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EYE 2016 – Fresh money: What would you do with €300 billion?

28-04-2016

Investment in the EU has dropped by 15% compared to its 2007 pre-crisis peak, and has yet to recover. Less investment slows the pace of recovery and can potentially hurt growth and competitiveness. The Investment Plan for Europe, launched 18 months ago, aims to reverse this trend and put Europe back on track, mobilising €300 billion and creating around a million jobs. XXXXXXXX Please click here for the full publication in PDF format

Investment in the EU has dropped by 15% compared to its 2007 pre-crisis peak, and has yet to recover. Less investment slows the pace of recovery and can potentially hurt growth and competitiveness. The Investment Plan for Europe, launched 18 months ago, aims to reverse this trend and put Europe back on track, mobilising €300 billion and creating around a million jobs. XXXXXXXX Please click here for the full publication in PDF format

Helicopter money: A cure for what ails the euro area?

21-04-2016

'Helicopter money', or 'helicopter drops' of money, generally refers to a non-standard monetary policy tool used in deflationary conditions. It can be understood as a permanent increase in the nominal stock of fiat base money at lowest nominal interest rates. Some experts call for its use in the euro area, arguing that the interest-free distribution of additional money to the private sector would increase consumption and investments, and help jump-start the EU economy. In practical terms, there are ...

'Helicopter money', or 'helicopter drops' of money, generally refers to a non-standard monetary policy tool used in deflationary conditions. It can be understood as a permanent increase in the nominal stock of fiat base money at lowest nominal interest rates. Some experts call for its use in the euro area, arguing that the interest-free distribution of additional money to the private sector would increase consumption and investments, and help jump-start the EU economy. In practical terms, there are different proposals for distributing helicopter money, which may entail fiscal policy measures, such as government bonds, or printed-money-financed tax relief for private households. Some empirical studies show that tax rebates have had positive macroeconomic effects in certain countries. Helicopter money is also criticised, however. Some experts argue that it would have a negative impact on public sector (or central bank) balance sheets. Others say it may prompt indebted euro-area countries to pull back from unpopular fiscal and structural reforms. Helicopter money, it is argued, could also undermine the stability of the euro, by triggering 'runaway' inflation or reducing the incentive to work. There are also questions about the legality of helicopter money. Some experts believe it is permissible under EU law, citing Article 20 (Other instruments of monetary control) of the Protocol on the European Central Bank's statute. The Bank has a rather reluctant stance, arguing that the very idea runs counter to Article 123(1) of the Treaty on the Functioning of the European Union, which prohibits the direct financing of public expenditure.

The OECD Interim Economic Outlook: Stronger collective fiscal policy needed

12-04-2016

According to the 2016 Interim Economic Outlook of the Organisation for Economic Co operation and Development (OECD), global GDP growth this year is projected to be the slowest in five years. The OECD has lowered its real GDP growth forecast for the euro area for 2016 from 1.8% to 1.4%, and for 2017 from 1.9% to 1.7%. While low inflation and prices are discouraging commodity exporters, low investment and demand have led to stagnation, stifling wage and employment developments. The OECD recommends ...

According to the 2016 Interim Economic Outlook of the Organisation for Economic Co operation and Development (OECD), global GDP growth this year is projected to be the slowest in five years. The OECD has lowered its real GDP growth forecast for the euro area for 2016 from 1.8% to 1.4%, and for 2017 from 1.9% to 1.7%. While low inflation and prices are discouraging commodity exporters, low investment and demand have led to stagnation, stifling wage and employment developments. The OECD recommends a stronger collective policy response in order to strengthen demand. While the impetus for structural reform has slowed in many countries, contractionary fiscal policy has gained new momentum. Monetary policy alone is considered to be insufficient. A sustainable mix of structural, monetary and fiscal policy measures must be deployed in order to boost GDP growth and counter deflationary tendencies. The policy mix, however, varies from country to country, as countries are being affected in different ways by the international economic crisis.

Japan's national budget: Procedure and the public debt burden

25-02-2016

Japan's budget is compiled by its Ministry of Finance based on estimates from other ministries and guidance from the Cabinet, before being approved by the Diet. In Japan's parliamentary system, the executive is drawn from the majority in the House of Representatives, the Diet's lower house, which generally prevails in budgetary matters over the upper House of Councillors. However, bills for what are known as 'special deficit-financing bonds' require the approval of the House of Councillors, which ...

Japan's budget is compiled by its Ministry of Finance based on estimates from other ministries and guidance from the Cabinet, before being approved by the Diet. In Japan's parliamentary system, the executive is drawn from the majority in the House of Representatives, the Diet's lower house, which generally prevails in budgetary matters over the upper House of Councillors. However, bills for what are known as 'special deficit-financing bonds' require the approval of the House of Councillors, which can delay the budgetary procedure if that house is dominated by the opposition. Budget-makers are formally constrained by the 1947 Public Finance Act (PFA), Article 4 of which stipulates that the government may only issue 'construction bonds' to finance investment in infrastructure, as opposed to covering ongoing social security spending. This constraint is belied by two major, and interlinked, fiscal challenges facing Japan: the increasing share of social transfers in the budget, which is connected to the ageing of the population and a structural decline in Japan's economic capacity; and an ever-growing gross national debt that, at 246% of GDP, in relative terms already dwarfs that of any other G7 nation. Almost every year since 1975, governments have circumvented the strictures of the PFA by enacting a law empowering them to issue special deficit-financing bonds, which have since grown to make up the lion's share of the national debt. The current government, led by Shinzō Abe of the Liberal Democratic Party, has set out a plan to arrest the growth in the debt pile by 2020.

Secular stagnation and the euro area

08-02-2016

Several years after the Great Recession began, the euro area is still far from fully recovered. The international economic and financial crisis has pushed down investment levels within the EU by about 15% from their peak in 2007. Even though the near-term prospects seem brighter, high unemployment persists in many Member States. Some experts argue that the euro area, alongside Japan and the United States, is facing 'secular stagnation', a long-term economic stagnation characterised by a shrinking ...

Several years after the Great Recession began, the euro area is still far from fully recovered. The international economic and financial crisis has pushed down investment levels within the EU by about 15% from their peak in 2007. Even though the near-term prospects seem brighter, high unemployment persists in many Member States. Some experts argue that the euro area, alongside Japan and the United States, is facing 'secular stagnation', a long-term economic stagnation characterised by a shrinking work force, low demand, excess savings and low investments, despite low interest rates and deflationary tendencies. The complexity of the ongoing crisis and the diverging economic situations of the Member States participating in the euro area make it difficult to predict future developments, as there is no common cure for long-term stagnation. Some believe that if the demand side is spurred, it would help boost the economy. In this context, the European Commission launched a number of measures in 2015, among which the European Fund for Strategic Investments (EFSI), with the aim of mobilising at least €315 billion worth of investments in the real economy by 2017. But it is also important to improve the supply side, which shapes the investment environment. Furthermore, in December 2015 the European Central Bank (ECB) extended its quantitative easing programme (in particular, the asset purchase programme (APP)) until at least March 2017 as a way to provide further liquidity and stability to Member States' financial markets.

The ECB's Quantitative Easing: Early results and possible risks

08-12-2015

In early 2015, at a time when most indicators of actual and expected inflation in the euro area had drifted towards historic lows, the European Central Bank (ECB) announced that it would launch a new asset purchase programme, which would be similar in many respects to the 'Quantitative Easing' (QE) programmes launched earlier by the United States Federal Reserve System, the Bank of England and the Bank of Japan. Researchers have published extensively on issues relating to the programme. On one ...

In early 2015, at a time when most indicators of actual and expected inflation in the euro area had drifted towards historic lows, the European Central Bank (ECB) announced that it would launch a new asset purchase programme, which would be similar in many respects to the 'Quantitative Easing' (QE) programmes launched earlier by the United States Federal Reserve System, the Bank of England and the Bank of Japan. Researchers have published extensively on issues relating to the programme. On one hand, empirical evidence from previous QE programmes (in the United States, the United Kingdom and Japan), shows that contrary to 'textbook' theory, the ECB's Public Sector Purchase Programme is expected to have negligible direct effect on the economy, contributing more through indirect effects. On the other hand, most researchers agree that the many concerns raised – e.g. there would be insufficient liquidity in the markets for the programme to have an impact; side effects would increase risks to financial stability or worsen income inequality; or that the risk-sharing arrangements could exert pressures on euro area solidarity in the event that a Member State declared bankruptcy − have not so far materialised. And, should they eventually come about, they would neither present significant risks to the euro area economy (in terms of direct losses or financial stability), nor create tensions between Member States, or between different population classes within a Member State. However, unwinding the current programme may present significant risks, so to avoid or at least mitigate them, careful planning of the timing and speed of the exit, complementing it with micro and macro-prudential supervision, as well as fiscal policy measures are all important. This briefing updates an earlier edition from the time of the ECB announcement.

Briefing for the Economic Dialogue and Exchange of Views with Vice-President Dombrovskis, Commissioner Moscovici and Commissioner Thyssen in ECON and EMPL on 1 December 2015

30-11-2015

Vice-President Dombrovskis, Commissioner Moscovici and Commissioner Thyssen are participating in an Economic Dialogue on the Annual Growth Survey, the Alert Mechanism Report and the draft Council Recommendations to the Euro Area. The Economic Governance Support Unit has prepared a briefing prior to this Economic Dialogue, which takes place on the basis of the economic governance framework, notably Article 2-ab of Regulation 1466/97 as amended in 2011.

Vice-President Dombrovskis, Commissioner Moscovici and Commissioner Thyssen are participating in an Economic Dialogue on the Annual Growth Survey, the Alert Mechanism Report and the draft Council Recommendations to the Euro Area. The Economic Governance Support Unit has prepared a briefing prior to this Economic Dialogue, which takes place on the basis of the economic governance framework, notably Article 2-ab of Regulation 1466/97 as amended in 2011.

Education policy in the Europe 2020 Strategy

25-11-2015

In 2010, the EU adopted its Europe 2020 strategy to put Member States back on track following the crisis shocks of 2008. Education was identified as one of five key areas needing specific measures to support economic recovery which could not be based exclusively on financial and budgetary reforms. The governance of the strategy rests on yearly cycles of reporting and feedback known as the European Semester. This makes it possible to monitor progress in individual Member States as a basis for recommendations ...

In 2010, the EU adopted its Europe 2020 strategy to put Member States back on track following the crisis shocks of 2008. Education was identified as one of five key areas needing specific measures to support economic recovery which could not be based exclusively on financial and budgetary reforms. The governance of the strategy rests on yearly cycles of reporting and feedback known as the European Semester. This makes it possible to monitor progress in individual Member States as a basis for recommendations from the European Commission. Supplementary thematic coordination involves both political leaders and experts in the field. Coordinated by the Council of the European Union, the mechanism is referred to as the open method of coordination. Member States are on their way towards meeting the Europe 2020 education targets: lowering the number of early school leavers to less than 10% and ensuring that at least 40% of 30-34 year olds have completеd tertiary education. However, EU citizens are not yet benefitting evenly from the positive outcomes. A closer look reveals that some regions and segments of the population fare less well than others. At the same time, employment rates have worsened in spite of improvements in the general level of education. The European Parliament has expressed its stance on these issues, indicating possible ways forward.

The minimum wage: A motor for growth or a brake on the economy?

23-09-2015

Setting minimum wages are a direct way for governments to influence wage levels. Even though they are one of the most analysed and debated topics in economics, their impact on (un-)employment, growth and poverty remains ambiguous. For some experts, the rise of minimum wages will lead to job losses, as it increases the cost of labour. Others argue that minimum wages not only prevent the creation of a 'working poor' class, but create jobs by increasing employee purchasing power. The empirical evidence ...

Setting minimum wages are a direct way for governments to influence wage levels. Even though they are one of the most analysed and debated topics in economics, their impact on (un-)employment, growth and poverty remains ambiguous. For some experts, the rise of minimum wages will lead to job losses, as it increases the cost of labour. Others argue that minimum wages not only prevent the creation of a 'working poor' class, but create jobs by increasing employee purchasing power. The empirical evidence from OECD countries does not provide a clear answer. Over recent years, the focus of the debate has switched from the macro-economic effects to the social dimension of minimum wages. A statutory minimum wage is increasingly considered a useful tool to ensure fair wages and social inclusion. The international financial crisis widened the gap on minimum wage levels between many Member States. At the same time, it gave new momentum to the debate on 'just' minimum wages, low wage immigration and a harmonised minimum wage rate for all Member States. The idea of combining minimum wages with fiscal policy measures such as tax relief, earned income tax credits or additional income support provisions to increase low paid employees' incomes is a subject for further discussion. The European Parliament (EP) has adopted several resolutions against 'in work poverty' and social exclusion over recent years. The minimum wage is increasingly considered to be a tool which ensures fair wages and social inclusion.

The ECB and the financial crisis: Rigid theory vs a pragmatic approach

16-07-2015

The European Central Bank's (ECB) main objective is stable inflation in the Economic and Monetary Union (EMU). During the financial crisis, the ECB decided to face the economic slump by, amongst other actions, increasing and then decreasing interest rates and the money supply. In addition, it launched a quantitative easing (QE) programme which aims to stabilise some Member State economies. The ECB's monetary decisions evoked mixed reactions in the euro area and triggered a debate on the relevance ...

The European Central Bank's (ECB) main objective is stable inflation in the Economic and Monetary Union (EMU). During the financial crisis, the ECB decided to face the economic slump by, amongst other actions, increasing and then decreasing interest rates and the money supply. In addition, it launched a quantitative easing (QE) programme which aims to stabilise some Member State economies. The ECB's monetary decisions evoked mixed reactions in the euro area and triggered a debate on the relevance of price stability, austerity and deficit spending. The ECB's monetary policy is broadly in line with Monetarist economic theory, according to which, changes in money supply are the main determining factor for business fluctuation – in both a positive and a negative sense. During the crisis, however, the very different Keynesian economic model – notably increasing public spending and fiscal policy measures to stimulate the economy – experienced a revival. Beyond the debate on the right theories and their practical application in combating economic downturn, the ECB demonstrated more pragmatism than before the crisis by, for example, adjusting and expanding its toolkit. The ECB, along with some experts, argue that only the combination of monetary and fiscal measures can end deflation and recession in the EMU.

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