, together to for closetheskills anissuethat win-win provides policiesthat anopportunity asset classesandprivate/public investment. technologies, focusing onallintangibles, notonlyR&D, andconsidering thecomplementarities between complementing finance with technical capacity, to innovation andthrough andadoptionofnew support investment critical Unblocking ininfrastructure andinnovation through better infrastructure governance, (crucial for digitalisation incentives), andthrough creating theconditions for atrueEuropean digital market. forservices particularly deepeningthesinglemarket, throughCommitting further to efficiency market demand andsupplysides. andexit,growth, andthrough addressing entry andmarket the ‘equity gap’ and ‘growth stagetrap’, onthe Encouraging adynamic, innovative businessenvironment through improving conditions regulatory for firm www.worldcommercereview.com (2018) 770,Brussels:European Commission. European Commission (2018),“Annual growth 2019: For survey astronger Europe intheface ofglobaluncertainty”, COM of technological catch-up, Washington DC:The World Bank. Cirera, andWFMaloney(2017),The innovation X, capabilities paradox: andtheunrealized promise Developing-country firms”, Research 43(8):1413-1421. Policy Cincera, M,andRVeugelers (2014), “Differences inthe rates of return to R&Dfor European and US young leadingR&D survey”, Cedefop Reference Series, No. 106. mismatch: Learning andskill Cedefop from shortages (2018), “Insightsinto Cedefop’s skill European andjobs skills OECD countries, OECDPublishing. Andrews, D, (2015),Frontier Micro CCriscuoloandPNGal evidence from firms, policy: diffusionandpublic technology References datacan1. The EIBInvestment (EIBIS).Further informationandsurvey accessed be Survey at:www.eib.org/eibis Endnotes Investment Bank Debora Revoltella istheChief Economist oftheEuropean oftheEconomics andDirector Department change ininvestment inclimate changemitigation. ■ anddata governance,on jobsanddemandfor issuesofcybersecurity and, skills, notleast, theneedfor astep- Retooling Europe mustbesociallyandenvironmentally into sustainable, account ofautomation taking theimpacts . www.worldcommercereview.com This article was originallypublishedonVoxEU.orgThis article causes”, ofEconomic Journal Perspectives 22(1):25–44. Van Europe gapbetween andtheUnited States: B, Trends productivity MO’Mahony Ark, andMPTimmer (2008),“The and 74. Restuccia, causes D, andcosts ofmisallocation”, (2017),“The andRRogerson ofEconomic Journal Perspectives 31(3):151- corporate R&D?Acomparison ofEUandnon-EUcorporate R&Dperformance”, Research Policy 39:523–36. Moncada-Paternò-Castello, P, CCiupagea, KSmith,ATübke andMTubbs too little Europe perform (2010),“Does FundInternational Monetary (2018),World Challengesto steady economic growth, outlook: Washington, DC. Press. Haskel, J,andSWestlake (2017),Capitalism withoutcapital: The riseoftheintangibleeconomy, Princeton University south Europe”, ofEconomics Journal 132(4):1915–67. Quarterly LKarabarbounis G,SKalemli-Özcan, Gopinath, andCVillegas-Sanchez (2017),“Capital in allocation andproductivity European 2018/2019:Retooling Investment Europe’s Bank(2018),Investment Report economy, Luxembourg: EIB. www.worldcommercereview.com Pissarides could argue make Europe that lackofaction Testing theresilience Globalisation isplacingthe European socialmodel of Europe’s inclusive under strain. Jacques BughinandChristopher growth model even more vulnerable www.worldcommercereview.com E declining in one-third ofEuropean countriesdeclining inone-third (Algan etal.2017,Foster andFrieden 2017),seeFigure 1. to accept more migration. Trust andEU, ininstitutions (bothown-country for member states’ citizens) hasalsobeen many citizens are expressing thosefears by voting andvoicing for theirreluctance non-mainstream politicalparties More broadly themedianincome speaking, growth inEurope hasbeentrailing beyond itslong-term trend, and increased withmany inequality citizens stillfearing that worse isto come. cluster have beenthemosthitby andinresponse thecrisis have cutsocialspending, amongothers, leadingto economic hasputsignificant crisis strain onthismodel, especially Mediterraneanfor the cluster. Countries inthat Europe’s socialprogress (Fehder hadbeen remarkable 2000).However, etal.2017,Benabou inrecent years, the European cracks (Esping-Andersendistribution 1999). established inclusive growth by modelcharacterised amore viewofrevenue egalitarian generation and Within thisdiversity, however, Europe’s socialcontracts have –theyare basedonalong- acommon backbone to benefitfrom those contracts. citizens from socioeconomic risks, how muchtheyredistribute revenue generated, andwhichcitizens are entitled Europe hasmany flavours ofsocial dependingonthedegreecontracts to whichindividual countries protect their adapting itscurrent social contracts to protect itscitizens, whatever thedisruptionsthat lieahead. suggests that keepingtheessence ofEurope’s current inclusive growth modeldoesnot preclude itfrom under strain, withvarious globalplacingupward pressure that could oninequality intensify. This column bymodel characterised amore viewofrevenue egalitarian generation Butthismodelis anddistribution. urope’s socialcontracts to protect theircitizens from socioeconomic are risks basedonaninclusive growth www.worldcommercereview.com communications technology bubbleat ofthe21 theturn the growth ofworld trade competition andrising from Asian economies inthe1980s, andtheinformation and Evidently, socialcontracts intheEUhave recent beentested inevery decade–by theoilshockin1970s, as growth returned, settledbackagain. effective transition effective social contracts in order to enable a fast and more more and fast a enable to order in contracts social model does not preclude Europe adapting its current current its adapting Europe preclude not does model Keeping the essence of its current inclusive growth growth inclusive current its of essence the Keeping st century. rose, theseperiods, During inequality butthen, www.worldcommercereview.com and theEnvironment 2015)–a ‘deliver’ scenario –itcould achieve more solidper capitaincome growth of1.9%a AI technologies, andinvests inthecircular Foundation economy Center (EllenMacArthur andMcKinsey for Business contrast,In ifEurope scalesupcurrent policieson,for instance, ageing, enablesthediffusionofdigital actively and likely depressive onincome rising inequality growth. effectof to reduce baselineincome growth from anaverage of1.6%peryear to 0.3%(an85%drop), notaccounting for the simulationOur suggeststhat thestrength oftheheadwindsinduced by themegatrends could besufficiently large income growth. prolonged secularstagnation (Gordon inequality, 2015),rising andgrowth inwelfare costs that gross outstrip to themegatrends (androll backcurrent policiessuchasincreases intheretirement age). The result would be Unlikely, buttheoretically possible, isa ‘denial’ scenario inwhichtheEUandEuropean countries donotrespond respond to orto them,eitherto mitigate seize positive potential opportunities negative effects. The ofthesemegatrends ultimate impact oninclusive growth willdependonhow European actively policymakers global competition andmigration; geopolitics. climate changeandpollution;shifting The sixtrends are ageingdemographics; digital technology, intelligence automation, andartificial (AI); increased coming of ageat thesame time. –intensify could –thistimestructurally astheresultinequality oftheinteraction ofsixglobaltrends that are But thistimemay bedifferent.Institute Global researchMcKinsey New suggeststhat the upward pressure on A new ball game? www.worldcommercereview.com 2. Estimated changeover timeinthemedianincome of thequintile. Prices. 1. Estimates income ofdisposable are basedonthecurrent average taxrate oftheincome taxbracket, corrected whichhasbeen forinflationusingtheHarmonisedIndexof Consumer Sources: World Indicators; BankDevelopment Eurostat; OECD; Eurobarometer; GlobalInstitute analysis McKinsey worstappearing off Figure clusters’ 1.Social hasdiverged performance inEurope since thecrisis, withtheMediterranean cluster www.worldcommercereview.com 2. After taxes andtransfers. 1. Before taxes andtransfers; GNIIndexonwage income only. Sources: World Eurostat; GlobalInstitute analysis Bank; McKinsey Figure divergence 2.Social may spread withintheEU28even ina ‘deliver’ scenario www.worldcommercereview.com incomes declinedby asmuch5%ayear inGreece over thisperiod, andby andSpain. about1%peryear inItaly Poverty andrelative have income inequality increased. Among themostaffected economies, mediandisposable disposable income percapitawiththelowest-income thelargest householdsexperiencing losses. ofthe2007/8crisis.digested All income theimpact decilesandquintiles have lost between 1%and3%ayear of contrast stark In (andashighlighted inFigure 1),the ‘Mediterranean’ Europe cluster ofSouthern hasstillnotfully improved socialprogress institutionaltrust(seeFigure andrising 2). capita income andaslight increase dueto income superior growth ininequality inthetop decile;there hasbeen These economies have experienced thehighestGDPgrowth intheEU, leadingto real positive growth inper relatively well. European countries. Europe’s ‘social democratic’ cluster ofcountries, which includesNordic economies, hasfared amongcitizens withinEUmemberstates, inequality Alongside rising more socialdivergence may develop among more thanothers.potentially (includingmanufacturing) hitsome sectors doing routine jobs andpay premiums to whilethedeployment thehigher-skilled, ofthecircular economy could concomitant forces For at work. instance, digital technology andAIwillputpressure onthewages ofthose However, even ifEurope appearsto policies, beinevitablebecauseof inequality delivers rising necessary to helpcitizens, whatever thedisruptionsthat lieahead. year, producing anadditional€9,000ofpercapitagross income that could fundadditionalpublicsocialspending www.worldcommercereview.com model of union-firm industrial industrial model ofunion-firm relations. financed anewmodelofeducation, mandating citizens to go to highschool, for instance, andlaunched thefirst contracts inorder to enableafastandmore effective aprevious transition.During societal revolution, countries Keeping theessence ofitscurrent inclusive growth modeldoes notpreclude Europe adaptingitscurrent social growth inthemediumterm (Atkinson 2015). developing newmodelsofworkforce andinnovating. participation, Onlyby doingsocanEurope achieve inclusive These challenges needto be metnomatter what, isinvesting andthebest–vitalform ofaction inskills, must adaptthepay-as-you-go model ofpensions, for instance. work (Acemoglu andRestrepo 2018),intheway we rethink pollutionandclimate externalities, andintheway we Furthermore, inthe ‘deliver’ scenario, isdueto transformational ofinequality changeintheway alarge part we entrepreneurship (Grigoli etal.2016,Aghion 2003). social contracts inEurope. This, however, may beastrategic mistake andbackfire. may,Inequality boost infact, With suchchallengesahead, itmay betempting to resist changeoralternatively to give upontheessence ofthe (seeFigureexperience doubletheincrease asthenorth ininequality 2). income growth, compared withmore than2%intheotherEuropean clusters. Moreover, Europe Southern could estimateOur suggeststhat thecluster ofMediterranean countries may generate lessthan1.5%ofpercapita to benefit from technology. demographics, and, ifitdoesnotcatch upwiththerest ofEurope on digital andAIcapabilities, have lower potential Even GlobalInstitute’s inMcKinsey ‘deliver’ scenario, Europe Southern willcontinue to bechallengedby its www.worldcommercereview.com Atkinson, AB (2015), Inequality: What can What done?,Harvard Press. be University AB(2015),Inequality: Atkinson, Conference Drafts, 7–8. September Algan, Y, European trustcrisisandtheriseofpopulism”, etal. (2017), “The Papers Brookings onEconomic Activity, BPEA Lecture. Aghion, ofincome andthedynamics P(2003),“Schumpeterian inequality”, growth theory Econometrica, Walras-Bowley Acemoglu, D, andPRestrepo (2017), “Low-skill automation”, andhigh-skill 24119. NBERworking paper References Christopher Pissarides isRegius Professor ofEconomics at theLSE Institute, Global Jacques at andDirector at Partner theMcKinsey McKinsey and BughinisaSenior models ofsocialcontracts, andusingsocialprotection asaninsurance againstfailure. ■ engaging infresh rapid societaltransitions action, experimenting thinking, withnew byfrom taking uncertain Challenging times–politicallyandeconomically –lieahead. However, hastaught usthat nations emerge history growth modeleven more vulnerable. difficult inan era of actionlow trustinpoliticiansandinstitutions. couldleave Butlackof the European inclusive oftheelements thatSome needto beputinplace may require strong politicalmandates, whichcould bevery natural resources. more withthegig economy, andenforce newbehavioural to modelswith respect limitingpollutionandoveruse of thenewgreenIn anddigital revolution, Europe willneedto embedlifelong intheworkplace, learning experiment www.worldcommercereview.com This article was originallypublishedonVoxEU.orgThis article GlobalInstitute (2018),“TestingMcKinsey theresilience ofEurope’s inclusive growth model”, discussionpaper. 16/244. Grigoli, F, E Paredes and growth: (2016),“Inequality Bella Aheterogeneous andGDi approach”, IMFworking paper Gordon, stagnation:Asupply-side RJ(2015),“Secular view”, American Economic Review105(5). European UnionPolitics 18(4). Foster, C,andJFrieden (2017),“Crisis determinants ofEuropeans’ oftrust: Socioeconomic confidence ingovernment”, performance”,societal American Economics Papers Association andProceedings 108. Fehder, progress: ofsocial empirics D, The subjective interplay between well-being and andSStern MPorter (2018),“The economies, foundationsofpostindustrial G(1999),Social Oxford Press.Esping-Andersen, University economy visionforacompetitive Europe”. Foundation CenterEllen MacArthur andMcKinsey forBusinessandtheEnvironment (2015),“Growth within:Acircular Benabou, R(2000),“Unequal Income societies: contract”, distribution andthesocial American Economic Review90(1). www.worldcommercereview.com EU budgetimplications estimated budget shortfall andhow theburdenestimated would budgetshortfall A no-deal Brexit would meantheUK’sA no-deal contributions to the EUbudgetfallto zero. calculates the ZsoltDarvas of a no-deal Brexit of ano-deal fall across different memberstates www.worldcommercereview.com T the same period (80% of customs duty revenues (80%ofcustomsthe sameperiod duty goto theEUbudgetand20% is retained by themember states). from theUKretained20% ofcustoms by dutiesonimports memberstates, whichcould amount to €0.8billionin This figure relates transferto the extra needed by membersstates to theEUbudget, yet anoffsetting isthe factor EU27 gross national income (GNI). hole intheEUbudgetfor March 30 UK willnotcontribute 29March at 2019,andEUspendingintheUKfullystops allafter that day –thetotal Brexit extreme assumptionsandsimplifications (seetheend of thepost),Ifindthat inan –inwhichthe scenario certain contribution extra to theEUbudgetincase ofzeroand 2020)necessary UKcontribution Brexit. after After making thispostIfocusIn onthecurrent multi-annualfinancialframework (MFF)inorder to assessthenear-term (2019 should standready to filltheeventual gap rather soon. case theUKmight from notcontribute March to 30 theEUbudgetat allstarting Yet itcanbeusefulto Brexit quantify theexit fee, hasincreased andinsucha becausethelikelihoodofano-deal ofBrexit.crucial aspects anddefencelike security cooperation, visa-free travel, aviation cooperation, nuclearsafety andfood safety are also and thereby budgetrevenues direct matters –asmore thantheexit fee. important Similarly, issues non-economic For example, Iregard –whichwillaffecteconomic thefuture andimmigration trade,growth partnerships services impacts thantheexit fee.impacts andthere arethe EUandUK, many issuesthat could more alsohave important larger budgetary direct – is, inmy view, ofBrexit. aspect alessimportant The amounts at stakeare smallrelative to GDPbothfor he United Kingdom’s financial contribution to theliabilitiesof European Union–theso-called ‘exit fee’ th 2019-December 31 st 2020could amount to about€16.5billion,or0.066%of th 2019. Thereby, EUmemberstates www.worldcommercereview.com This estimation canbeconsidered asanupperlimitfor theBrexit holefor thefollowing mainreasons: 0.062% ofGNI. Thereby, financialburden direct theextra onthe publicbudgetsofthe27membersstates would be€15.7billion,or • (even ifEUspendingintheUKwould alsonotstop overnight). its goodwillinthehopeofabetter agreement later. so, If thefinancinggapinEUbudget could besmaller because, for example, theUKmight recognise itsfinancialliabilities towards theEU, or itmight wish to show Even intheabsence ofacomprehensive withdrawal treaty, theUKmight contribute to theEUbudget billion, or 0.062% of GNI of 0.062% or billion, budgets of the 27 members states would be €15.7 €15.7 be would states members 27 the of budgets ... the extra direct financial burden on the public public the on burden financial direct extra the ... www.worldcommercereview.com See asimplifiedtable of theMFFhereSee MFF is1.22%ofGNI,whichrepresents themaximumamount ofitsown resources that theEUmay raise. no newlegislation isneededto cover thisfinancinggap. The overall own-resources ceiling of the current 2014-2020 Even considering my upper-limit estimate of€16.5billionfor contribution theextra to theEUbudgetin2019-2020, resources. explanations Some are available here • • • from theUK. fell less, imports highercustoms dutieswould If a 20%fallinthevolume onimports becollected imports. Brexit, includingtheintroduction ofthe customs duties. Butfor illustrative thecalculation purposes assumes fromI donotwishto theUKasaresult causedby estimate ano-deal ofthedistraction thefallofEUimports paidby EU27companies primarily andhouseholds.but aduty Yet thiswillbearevenue intheEUbudget.) the calculations. revenues from (Note theUKisnotatransfer that from customs-duty imports from theUK, Thereby, theaverage from theUK tariff ratecould be considerably on imports higherthanwhat I consider in countries alsoincludealarge amount of raw materials, whichhave zero low tariff rates. orvery countries includedeveloping countries, face preferential whichtypically from non-EU tariff rates.Imports the sameaverage tariff rate asthecurrent average from non-EU tariff countries.rate onimports Butnon-EU I consider alow by estimate revenues fromassuming for theUK, from arising thecustoms-duty EU27imports national contribution willbesmaller. lower usedto bespent thantheceiling inlater (even years).so, thoughsomecarry-overs If theneeded I assumethat 100%oftheMFFpayment slightly spendingistypically ceiling willbe spent inEU27, butactual , whichshows thethree ofMFFceilings: payments, types commitments, own . The payment ceiling is0.96%ofGNI. The difference between the www.worldcommercereview.com Assumptions for the2014-17calculations: revenue fromduty theUK. from imports of thisamount across countries basedontheirGNI,alongwiththenationally-retained customs 20%oftheextra gap would therefore befilled by larger contributions from the27EUmemberstates. Figure 1shows thedistribution This margin, 0.26%ofGNI,ismuchlarger Brexit. thanthefinancinggap, 0.066%ofGNI,caused by ano-deal This emergencies”. overall own-resources ceiling andthe payment ceiling “provide room formanoeuver incase ofunforeseen needsand • • the UK’s share isthesame astheUK’s share inEU28expenditures ofthesameexpenditure heading. the globalandadministration components expenditures. ofotherandearmarked For therest Iassumethat To guesstimate theUK’s share intheseexpenditures (line1.3.1),Idonotconsider non-EUexpenditure and revenuethe earmarked specific to eachinstitution. forearmarked aspecificpurpose, suchasincome from foundations, subsidies, andbequests, gifts including groups ofcountries orpaidto international organisations). expenditures Earmarked relate to revenue expenditure isexpenditureOther allocated to whose beneficiaries countries cannotbedetermined (covering (€11.1 billionin2017)andother(€6.12017). expenditure isthesumof expenditures expenditure innon-EUcountries (€8.6billionin2017),earmarked isnotpossibleto determine theshareIt oftheUKin ‘further’ expenditures (line1.3of Table 1). ‘Further’ All 2014-17 data, except values initalics Table 1,are data calculated from onthebasisofactual DGBudget; www.worldcommercereview.com are retained by states) themember would reduce burden. public-sector Various thenext assumptionsforthecalculations are inthetext. described Brexit scenariohave Iconsider. to transfer to theEUbudgetinno-deal The orange barswithnegatives show by how revenues much the20%ofhypothetical (which customs-duty Note: The bluebarscorrespond to 0.066%ofeachcountry’s ofMarch 31st2020,andrepresent GNIintheperiod 30th2019-December theextra states amountthatmember would Figure oftheMarch 1.Distribution 30 from theUK(€millions) between EU27countries, andtheoffsetting nationally-retained customsextra duty revenue from imports th 2019-December 31 st 2020 no-deal Brexit EUbudgetfinancinggap 2020no-deal www.worldcommercereview.com [A] ofcontinued Scenario UK'sEUmembership orthetransition alongtheagreed period deal 2.6.1 2.6 2.5 2.4 2.3 2.2 2.1 2 1.3.1 1.3 1.2 1.1 1 Table EUbudgetfor 1.Actual 2014-2017andmy for projections 2018-2020(€billions) guesstimated otherrevenue from theUK Other revenueOther Surplus fromSurplus previous year UK customs EU27 customs [including rebates] UK VAT &GNI-basedcontributions [including rebates] EU27 VAT &GNI-basedcontributions of which: Total revenue guesstimated UK part of'further' guesstimated UKpart further [non-EU, andother] further earmarked in UK in EU27 of which: Total expenditure 103.9 143.9 121.6 142.5 2014 10.0 14.5 11.7 13.9 1.0 2.9 0.2 7.0 1.6 146.0 122.7 145.2 2015 16.6 18.2 99.2 15.1 7.3 1.4 3.4 0.2 7.5 1.3 Actual 144.1 110.8 136.4 2016 10.6 16.9 12.8 99.3 18.5 1.3 3.2 0.4 7.1 0.2 139.0 105.3 137.4 2017 17.2 17.3 10.6 84.4 25.8 6.4 3.2 0.7 6.3 2.6 109.5 154.6 126.7 154.6 2018 17.6 13.7 20.2 1.3 8.9 1.6 3.2 0.4 7.7 Projections 121.4 166.7 136.7 166.7 2019 18.0 15.2 21.8 1.3 8.9 0.0 3.2 0.5 8.3 125.9 172.2 141.2 172.2 2020 18.3 15.8 22.5 1.3 8.9 0.0 3.2 0.5 8.5 www.worldcommercereview.com [B] Hypothetical custom duty revenues from UK imports in case of a no-deal Brexit, if: revenues custom incaseofano-deal duty [B] Hypothetical from UK imports 6 5=3-4 1.2-1.3.1 4=2.2+2.4+2.6.6- 3=2-1 al revenues from suchduties, Iconsider in2019. only the30March period –31December full year even in 2019inorder to consistent be withothernumbers inthe2019column, whichallrefer to thefullyear of2019.Butwhenquantifying EUbudgetandnation- thepossible includemyics assumptionsandestimations–seethevarious assumptionsforthe calculations The inlines6and7relate hypothetical inthetext. to customs dutiesfrom UKimports Note: 2014-17numbers are Non-italics basedonDGBudgetdata,whilethe2018-2020values fortotal expenditure are theupdated current price MFFpaymentceilings. Values inital- Brexit dueto no-deal *no changeinimports *20% reduction inimports *20% reduction EU27 Balance [excluding theUK] Estimated UKnetcontribution EU28 Balance 20% retained by memberstates 80% goingto EUbudget 80% goingto EUbudget 20% retained by memberstates -7.5 1.4 8.9 -14.4 15.2 0.8 -1.0 7.7 8.7 -7.6 1.6 9.3 -10.2 10.2 0.0 -11.0 11.0 2.8 2.2 0.4 1.8 2.2 0.6 0.0 -11.3 11.3 2.9 2.3 0.5 1.8 2.3 0.6 0.0 www.worldcommercereview.com transition alongtheagreed period deal (lines1-5of Table 1): Assumptions for underthescenario oftheUK’s the2018-2020projections continued EUmembershiporthe • • • • • ‘Other revenues’‘Other willbe€8.9billion annuallyin2018-2020(average value for 2014-17); expenditure to which are theMFF’s notsubject ceiling for payments); ‘Assigned revenues’ willnotreduce theGNI-basedcontributions (“Assigned revenues” finance specific items of EUbudgetpaymentsActual will be100%ofthepayment ceilings in2018-2020; average in2014-2017; oftotal EUspendingas itwasEU spendingintheUK2018-2020isassumedto on bethesameproportion revenues isthesameasUK’s share inEU28GNI(line2.6.1). 2.1 and2.2). The estimated ‘other revenue’ from theUKsimplyassumesthat theshare oftheUKinthese in muchlower VAT- andGNI-basedrevenue from collection memberstates years in2017thanearlier (lines For example, in2017there was anunusuallylarge ‘other revenue’ amounting to €17.2billion,whichresulted ofthis fluctuations revenue. EU staff, interest onlate payments,Most likely, andsoon. competition finesplay abig roleintheannual include income from third inEUprogrammes, countries for participating competition fines, taxes paid by isnotpossibleto determine theshareIt oftheUKin ‘other’ revenues (line2.6ofthetable). revenues’‘Other www.worldcommercereview.com Assumptions for the 30 March 2019 – 31 December 2020 projections under the scenario of no-deal Brexit:Assumptions for the30March underthescenario 2019–31December ofno-deal 2020 projections • • • • • • • • No UK contribution to the EU budget starting from MarchNo UKcontribution 30 to theEUbudgetstarting rebate, whichitselfvaries across theyears); 2018-2020 asitwas in2017(thisshare, whichislower thantheUK’s share theUK inGNI(14.9%),reflects I assumethat theUK’s share intheEU28 VAT- andGNI-basedcontribution willremain thesame11.1%in For 2018-2020,IusetheEuropean Commission’s November 2018forecast for GNI; VAT- andGNI-basedcontributions result asresidual; The EUbudgetwillclosewithzero overall balance; Annual customs revenues from non-EUcountries willgrow in2018-2020as2017; GNI; revenues’‘Other from theUKrelative to total ‘other revenues’ to theratio isproportional ofUKGNIto EU28 No EU spending in the UK starting from March 30 No EUspendingintheUKstarting to thenumberofdays;contribution isproportional UK is proportional to thenumber ofdays;UK isproportional th 2019, while the January 1 2019,whiletheJanuary th 2019, while the January 1 2019,whiletheJanuary st -March 29 th st -March 29 EUspendinginthe th

www.worldcommercereview.com Assumptions for the calculation about the cross-country distribution oftheBrexitAssumptions distribution for financinggap: thecalculation aboutthe cross-country • • • • • • member states. assumptions discussedabove, from theUKacross the27 ofimports considering the2017distribution revenues: statesMember retain theorange 20%ofcustoms-duty barsshow theestimates usingthe The mechanisms(“rebates corrections onrebates” ) are notconsidered inthiscalculation; according to theirGNI; Starting from March 30 Starting The €16.5billion, March 30 0.7589 timesthe2019values, plusthe2020 values. The total March 30 Iusedvaluesearlier corresponding to for the20%reduction illustrative purposes; from7 shows theUKdeclinesby theestimate 20%–intheoverall ifEU27imports calculation mentioned Line 6ofthetableshows revenue thecustoms volumes duty donotchange, estimate whileline ifimport applied to raw materials; the preferential from tariff rates developing applied to import countries andthe lowzero tariff rates or very Note that thisassumption underestimates becauseof revenues thecustoms form duty theUK, from imports the average tariff rate willbethesameascurrent average from non-EU tariff countries.rate onimports th 2019-December 31 th 2019, EU27 imports from the UK will be subject to from customs duties. theUKwillbesubject Iassumethat 2019,EU27imports th 2019-December 31 st 2020 impact iscalculated from 2020impact theEU27balance (line5of Table 1): st 2020gapisto bedistributed amongthememberstates www.worldcommercereview.com numbers, and André Sapir on certain customs issues. This article was customs issues. originallypublishedonBruegel Thisnumbers, oncertain article Sapir andAndré I thankKonstantinos forhelpfuldiscussionsonvarious Efstathiou issuesrelated to theunderstatingofEUbudget Fellow isaSenior Zsolt Darvas at Bruegel paper 2017 working ourtutorial forSee themainEUbudgetconcepts andourdetailedmethodologyto calculate theexit fee inour . ■ www.worldcommercereview.com Fraser Cameron considers theunforeseen consequences of globaluncertainty, and how theEUhasseized the The EU'spivot to Asia opportunity indeepening EU-Asia relations opportunity www.worldcommercereview.com O involving President before Moon ASEMbegins. forissues. many ASEMalsoprovides sidemeetings. anopportunity For example, there willbeanEU-Korea summit Although largely atalkfeast, itprovides aunique forum for overEuropean and fifty Asian leaders to discussglobal EU-Asia deepenedat thebiannual Asia-Europe relations willbefurther meeting(ASEM) inBrusselsOctober. engagement withtheAsia-Pacific region. commissioners aswell asministers from memberstates have alsovisited theregion highlighting thegrowing EU commissioner, inAsia Cecilia active promoting Malmström, closertrade hasalsobeenvery ties. Several otherEU the EU’s energetic, foreign chief, policy spent ten days intheregion cementing tieswitharange ofpartners. Trade July,In Presidents Tusk andJunckerhadsuccessful August, summitsinChinaandJapan.In Federica Mogherini, the region. reviving theideaofanEU-ASEAN blocto blocdeal, engagement andalsoincreasing with itspoliticalandsecurity signing freeThe trade EUhas beenquickto agreements seize theopportunity (FTAs) withseveral Asian countries, ofarules-basedworld order. andstaunchsupporter EU asapredictable institutions causedconsternation around Asia, from Australia to Japan,andledmany countries to reach outto the into questionthe usefulnessofAmerica’s alliances inAsia. security plushisattacks oninternationalThese actions inthe firstaction His White House was to withdraw from the (TPP) trade dealandcall Trans-Pacific Partnership California, was ditched by President Trump assoonhetook office. which involved several to trips theregion andreceiving ASEANleadersat anunprecedented summitin Trump’s behaviour, unpredictable isadeepeningofEU-Asia relations. President Obama’s ‘pivot to Asia’ ne oftheunforeseen consequences oftheincreasing globaluncertainty, largely dueto President www.worldcommercereview.com without Asia’s isalsotruethat there input. are It many unresolved issuesinAsia, from security theKorean peninsula, Furthermore, itisquite clearthat mostglobalproblems, from climate changeto migration, cannotberesolved increase incoming years. an increasingly large amount ofAsian FDIcoming to theEU. Allshow projections that thesefigures are likely to intwo-way trade€1.5 trillion in2017andover €800billionofEuropean FDIgoingto Asia in2016. There isalso hasbeenthedriver ofglobalgrowthIt for isnow thepasttwo decades. theEU’s It biggesttrade partner, withsome The growing ofAsia for importance theEUiseasyto ishometo oftheworld’s understand. two-thirds It population. Asia rising which is now viewed as a stable and predictable actor predictable and stable a as viewed now is which growing Asian interest in strengthening ties with the EU EU the with ties strengthening in interest Asian growing economic and security reasons, there is a reciprocal reciprocal a is there reasons, security and economic Just as the EU is paying more attention to Asia for political, political, for Asia to attention more paying is EU the as Just www.worldcommercereview.com economy intheworld with127millioncitizens. two decadesandcreates richest for selling significantto the European newopportunities goodsandservices fourth The FTA astheEU-Japan (known Economic Partnership Agreement) isthebiggestfree trade agreement inthepast foreign policy. andsecurity agreement was complemented politicalagreement by awide-ranging that shouldleadto closercooperation in basket anditwas timeto deepenrelations withthelargest trade blocintheworld. The economic andtrade multiple golfrounds with Trump, concluded that itmight notbesensibleto place allhiseggsintheAmerican This enthusiasm was by mostmarked theJulyagreement onanEU-Japan FTA. Prime Abe, Minister despite his EU-Japan FTA defenderas theprincipal ofarules-basedorder. andtheydonotwishtoon UncleSam fallundertheChinesesteamroller. There isthusanewenthusiasm for theEU international system destroyed. Hedging isnow thenameofgame. Asian leaderscanno longerrely exclusively The constant refrain from allAsian leadersinrecent months isthat theydonot wishto seethecurrent rules-based theUnited thatcompared characterises States to under theuncertainty Trump. growing Asian interest instrengthening tieswiththeEUwhichisnow viewed actor, asastableandpredictable Just astheEUispaying more attention to Asia for political, reasons, economic and security there isareciprocal between ChinaandJapan, Taiwan, allthree are closelylinkedviajust-in-time supplychains. onpromotingwith theseunresolved businessties. For disputes andcarry example, despite poorpoliticalrelations tothrough ChinaSea Kashmir. theSouth are impressed Butmostobservers ofAsian at countries theability to live www.worldcommercereview.com achieve summits. inthetwo previous EU-China summit was significant inthat bothsides were able to agree alengthy statement, somethingthat they could not strategic partnership, relations had stagnated inthepastcouple ofyears over theabove trade disputes. The July Although theEUandChinahave signed impressive documents outlining theirmutualdesire to deepentheir growing protectionism. side, there are complaints that theEUhasreneged onapromise to grant economy Chinamarket status andits subsidies andcheapfinancing, and poorprotection andenforcementrights. OntheChinese property ofintellectual government intheeconomy, intervention firms, unequalaccess resulting inadominantto positionofstate-owned lack oftransparency, measures policiesandnon-tariff industrial that discriminate against foreign companies, strong there market, areits second-biggest inevitablysomedisputes. export OntheEUside, there are concerns abouta China andEurope trade onaverage over €1 billion aday. Given that ChinaistheEU’s and biggestsource ofimports EU-China allow data to flow freely between theEUandJapan,creating the world’s largest area offree flow of data. mechanisms. sidesalsoagreed Both to recognise eachother’s data protection systems as ‘equivalent’, whichwill core labourstandards, natural resource management, environmental protection anddispute settlement advanced provisions onmovement ofpeoplefor businesspurposes. The EPA alsocovers sustainabledevelopment, interestingParticularly are theprovisions for €28billionto currently EUfirms, trade inservices, including worth also benefitfrom higher standards for example onmotor vehicles, on food andonwineadditives. year oncustoms dutiescompared to what theyare required to pay to Japan. EUcompanies today will uponexports chemicals, likelyto machinery, benefitmost. EU companies carsandbusinessservices could save up to €1billiona According to theEU, to thedealshouldleadto Japanwiththefood a13%increase sector, inexports textiles, www.worldcommercereview.com increased almost 60% and exports of services increased 50%over nearly ofservices thesameperiod, trade turning increased deficits almost60%andexports Korea wasto sign thefirst anFTAAsian country ofgoods to Korea withtheEUin 2012. Since thenEU exports EU-Korea the EU’s between Europe on enhancing connectivity andAsia. policy forthcoming anditremainsBrussels andBeijing to beseenhow China’s Initiative andRoad canbelinkedto highlyambitiousBelt world. EU asasolidanchorinanuncertain There are ofcourse areas ofdispute suchashumanrights between the UNsystem thanwiththeUS.President Xi,whohasrecently cemented hispower baseinChina,alsoviews the Remarkably, theEUandChina are more onthesamepagewhen itcomes to climate Iran, changeandpreserving regulations. digital economy, includinghow to avoid introducing access market through barriers theirrespective cybersecurity stock platform ofprogress –andexchanged –taking connectivity intheEU-China connectivity views on the trading system plusanoceans’ covering pollution. andmarine fisheries partnership Finally, bothsides discussed There were alsootherpositive outcomes at thesummitincludingMoUs onthecircular economy and an emissions procurement agreement (GPA). for abilateral investment agreement. Chinaconfirmed its commitment to acceding to theWTO government sidesalsoagreedBoth anexchange access ofmarket offers that should give animpetus to thenegotiations groupworking onreform ofthe WTO. divergence. Leaders for expressed therules-basedmultilateral support trading system andagreed to setupa Trade issueswere stillcentral at thesummitbutbothsidessought to emphasiseareas ofcooperation rather than www.worldcommercereview.com The EUisIndia’s istheEU’s whileIndia numberonetrading partner 9 procurement, geographical indications, soundinvestment protection rules, andsustainabledevelopment. have proved points includeimproved difficult. Sticking market access government forsomegoodsand services, of1.25billionpeople.sizable anddynamicmarket Butthenegotiations for anFTA, launchedover adecadeago, iscurrentlyIndia thefastest growing economy intheworld for andastrategic theEU, partner representing a EU-India cooperation hervisit. during further increasinglyand Seoul agree onmajorforeign for was ableto issuesandMogherini explore opportunities policy Brussels from theDPRK, Korea. Apart againstNorth The EUhasbeenastrong defender policy oftheUNsanctions number. The visitdemonstrated theEU’s negotiations forto the Korean denuclearise peninsula. thetricky support EU-Korea visited inAugustAhead Seoul summit, oftheplannedOctober Mogherini for talkswithheropposite The EUandKorea alsohave agreement apoliticalandsecurity allowing for closecooperation inforeign policy. expressed withtheFTA satisfaction althoughthere are callsfor someadjustments insomesectors. into surpluses. Two-way FDIalsosaw a50%increase inthepastfive years. Businesses inKorea and Europe have unwillingness of India to open its market while India criticises theEUforunwillingness criticises to itsrestrictive whileIndia visapolicies. openitsmarket ofIndia Europe. sidesrecognise Both that there isvast potential to increase trade but theEUremains disappointed at the inthepastfivehas almosttripled years andFDIdoubled. There hasalsobeenasizeable increaseIndianFDI to in to to India theEUwere ofservices exports billion in2006to ofasimilarscale. €38billionin2016.Indian Butexport Korea andCanada. grew from ismuchsmallerthanwithChina.Exports just€24 to India The value ofEUexports th trading partner, sandwichedbetween www.worldcommercereview.com Australia andNewZealand have alsomoved to deepentheirrelations withtheEU. Julybothcountries opened In Australia/New Zealand experiences inresolving disputes could beusefulinreducing andelsewhere. tensions ChinaSea intheSouth to multilateralism, international rulesanditsculture ofconsultation andinclusiveness. believes that itsown It Despite itsmany internal problems, theEUiskeento promote thecentrality ofASEAN,withitscommitment disparate size oftheeconomies between ASEANmembers thiswillbeadifficultundertaking. trade between theEUandSEAsia. There isalsorenewed talkofanEU-ASEAN free trade agreement butgiven the There are currently negotiations agreement for boostthebooming tourism anopenskies whichwould further from theASEANside. in 2017. The EU is keento upgrade relations to butithasproved astrategic partnership difficult to agree a response There andboostEU-ASEAN have relations that plansto beennumerous celebrated try action their40 ruleinanumberofASEANcountries.the Rohingya inMyanmar, ormilitary andoneparty internal problems that affect relations withtheEU. For example, thedrug war inthe Philippines, thetreatment of haveSome questioneditslackofleadership, arole that usedto beplayed by Indonesia. There are alsomany plus itsinsistence for onunanimity alldecisions. and technical assistance.considerable financialsupport ASEANishandicapped by itssmallbudgetandsecretariat Asian oftheten-nationThe nations (ASEAN) EUisastrong association ofsouth-east provided supporter ASEAN th anniversary anniversary www.worldcommercereview.com approach to promote structures. effective Onthe security Asian side, itisthe current occupant ofthe White House This volatile mixexplains theEU’s overall vitalinterest inAsia andadvancing stability arules-based insupporting capabilities, includingnuclearcapablestates. failures; competition for resources, andinfluence, all territory compounded by expanding defence spending and strategic competition between thebigpowers; historical grievances; ethnicandreligious tensions; governance Upping theEUrole inAsia willnotbeeasy. The landscapeisshapedby Asian alarge security numberoffactors: the EU-ledOperation Atalanta Sea). intheRed have in (anumberofalready Asian partners contacts, andanti-piracy participated to military illegal fishing, military already engagedsuccessfully inAceh, counter Indonesia), terrorism, police andcoastguard training, combatting agendato coverNow security theplan isto expand onthissoft conflict resolution andpeacekeeping (theEUhas sensitive andtheprevention security, issuesofmaritime security ofviolent extremism. cyber consultations, building, capacity training programmes andjoint exercises. The withASEANon EUisalready working May,In EUforeign ministers agreed to enhance theEU’s cooperation security withAsia thoughintensified An increased role security a majordebate about theirfuture security. inaturbulentworld.They too viewtheEUasastablepartner based, multilateral system’. in Given theunpredictability Washington, Canberra and Wellington are alsoengagedin alsovisited AustraliaMogherini andNewZealand inJuly, themas describing oftherules- supporters ‘like-minded Commission. The biggestproblem area willbeagriculture, inboth offarmers given theefficiency Pacific countries. negotiations for anFTA for deal, withexpectations possiblybefore aswift theendofmandate oftheJuncker www.worldcommercereview.com Fraser Cameron oftheEU-Asia isDirector Centre world. ■ that Asians isdriving towards acloserrelationship withtheEU. isarelationship that It could shapethefuture ofthe www.worldcommercereview.com sanctions and the new EU blocking statute. andthenewEUblocking Matthew sanctions Between arockBetween anda European companies are squeezed between US Oresman andHenrietta Worthington discuss hard place www.worldcommercereview.com T transactions with Iranian SDNs. withIranian transactions Iran’s in to anumberofspecificcategories includingparticipating ofactivities, energy andengaging in sector apply sanctions can beappliedto companies even secondary sanctions contact; whenthere isnoUSjurisdictional pass through theUSfinancialsystem insome way, even ifjust for amoment whentheyare ‘cleared.’ Secondary inUSdollars, alldollardenominatedperson transacting even transactions from outsidethe US,becausevirtually isfarreaching. sanctions For canapplyto andsecondary any sanctions example, ofUSprimary The primary impact United States andthat isgoingto “the enforce thesesanctions.”to pushbackagainstIranian malignactivity” our efforts Pompeo,Mike stating sanctions, that of theyare “an ofthere-imposed hasstressed part theimportance important a large numberofnewSpeciallyDesignated Persons andBlockedNationals (SDN)designations. of State, Secretary The UScompleted the ‘snap back’ regime ofitsrigorous sanctions on5November, alongwiththeannouncement of business inIran. penalties for breaching USsanctions. The UShasconfirmed that itintends to makelife difficult for anybodydoing For European companies, rock’‘the themselves other orincurring real ofbeingsanctioned possibility isthevery US sanctions caught between arock andahard place. still involved inIranian-related transactions, even orunintentionally. indirectly European companies much are very in thecrossfire asthispatchwork hascreated ahost of complex optionsandprocesses for thosewhoare and provide somelevel ofrelief to European companies. However, European companies are now caught European governments. response, In theEUissuedanew statute’‘blocking to counter thesesanctions over oftheEUandvarious againstIran he USrecently sweeping theobjection sanctions re-imposed www.worldcommercereview.com the same, andthere are many otherexamples. ofSudan,Cubarespect Penalties andIran. ofabout$1.3billionhave justbeenannounced for SociétéGénérale for 2015,theUS violating In USsanctions. Treasury finedBNP almost$9billion infringementsin Paribas for sanctions ofThe Office Foreign Assets Control (OFAC) hasshown itswillingness toimposesignificant penaltieson companies EU can offer sufficient economic protection economic sufficient offer can EU scrap what remains of the nuclear deal unless the the unless deal nuclear the of remains what scrap with a workable solution, with Iran threatening to to threatening Iran with solution, workable a with There is increasing pressure on the EU to come up up come to EU the on pressure increasing is There www.worldcommercereview.com for that claimscould thepossibility bebrought againsttheUSby aninjured company underthisprovision. caused, causingit, possibleshared thepersonorentity responsibility, etc. The languageisvague enoughto allow whowillbethedefendantkind ofdamage them. Exactly ineachcasewilldependonthespecificsof case, the Finally, itallows companies to recover from damagesincurred thepersonwhocaused becauseoftheUSsanctions and arbitration awards. Secondly, theStatute nullifies any rulings Iranian including sanctions, judgementsforeigncourt basedonUS court proving that any withdrawal from was dueto Iran rather USsanctions, thanalegitimate businessdecision. specifically authorised. However, there are as alsoqueries to the robustness ofthisprovision, given thedifficultiesin anapplication. making This could beindicative oftheEU’s intention to enforce any breaches whichhave notbeen The to EUhas tried put someweight behindthis exception by publishing, for thefirst time, themechanics for of theCommunity.” approvals incircumstances where “non-compliance [withUS would sanctions] seriouslydamagetheirinterests orthose from complying unlesstheyhave withUSsanctions, aspecificauthorisation to do so. EUoperators may apply for The statute approach takesathree-pronged initsattempt to protect EUbusinesses. Firstly, itforbids EUcompanies keep thedealalive. has stressed its commitment to nucleardeal, theIran anditsamendedlegislation istestament to itsintention to The EU’s Statute isthe Blocking ‘hard place,’ asitaimsto USsanctions. counter ofthe theeffect re-imposed The EU StatuteEU Blocking www.worldcommercereview.com Whilst theEU, Germany, andinparticular France have andthe UK, stressed their commitment to theJoint initiativesOther should navigate rules. theseconflicting Statute andignore theUS legislation.” However, noguidance hasbeengiven oneithersideasto how companies measures to athome(iftheychoose comply withtheAmerican orintheUS sanctions) (iftheyabideby theBlocking thatacknowledging “it enforcement putsEUand UKcompanies risking ofhavingto between intheposition choose The House ofCommons European Scrutiny Committee released Statute, theircomments ontheBlocking considering thecurrent transatlantic trade tensions. for complying withUSlaws inorder to avoid highfinesintheUS.However, possible, particularly thisisdistinctly remainsA hugequestionmark asto whetheramemberstate oneofitsprized wouldcorporate sanction assets prosecution. This contract to isinstark OFAC’s to eagerness enforce breaches. USsanctions Only Austria hasever brought Statute charges andthecasenever undertheBlocking even advanced to a Historically, there lackofEUmemberstate hasbeenaserious enforcement for regulations. breaches ofblocking are responsible for enforcing theregulations, whichwillleadto inconsistencies inimplementation across thebloc. However, whethertheregulations really offer significant in practiceprotection remainsMemberstates tobeseen. Iran. affected on by USsanctions navigate itsterms. EUoperators are alsorequired to inform theEuropean Commission where theirinterests are To reinforce further Statute, itscommitment to theBlocking theEUalsopublishedguidance to helpcompanies www.worldcommercereview.com against purchases ofEUgoodswhilstavoiding transactions. anybanking actual companies house, from of clearing wouldIranian offsetting thereach work exports It asakind ofUSsanctions. theory,In thisSPVwould have system sat outsidetheinternational withtheaim ofprotecting EU banking payments, butthisinitiative looksto have collapsed. The mostpromising suggestion was for theEUto establisha ‘Special Purpose Vehicle’ to process Iran-related (SPV) This hasforced theEUbackto thedrawing board to develop financialmessaging that is ‘outside ofUSinfluence’. will move underground. ofSWIFT,transparency provoking whichhelpsto Iranian weed transactions fears that –further outfinancialcrime its own SWIFTsystem. euro-based However, theChancellor, the Angela Merkel, haswarnedagainstundermining ForeignHeiko Maas, the German Minister, hasindicated that Europe, likeChinaandRussia,could lookto create position onenforcement againstfinancialtransfer messaging platform providers. messaging system) ofState Pompeo would Mike comply US Secretary withUSsanctions. alsohighlighted thestrict Along withthecompletion ofthe ‘snap back’ cametheannouncement that SWIFT(theinternational financial orreassurancesclarity to EU companies. The second wave –targeted ofUSsanctions at Iran’s –provided andshippingindustries oil, no financialservices formally rejected anappealfrom E3ministers requesting various exemptions USsanctions. to there-imposed Comprehensive Plan (JCPOA), ofAction theUSisholdingallcards. July, In Pompeo Mike andSteven Mnuchin www.worldcommercereview.com American allies importing Iranian oilto Iranian findalternative sources. alliesimporting American adviser, National security Bolton, JohnR confirmed yetIn anothershow ofUSdetermination to causethecollapse deal, oftheIran ithasoffered itsassistance to involvement. as yet, hasshown awillingness to takethat risk. The European Investment Bank’s board was quickto refuse any again, itappearsthecentral banksare afraid Nobank, USfinancialmarket. ofbeingcutofffrom theall-dominant already proposing individualcentral that theUSsanction bankersifthebanksthemselves are offlimits. Once The gamble here isthat theUSwouldn’t dare anally’s to sanction central However, bank. USpressure groups are transactions. the commercial banksoffthetable, EUmembersare usingtheir considering own centralIranian banks to handle deal unlessitisableto finda“financially sovereign independent channel”to move fundsto, andfrom, Iran. With Despite allgoodintentions, Europe willbeheavily constrained to upholditscommitment initsability to theIran increasinglychallenge, unlikely. butthisislooking EU was aimingto have theSPVupandrunningby theendofNovember, to Luxembourg looking to step upto the blow camewithAustria’sA further confirmed refusal to hosttheSPV, prompting questionsas to its feasibility. The sanctions. also appearnotto bebuyinginto theideaandare instead bowing to thefear ofconsequence for breaching US However, theideahashitmultiplehurdles, willingto hosttheSPV. withnoEUcountry European companies trade withIran inaccordance intheworld.” withEUlawandcould to open otherpartners be EU diplomat, Federica told theUNgeneral Mogherini, assemblythat theSPVwould “allow European countries to www.worldcommercereview.com authorisation, particularly ifmemberstates show Statute thepoliticalcommitment toauthorisation, particularly strictly. applytheBlocking However, EUoperators shouldbeaware intheabsence ofan ofcancelling oftherisks plannedactivity complies withapplicable sanctions. We cannot defytheUnited States.” BP alsoannounced that itwould besuspendingajoint venture partner, withanIranian stating that “BPalways they would activities. exit theirIran from Companies market. theIranian including Total, Eni,Boeing, andPeugeot Maersk, were quickto confirm that Almost withoutexception to date, businessescaught by boththeEUandUSregimes are choosing to step away European USsanctions. multinationals to there-imposed Probably oftheEU’s thebestmarker success incountering theUS’s aggressive standpoint istheresponse Iranian of willleaveUS sanctions vulnerable. EUoperators inIran withactivities of UScompanies, ofEUcompanies, orUSsubsidiaries to whichare USlaw. onlysubject However, thelongreach of relevance Statute toThe ofUScompanies. doesnotapply to isofparticular EUsubsidiaries Blocking EUbranches It How are companies reacting? regime. outofthehandsIranian hard currency the condition that they commit to reducing theirpurchases. They mustalsouseescrow accounts designed to keep JCPOA hasbeenreinstated system andexemptions oilexports onIranian have beengranted to eight countries on Even thewaivers granted by theUScome tinged withtheircommitment economy. to theIranian cripple The pre- that theUS“[does] notintend to allow to evaded be oursanctions by Europe oranyone else.” www.worldcommercereview.com should obey. isevident that businessesperceive It offallingfoul to therisk beagreater ofUSsanctions threat than Whilst companies runthegauntlet between theconflicting regimes, thequestion remains as to whichonethey scrap what remains ofthenucleardealunlessEUcanoffer sufficient economic protection. plummeting. There isincreasing pressure threatening on theEUto solution,withIran come upwith aworkable to is are onthedeclineanditscurrency theirtoll: already oilexports Iranian appeartoUS sanctions betaking What next? of them. given allrecentshould bewary theymay USrhetoric: not slipundertheradar iftheUSwants to makeanexample SMEs may taketheviewthat theyare too smallto betargeted by theUSfor breaches. sanctions However, they Iran. seminars intheEUdevoting timeandresources any to thwart attempt for theSMEsto economic bring benefits to USrepresentatives outsideof Iran. business opportunities from theCommerce have beenholding Department Meanwhile, USdiplomats thesecompanies have to and withexactly helpthemfindnewmarkets beenworking channel, canbe secured. tooperations grow intheUShave businesses–provided theirIranian theopportunity theSPV, orotherpayment to Smallercompanies itsSMEsto inIran. withlimited leadthecharge orno looking onactivities The EUhasstarted a safer approach. maysanctions, not beaneasyanalysis to demonstrate to EUregulators; obtainingauthorisationtherefore may offer Whether suchacancellation isbasedontrueeconomic considerations, orbecauseofconcerns related to US www.worldcommercereview.com Shaw Pittman LLP Matthew Oresman isaPartner, andHenrietta Worthington Associate, aSenior at Pillsbury Winthrop and avoid beingcrushedby laws. theconflicting ■ Statute allows aprocess tothe Blocking comply EUcompanies withUSsanctions to seeking obtainauthorisation the protection offered by theEU–anduntil theEUproves theyare probably otherwise, right. The goodnews isthat www.worldcommercereview.com immigration andwelfare Europe, andfindsthat theirpoliciesmatch those ofthe Niek Kok examines the rise of'right-wing' Kokexamines therise populismin Niek social democrats ofthemid-twentieth century On populists, www.worldcommercereview.com I themselves asleadersembodying people’s‘the trueinterests’. Political analysts findthat thisdiscursive strategy is Populists have beensaidto distinguishan ‘us, thepure people’ from a thecorrupt elites’.‘them, They present What says thepopulist statism and, asaresult, welfare protectionism. – andiftheyare, inasense, that advocated notsimplybestcompared to classparties welfare traditional working I argue that thisbegsthequestionifitmakessenseat allto labeltheaforementioned right-wing politicalparties today withthetraditional socialdemocrat yieldsinteresting parallels. on thewelfare state. Still, comparing theviews onthewelfare state andimmigration ofthe ‘right-wing’ populistof Undoubtedly, thepopulistemphasisisonanti-immigration whereas putstheaccent traditional socialdemocracy social democratic thought from the1930s to the1970sonwards. statism and, thoughto preferences alesserextent, trade protectionism. All ofthesepolicy oftraditional were apart immigration torestrictionist makepoliticalarguments policies. inlinewithwelfare Butmost ofthemalsostart Indeed, mostEuropean populists (admittedly, share apreference category) ill-defined ananalytically often for of what theyclaimto be people’.‘the andtheFreedom ofAustriaFreedom Party (FPÖ). present (PVV) immigrantsThese parties asathreat to theidentity She refers suchastheDanishPeople’s to parties (DPP),theSweden Party Democrats (SD), for theDutch Party European populist parties right-wingEuropean istheirxenophobic populistparties character. forto counter right-wing populists. support that therising what Mouffe makesmostcurrent hasobserved n herbookFor aLeft Populism (2018),thepoliticalphilosopherChantal Mouffe argued for a populism’‘left-wing www.worldcommercereview.com immigration asaway economic security. to promote working-class And Wilders opposedattempts reportedly by hisview,In you cannothave both. Trump repeatedly calledfor renegotiated trade in dealsandareduction views. Åkesson, for instance, presents politicsas adichotomous choice between massimmigration and welfare. Interestingly, these three politiciansshare similarviews onimmigration, butalsoadoptsimilarwelfare chauvinistic President Donald Trump, whoissometimesdeemedapopulistaswell. used by mostEuropean populistssuchastheDutchman Geert Wilders ortheSwede JimmieÅkesson –aswell asby are already quite leftish quite already are But in a way, the supposedly right-wing populists populists right-wing supposedly the way, a in But Chantal Mouffe has called for a left-wing populism. populism. left-wing a for called has Mouffe Chantal www.worldcommercereview.com policy conceptually followspolicy from theideaofwelfare state. for thewelfare state immigration andrestrictionist policies. The reason for immigration thisisthat arestrictionist ofwelfare atLooking thehistory statist ideas inEurope, strong we ideological find congruencevery between support Traditional democrats social andtheanti-immigration cause ofsocialdemocratic ideasshowshistory that thesepoliciesare likelyto gohand-in-hand. a conceptual congruence between thewelfare state, andeven immigration trade protectionism. policy astrict The The traditional European alsofavoured left anti-immigration policiesto protect thewelfare state. This isbecauseof are usingthewelfareparties state asanargument forrestrictionism. favour immigration policies. strict Iwould argue that thisisarather limited view. Contemporary anti-immigration As Mouffe hasargued, socalledpopulistslike Åkesson, Trump and Wilders areright-wing deemed becausethey socialdemocratic politics.traditionally supported from are voters increasingly support who,is that attracting populistparties for European speaking politicsat least, or whethertheyadopted thisapproach thevote attracting class. onlyafter oftheworking What isclear, however, adopt a protectionist approach remains to welfare unclear whether populist parties It class voters to working attract are allowed to enjoy common asfree benefits riders”. grieve that “people who have notcontributed throughout alifetimewiththeirlabour, taxes usefulactivities andsocially Many populistslament contemporary theideaofimmigrants coming to the ‘fully laidtable’ ofthewelfare state and and immigration well turnedoutto withlesseducated dovery voters” . the Dutch government to slashfundingfor healthcare andotherwelfare state programs “his after criticismofIslam www.worldcommercereview.com them to carry withthemsomeoftherights thattheyhavethem to carry acquired intheirformercountry,” Beveridge wrote. rights to welfare to from theother, onecountry “enabling andallowing menonmigration security to avoid forfeiting Beveridge proposed that, induetime, different countries shouldarrange possibilities for transfers ofindividual rights assoonindividualswould move to anothercountry? in whichpeoplecould freely move to from another. onecountry What would happento acquired, individualsocial Beveridge already foresaw that exclusive rights to welfare would beproblematic benefitsinone country ina world theyhaveafter madecontributions. who doesnotcontribute, canthusnotbesaidto have aright to welfare benefits –theycanacquire itonlyuntil other words, ofwelfare thesolidarity programs exist for thosewhohave contributed. Foreigners, aswell asanyone Citizens onlyhave aright to ofthe welfarecontributions theyhave benefitsinvirtue made to the welfare state.In absolute right to welfare benefits. Insurance (1942)whichoutlinedthecontours for andAlliedServices welfare theBritish state, wrote that there isno economistBeveridge (1879-1963),aBritish andmemberoftheLiberal Party, Social for bestknown hisreport may temporarily fallbackonitsbenefitsintimesofunemployment or, for instance, for oldagepensions. William This ‘logic ofthewelfare state’ stems from theideathat onlythoseindividualswhohave contributed to itssystem and notwithoutsiders. members”. The welfare state presupposes aboundedgroup ofpeoplethat distribute welfare amongstthemselves – to closedsystemslogic be thatseekto insulate themselves from pressures external andthatrestrict rightsandbenefits to Freeman thepoliticalscientist Gary noted article, that national welfare amuch-cited In states “are compelled by their www.worldcommercereview.com pose to social andeconomic security. Onthe22 At theendof 1940s, several Labourpoliticiansalready British foresaw theproblem massimmigration could home. for newcomers whohadnever contributed. Onecould onlyhave aright to asmuchonehadcontributed at The receiving could, country orsoseemsto have beenBeveridge’s to assumption,notbeexpected provide welfare state in Western countries is, ashewrote, by necessity, protectionist andnationalistic. welfare rights withnationalism andthe ‘commonness’ ofthepeople. Myrdal was acutely aware that thewelfare The Swedish ideologist andeconomist GunnarMyrdal (1898-1987)expressed notion.Heexplicitly linked thisexact Concerns immigration about by thetraditional Swedish andDutch left ofthesamefamily.are allpart oneinwhichcitizens feel ismore likethey amongst them.And easilyachieved solidarity inahomogenoussociety: Europeancentury socialdemocrats realized that citizens would onlywant to contribute ifthere was solidarity Hodge’s argument was, however, anargument congruent withtraditional socialdemocratic ideas. Mid-twentieth ‘far-right’. welfare shouldreward individualswhopaidinto thesystem, she was heavily criticized for usingthelanguageof the same insight andargued that giving council housingto newlyarrived immigrants Beveridge’s undermined ideathat then, theirargument was notalltoo controversial. Butwhenin2007Labourminister Margaret Hodgehadthevery These politicians thuscalledfor to immigration prevent arestrictionist policy massimmigration inthefuture. Back legislation ifnecessary, control immigration inthepolitical, social, economic andfiscal interestspeople” ofour . suggesting “thattheBritishGovernment should, like foreign countries, thedominionsandeven someofthecolonies, by nd ofJune1948,theywrote aletter to Prime Attlee, Minister www.worldcommercereview.com have been part oftheDutch socialdemocratichave ideologyinthe 1950s. From beenpart 1948 until 1958, thesocialdemocrat The sameideological congruence between welfare immigration statism andrestrictionist policies canbesaidto other aspects”. infinitely ishomogenous, happier notonlyin condition. population ofour regardsThe country to race butalsoinmany continued hispolicies. 1965, hecompared In Sweden to theUnited Swedes that States, “We live inan observing Folkhemmet excluded non-Swedes onbothbiological andcultural grounds. Hansson’s successor, Erlander, with thesocialdemocratic interest inbuildingupawelfare state. government immigration integration to policies andassimilatory adoptstrict policies, asethnicdifferences collided basis oftheSwedish welfare state ofitspeople. was andmutuality thecommonality ledhis The ideaoffolkhemmet people. Welfare statism required theSwedes to vieweachotherasasingle, large family. Hanssonargued that the Hansson introduced thefamousSwedish, whichexpresses notionoffolkhemmet thewelfare state asahomefor the ministers).both prime their welfare asminister state for ideologyontheseideas(Myrdal served commerce between 1945and1947under Swedish socialdemocratic ministers prime Per Albin Hansson(1936-1946)and Tage (1946-1969)based Erlander All inall, awelfare state through flourishes thepeople’s andeconomic stability. homogeneity The successive home”. to take defensive againsttherepercussions action andwelfare oftheinternational crisesinorder stability to preserve at economic policies”. Myrdal moreover attested ofthewelfare that thesupporters state are inclination naturally“the of ofindulginginnationalistic –attheexpense forallwithintheirboundaries ofopportunity andequality increase in liberty inthosecountries peoples have achieved economic“The welfare athome–economic progress andasubstantial www.worldcommercereview.com appear to have thesamevoting base. populistsremain –andontop ofthat, theirpredecessors so-called populists contemporary andcontemporary and allowed for more foreign influxintheir respective countries. Butthe parallel oftheir predecessors with such asOlofPalme to inSweden approve started andJoopdenUyl intheNetherlands ofmulticulturalist policies the1970s,In traditional socialdemocratic views Newsocialdemocratic to on immigration shift. leaders started Conclusion present-day political scientists. –anditfitsneatly into theanalyticalframeworkbetween himandhissupporters ofpopulismproposed by many FatherDrees was nicknamed Drees. apoliticalleaderto Deeming beafatherlyfigure attests to a rather deepbond the populistideaofaleaderrepresenting thepeople’s interests ideaofthepeopleasafamily, andthefolkhemmet theimageofDrees’Recalling leadershipisrather andpopulism:paralleling fittinginthe context offolkhemmet allowed thefree settlements ofmany Surinamese, Turkish andMoroccan immigrants intheNetherlands. criticized theimmigration policiesofthelater socialdemocratic minister Uyl, cabinetof prime Den whichhad politics, 1977,whenDrees TelegraafIn hadlongleft theDutch newspaper De that Drees reported hadstrongly these views throughout hislifetime. even advocated aproactive emigration policy, to become asinhiseyes too started full. theNetherlands Heheld Drees, too, was aware ofthedangermassimmigration to Dutch socialandeconomic security. At onepoint, he having laidthefoundations for theDutch welfare state. Willem Drees was minister. theDutch prime thisrole In andasminister for Affairs,known Social hebecame for www.worldcommercereview.com nytimes.com/2017/02/27/world/europe/geert-wilders-reclusive-provocateur-rises-before-dutch-vote.html?smid=fb-nyt 3. cf.: Wilders, Rubin, reclusive AJ(2017)‘Geert provocateur, Before Vote’, Dutch Rises NewYork Times, https://www. 2. Ibid, p. 55. 69. Populism’,of Right-wing in:Panizza, F(ed), Populism andtheMirror ofDemocracy, London/New York, Verso, pp. 50-71,p. 1. Mouffe, C(2018), For a Left Populism, London/New York, ‘The ‘EndofVerso; Mouffe, Politics’ andtheChallenge C(2005), Endnotes KokNiek isaresearcher at the Telders Foundation (TeldersStichting) way, thesupposedlyright-wing populistsare already ■ quite leftish. – except for amore explicit anti-immigration emphasis. Chantal Mouffe hascalled populism.Butina for aleft-wing manyIn respects, these politiciansadvocate thesameideasas socialdemocrats ofthemid-twentieth century populists likeJimmieÅkesson andGeert Wilders withtheright-wing? that many voters left-wing now vote for ‘far-right’ begsthequestion:why should we soexplicitly parties associate But besidestheideological congruence between welfare immigration, statism andrestrictionist theobservation ‘far right’. retrograde,” Chantal Mouffe hasshifted towardfor thetraditional writes. left Much ofthesupport what iscalledthe and thattheyhave stopped representing theinterests –whosedemands are sectors ofthepopular considered archaic or have inmostcountries democratic“[S]ocial identifiedthemselves more parties orlessexclusively with themiddleclasses, www.worldcommercereview.com 14. Ibid, p. 133. Books, NewYork, p. 135. 13. Myrdal, G(1967[1958]),Beyond thewelfare state. Economic International Planning Implications, andIts Bantam 20431729&intlink_ts=1542801037153-sa, accessed on21November 2018. stm#sa-link_location=story-body&intlink_from_url=https%3A%2F%2Fwww.bbc.com%2Fnews%2Fmagazine- 12. BBC,‘Call formigrant housingrethink’, 21May2007,http://news.bbc.co.uk/2/hi/uk_news/politics/6673911. November 2018. https://socialdemocracy21stcentury.blogspot.com/2018/02/opposition-to-mass-immigration-in.html 11. Letter ofeleven ofParliament LabourMembers to Prime Attlee, Minister 22June1948, 10. Ibid, p. 19. 9. Beveridge, Insurance W(1942),Social HerMajesty’s andAlliedServices, Office, Stationary London, p.9. Political Sciences, vol. andSocial 458,pp. 51-63,p. 51. 8. Freeman, GP(1986),‘Migration andthePolitical Economy oftheWelfare State’, oftheAmerican The Annals Academy of Basingstoke, Palgrave Macmillan,pp. 225-275,p. 270. VadA, Borevi, K, H,Petersen, Jonsson, K(eds.), Immigration Policy andtheScandinavian Welfare State 1945-2010, 7. Brochmann, G,Hagelund, A(2012),‘Comparison: withThree AModel Exceptions?’ in:Brochmann, G,Hagelund, , accessed on16November 2018. mark-rutte-elections/ 6. Meeus, TJ Wilders effect’, (2015).‘The Politico, https://www.politico.eu/article/the-geert-wilders-effect-dutch-politics- 5. Morgan, SL,Lee, J(2018),‘Trump Voters Working and theWhite Class’, Science, Sociological vol 5,pp. 234-245,p. 242. 4. Coman, J(2015).‘How the Nordic far-right hasstolen theleft’s ground onwelfare’, The Guardian, 26July2015. accessed on16November 2018. Post,, https://www.huffingtonpost.com/entry/trump-sweden-anti-immigration_us_5b43abcde4b07aea7542f347 November 2018;ASAhmed, AS(2018),‘Trumpism isthrivinginSweden by carefully Trump’, ignoringDonald Huffington imes&smtyp=cur&fbclid=IwAR1826DOlghEvwR-AvH3YWhk-wS-eIsF0cVCMBAtHjEU-sSQBwzOympAIrY , accessed on21 , accessed on16 www.worldcommercereview.com pp. 50-71,p. 55. Populism’,Challenge ofRight-wing in:Panizza, F(ed), Populism andtheMirror ofDemocracy, London/New York, Verso, 18. Mouffe, C(2018), For a Left Populism, London/New York, ‘The ‘EndofVerso; Mouffe, Politics’ andthe C(2005), taboo https://www.overpopulationawareness.org/en/articles/population-politics-from-a-left-wing-preference-to-a-left-wing- 17. Couwenberg, SW(2010).‘Population Politics: from preference aleft-wing taboo’, to aleft-wing 15July2010, ofCulturalJournal Policy, DOI:10.1080/10286632.2017.1335719,p. 7. 16. Tawat, ofSweden’s birth M(2017).‘The multicultural policy. Palme ofOlof The impact andhisideas’, International pp. 25-96,p. 26. Petersen, K(eds.), Immigration Policy andtheScandinavian Welfare State 1945-2010,Basingstoke, Palgrave Macmillan, Borevi, K(2012),‘Sweden: theFlagship ofMulticulturalism’, Vad in:Brochmann, G,Hagelund, A,Borevi, K, H, Jonsson, 15. Barker, V(2018).Nordic NationalismandPenal Order. Walling theWelfare State, London/New York, Routledge, p. 65; , accessed on21November Telegraaf, 2018;De ‘Dreessr. Uyl’, veegt aanmetDen devloer 20mei1977. www.worldcommercereview.com How Europe could yet take Veugelers consider how Europe might bestattempt to catch the lead in the global EV the leadinglobalEV the automotive sector. Simone Tagliapietra andReinhilde The electrification of Thevehicles hasbecome electrification akeytrend in and overtake othercountries inthedevelopmentand overtake race development race www.worldcommercereview.com T overall allmajorcountries, In carmarket. EVs in2017had shares well below 5%oftotal vehicle registrations. Butit Data onregistrations vehicles reveals ofelectric remains, market that the global EV to ofthe date, stillasmallpart vehicles inEurope:Electric thedemandside –encouragingsurprisingly for Europe. substantially progresses.which electrification In thisblogpost the we summarise results ofourstudy, whichare – arecentIn Policy Contribution we investigated thepositionofEuropean inascenario in automotive industry charging infrastructure. thedeployment ofEVs vehicles andsupporting vehicles, andtheir for zero-emission banningdirty their support side, toOn thepolicy meetcommitments assumedundertheParis Agreement, more governments are increasing by costs. costs,reducing production battery inparticular improvements reducing (EV) are electric-vehicle quickly to reduce greenhouse gasemissions. We EVs canexpect to proliferate inthefuture. Onthetechnology side, vehicles for taxes andcarbon zero-emission –intended –suchassupport interventions change concerns andpolicy of Thevehicles hasbecome electrification akeytrend intheautomotive sector, driven by cleanenergy andclimate- daily life, theirfulldeployment isnotyet guaranteed, noristhespeedoftake-up. autonomous driving, sharing, cars. andconnected While eachoftheseinterconnected trends isalready visiblein The automotive iscurrently sector at thecentre ofaglobaltransformation, driven by four keytrends: electrification, because of its long supply chain, the sector hasasignificantbecause ofitslongsupplychain,thesector multipliereffectontheEU economy. andresearch interms anddevelopmentpeople andranksofexports amongthemainEUsectors (R&D). And forhe automotive theEUeconomy. isimportant sector Accounting for 4%ofEUGDP, itemploys 8million www.worldcommercereview.com established itselfasthegloballeader, leaving Europe andotherregions behind. While JapaneseandUSfirms were China isalsothesource over ofanothercrucialtrend manufacturing: thelastfew inglobalEV years, ithasrapidly vehicles inEurope:Electric thesupplyside experiencedNetherlands declinesbetween 2013and2017(Figure 1). the EU, Germany andtheUKincreased theirshares whileFrance market, oftheglobalEV andearly-adopter the clear lead, registration, with48%of globalEV leaving farbehindtheUS(with 16%)andtheEU28(with15%). Within While theEU(with23%)andUS48%)dominated in2013,by market theworldwide 2017Chinahada EV vehicles isnowadayselectric inChina. is growing rapidly. This manifesting growth itselfinChina.As aconsequence, isparticularly for themajormarket is huge is The gap in policy ambition between Europe and China China and Europe between ambition policy in gap The www.worldcommercereview.com Source: Bruegelbasedonnationalstatistics. Figure 1.Share registrations ofnew EV in world ofcountry registrations new EV www.worldcommercereview.com Source: International Council onCleanTransport (2018). Figure by vehicle production 2a.EV manufacturer www.worldcommercereview.com Source: International Council onCleanTransport (2018). Figure 2b. by manufacturer battery production EV www.worldcommercereview.com of EU EV patentsof EUEV grew from 124 in2008to more than250peryear for eachyear between 2011-2016. balanced positionacross allpower-train technologies hybrid, –electric, hydrogen andICE. For instance, thenumber The dominance ofICEtechnology inEUautomotive patents before 2009hassince beenchangedto amore theEUitbeganto growIn onlyin2009(Figure 3). technology technology until patenting 2008.EV activity, globallyin2005. kick-started whilemostlyflat until 2005, Engine (ICE)technology hastraditionally beenthemajorpower train technology for cars. The EUdominated theICE The EUwas notafirst moverEV technology development, neitherin aspatent data show.Internal The Combustion EU andthetechnology development inEVs strong financialincentives EV purchasers;for extensive charging infrastructure deployment). innovation; requirements for international to EVs carmakers manufacture inChinaorder to access themarket; field (eg.EV’s generous fiscalsubsidies EVmanufacturers, basedonthe for driving rangepercharge, to foster hasbeendrivenThis by impressive thecountry’s manufacturing ofChinainEV inthe rise strong policy industrial producers.major battery companies proliferated andgrew rapidly along with Korean firms. There are amongthe noEUorUSfirms world’s even more evident. The firstmover, Japan, was rapidly surpassed by Chinabetween 2014and2017,asChinese (Figure value chain,China’s oftheEV manufacturing battery 2b), whichisacrucialpart globalEV In leadershipis theircatching up,starting especially theGermans. US’s Tesla entered EUfirms market. iscurrently intheglobalEV aleadingmanufacturer late, andare only recently movers,early nowadays are manufacturers thelargest (Figure newChinesefirms EV 2a). From movers, theearly only www.worldcommercereview.com Source: BruegelbasedonEPOPatstat, 2018edition. April Figure 3.EUvs. rest oftheworld inmajorpower-train technology patents www.worldcommercereview.com ICE patents. Volkswagen have power-train thehighestshares ofelectric technology patents, whilealsohaving large shares of exhibit anoverall low level stillvery ofpatenting. Among theEUassemblycompanies, BMWand Renault, There are majordifferences between thepatenting ofdifferent activities companies (Figure 4).Chinese companies are establishedincumbents, few new entrants, withvery Tesla andChinesecompanies beingtheexception. withseveral ofpatentingdistributed structure majorplayers activity involved. allcases, In allofthemajorplayers Motors andFord. The EUandJapan, althoughtheyhave bigplayers suchas Volkswagen and Toyota, show amore in thissector. Patenting by Korea’s South automotive isdominated sector intheUSitisGeneral by Hyundai; the EC-JRC Scoreboard. This handfuloflarge account firms ofpatenting majority activities for the overwhelming We focus whoare firms thelargest ontheautomotive inthe R&Dspendingfirms world, andparts as recorded by compared inimproving to theiractivities theincumbent ICEtechnology. EU automotive have firms beenindevelopingEV technology compared to theirinternational competitors and orderIn to assessthecommitmentEV technology, ofEUfirms to we turn to patent statistics to assess how active committed investmentactual isnotwidely available.EV manufacturing by in EUfirms But asmostoftheinvestment inEVs recent are stillvery and/orattached to announced plans, hard evidence of salestargets to modelsandambitiousannualEV announced beachieved newEV inthenearfuture. automotive have firms now allbecome asbuoyant astheirglobal All haveEV market counterparts. onthe Which EUautomotiveEV trends? are firms the driving Although they were notthefirst movers on EVs, European How European automotiveEV challenge the firmstackle www.worldcommercereview.com internal alongexperience market, andastrong brand-name inautomotive manufacturing. generation ofautomotive technologies can rely manufacturers isphasedin.European onalarge carand carparts European have firms to the capacity continue theirgloballeadershipoftheautomotive asthenext sector EVs. focused onICEtechnologies. lacksstrong playersThe EUparticularly that cancapture thevalue from batteries for Too manufacturers, companies, are many stillpredominantly especiallycar-parts important oreven exclusively technologies,ambitiously innewEV reducing whilemore theirexposure quickly to theincumbent ICEtechnology. value chain.Aspositions intheEV EUcompanies were first-movers, notamong theEV theywillhave to invest more isfor to face theEUautomotive revolutionIt andideallydrive theglobalEV industry andto takeuppivotal race, butithasto step upifitwants to remain at thefrontier ofautomotive technology. agendabothat theEUandatbroader member-state policy level. isnottoo late It for Europe to leadtheglobalEV by amore technology needstothe ICE, isthemostpowerful, ambitiousand amongwhichtheEV besupported andthedevelopment cleanpower-trainThe transport transition to zero-emission technologies asalternatives to Conclusions recommendations andpolicy isalsotrueforbalanced patenting theJapaneseandUSincumbent automotive activity assemblers. companies have carparts highershares ofnon-ICEpatenting,Other thoughwithlow absolute numbers. The technologies. companies, Some andRheinmetall, are suchasMahle onlyinICEtechnology active patenting. companies,automotive whichexhibit amuchgreater parts degree ofspecialisation whenitcomes to power-train Overall, theseEUassemblycompanies exhibit relatively balanced patenting activity. This contrasts withEU www.worldcommercereview.com Source: Scoreboard BruegelonJRC 2016. Figure 4.Patenting ofthetop automotive structure 50R&D spending companies (2012-14) www.worldcommercereview.com includes urban planning, public transport, charging planning,includes urban stations publictransport, andaccessibility improvements. not least, afullrange ofpoliciescanbeimplemented to bolster infrastructure deployment: list anon-exhaustive Policymakers canalsofavour cleantechnologies that includeEVs standards. by establishingefficiency Lastbut technologiesconversion into clean. ofdirty for investmentincluding support for inthelatest cleantechnologies, andnext-generation the andsupport for generation ofcleantechnologies, thenext menuincludespublicR&Dsupport On thesupplyside, thepolicy investments inotherworld regions, most notablyChina. including EVs. Without anEUinternal for market EVs, EUcompanies might bedeveloping theirambitious technologies shouldbeusedto stimulateclean rather EUdemandfor than dirty cleantechnologies ingeneral, First andforemost, there needsto beEUdemandfor EVs. Subsidies, taxation andpublic procurement favouring mix. policy demand- andsupply-side instruments inanambitiouslong-term cleantransport that piecemeal willnotwork. interventions combiningWhat framework, amultitudeof isneededabroad policy thedeployment ofEVs.support However, andChinaillustrate policiesfrom best-practice examples ofEV Norway should beinplace. theEUand EUmemberstates Both are increasingly discussingandputtinginplace policiesto To warrant more ambitiousinvestment inEVs by EUautomotive companies, theproper framework conditions Chinesecompetition, European willhave firms particularly to bemore ambitious. various power-train technologies. Butinorder to realise thepotential from thiscapacity, andto face globaland They alsohave andpatents ofR&Dprojects from thetechnological aportfolio that isdiversified expertise across www.worldcommercereview.com (electric) vehicles inEurope.(electric) fragmentation for andmore business, certainty thusincreasing theincentives to invest ofclean inproduction done inthefieldofdigital taxation throughout taxation. Aharmonisation ofmobility Europe would lead to less The EUshouldpromote taxation, anewdiscussionamongEUcountries asisbeing onthefuture oftransport European countries stillhave different taxation very regimes. transport Taxation tool to fostering switch decarbonisation. isakeypolicy demandto road cleanertransport, transport taxation transport 2) Rethinking batteries. technologies andshouldfocus across thevalue chain,includingfor batteries, next-generation suchassolid-state Transport-related research andinnovation fundingshouldnotablyfocus early-phase onnext-generation money, targeting areas inwhichitcantrulyhave leverage onprivate investment. The EUcan improve research itstransport andinnovation funding. particular, In itshould carefully allocate this 1) Targeting EUR&Dfundsto triggerfrontier cleantechnologies particularly: more measures. ambitious combination ofsupplyanddemand-stimulating policy At theEUlevel, thisincludes However, Europe canandshoulddomore to stimulate thetransformation through ofitsautomotive a industry measures.adoption ofcentrally-planned policy industrial futurecommitments andcoercive to anelectric measures for carmakers. Europe cannotfollow Chinainthe ambitionbetween EuropeThe gapinpolicy andChinaishuge. mixincludesstrong policy The ChineseEV www.worldcommercereview.com This article was originallypublished onBruegel This article Simone Tagliapietra and Reinhilde Veugelers are Research Fellows at Bruegel of automotive workers to to cleantechnology technologies. enablethemto production switch from ■ dirty measures suchasthedeploymentmoney to ofalternative theretraining support fuelsinfrastructure orto support committed to atransformation For to transport. decarbonise instance, thisfundcould allow citiesto bidfor EU An ‘EU Clean Transport Fund’ could beestablishedto provide to countries andcities dedicated financialsupport costs associated withthistransformation. To encourage thetransition systems, itsmemberstates andcitiesto clean-uptheirtransport theEUshouldsupport for states’ member 4) EUsupport transition towards cleantransport ambitious. become a globalplayer incleanvehicles. The EUshouldensure that theseplansshouldbemore coordinated and These plansare alsomeant to provide astrong signal to theEUautomotive industry, encouraging itto innovate and already underwaythe shift towards cleanvehicles willcontinue to gather pace over thecoming years. plans are mainlydriven by apoliticalcommitment to reduce airpollution,andare that basedontheexpectation Since ofcountries 2017, aseries andcitiesacross Europe have introduced bansondieselandpetrol cars. These cleaning-uptheair cars: ondirty 3) Bans