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Banking Union: Towards new arrangements to finance banks under resolution?

16-07-2019

The recent case of Banco Popular has shown the importance of liquidity funding in the context of bank resolution. Ahead of the June Euro Summit, in a letter the President of the Euro group noted that in addition to the Single Resolution Fund (and its backstop) “work needs to continue on a possible framework for liquidity in resolution, including on the possible institutional framework”. This briefing (1) describes the existing arrangements in the Banking Union, (2) compares those arrangements with ...

The recent case of Banco Popular has shown the importance of liquidity funding in the context of bank resolution. Ahead of the June Euro Summit, in a letter the President of the Euro group noted that in addition to the Single Resolution Fund (and its backstop) “work needs to continue on a possible framework for liquidity in resolution, including on the possible institutional framework”. This briefing (1) describes the existing arrangements in the Banking Union, (2) compares those arrangements with the US and the UK regimes and (3) echoes ongoing reflections on possible new arrangements along the lines of the US and UK regimes, with a view to completing the Banking Union.

Single-limb collective action clauses: A short introduction

05-07-2019

Sovereign bonds, the most common form of sovereign debt, have specific characteristics. They are issued by national debt management offices on the primary market and subsequently traded on secondary markets. Loan agreements signed at the issuance of sovereign bonds on the primary market may include collective action clauses (CACs) aimed at making restructuring more orderly and predictable. CACs have been included in loan agreements and bond contracts since the 1990s. These clauses enable a 'supermajority ...

Sovereign bonds, the most common form of sovereign debt, have specific characteristics. They are issued by national debt management offices on the primary market and subsequently traded on secondary markets. Loan agreements signed at the issuance of sovereign bonds on the primary market may include collective action clauses (CACs) aimed at making restructuring more orderly and predictable. CACs have been included in loan agreements and bond contracts since the 1990s. These clauses enable a 'supermajority' of creditors to modify essential payment terms of the contract, thus overcoming the problem posed by holdout creditors. Indeed, while debt restructuring involves benefits for both debtor countries and their creditors, there are also incentives for both parties to delay the process. Certain creditors, for instance, are tempted to hold out, and are therefore referred to as holdout creditors. Their incentive for holding out is the chance that they might recover their investment either in full or in a higher amount than the debtor country has offered in the restructuring agreement. While a holdout can bring creditors great gains, it has significant negative consequences for debtor countries and, in the worst case, can jeopardise the restructuring process. CACs can have one or two 'limbs'. While the EU Member States that are in the euro area decided in 2011 to include two-limb CACs in sovereign debt issued after 2013, the Greek restructuring experience and recent New York court decisions relative to sovereign debt have shown that such CACs can protect sovereign debtors only up to a certain point. Therefore, in the context of the euro-area governance reform, the Eurogroup has proposed that euro-area leaders should work for the introduction of single-limb CACs by 2022, and included this commitment in the draft revised text of the European Stability Mechanism Treaty.

Multinational enterprises, value creation and taxation: Key issues and policy developments

03-07-2019

The substantial reduction in trade costs and the rapid technological advances characterising the global economy over the past three decades have allowed multinational enterprises (MNEs) to increasingly break up their supply chains and spread them across different countries. The principal implication of this change relates to the concept of value added and the way it is created and captured across MNE-controlled global value chains (GVCs). The dynamic nature of transfers within MNEs, the increasing ...

The substantial reduction in trade costs and the rapid technological advances characterising the global economy over the past three decades have allowed multinational enterprises (MNEs) to increasingly break up their supply chains and spread them across different countries. The principal implication of this change relates to the concept of value added and the way it is created and captured across MNE-controlled global value chains (GVCs). The dynamic nature of transfers within MNEs, the increasing role of services and intangible assets in manufacturing, and most critically the unfolding digital revolution have all intensified the mobility of value-generating factors within GVCs, and highlighted the difficulty of defining the exact location where value is generated. These developments have significant policy implications. One critical area is that of tax policy, where the challenges posed by the new economic landscape are numerous and multifaceted. On the one hand, governments seek to encourage trade and investment by MNEs by removing tax and regulatory barriers they face. Some governments go even further by resorting to harmful tax competition that drives corporate income taxes to the bottom. At the same time, many MNEs continue to employ enhanced tax arbitrage to minimise their tax obligations across jurisdictions; furthermore, business models are increasingly becoming borderless and highly mobile, and therefore difficult to tax. In view of these challenges, consensus is gradually emerging that tax systems need improved alignment to ensure that profits are taxed where the economic activities generating them are performed and where value is created. Yet, allocating jurisdiction to tax business profits in the context of MNE-controlled GVCs remains a highly complex process.

Towards unified representation for the euro area within the IMF

02-07-2019

Looking back on 20 years of the euro, it is widely acknowledged that it has proved successful as the common currency of the euro area, and that it has also developed into a vehicle for international trade, having become the second most widely used currency in the world. However, this growing international role is not reflected in the external representation of the euro in international financial fora, notably the International Monetary Fund (IMF). Over the years, various attempts have been made to ...

Looking back on 20 years of the euro, it is widely acknowledged that it has proved successful as the common currency of the euro area, and that it has also developed into a vehicle for international trade, having become the second most widely used currency in the world. However, this growing international role is not reflected in the external representation of the euro in international financial fora, notably the International Monetary Fund (IMF). Over the years, various attempts have been made to change this. The latest of these attempts came in the wake of the Five Presidents' Report of 2015, which subsequently led to a Commission proposal for a Council decision on unified representation of the euro area in the IMF. The proposal aims to secure representation of the euro area on the IMF's Executive Board through the creation of a single euro-area constituency, and by the Eurogroup in the remaining IMF bodies. Member States have shown reluctance to give up the current form of representation on the IMF Executive Board in favour of a unified euro-area constituency. Their objections are mainly geopolitical in nature. They tend to consider that their national interest is best served in the framework of the existing IMF governance structure. Although the proposal has been on Council's table since 2015, there has been no visible progress to date, with the 2025 implementation deadline proposed by the Commission now called into question.

Economic impacts of artificial intelligence (AI)

01-07-2019

Artificial intelligence plays an increasingly important role in our lives and economy and is already having an impact on our world in many different ways. Worldwide competition to reap its benefits is fierce, and global leaders – the US and Asia – have emerged on the scene. AI is seen by many as an engine of productivity and economic growth. It can increase the efficiency with which things are done and vastly improve the decision-making process by analysing large amounts of data. It can also spawn ...

Artificial intelligence plays an increasingly important role in our lives and economy and is already having an impact on our world in many different ways. Worldwide competition to reap its benefits is fierce, and global leaders – the US and Asia – have emerged on the scene. AI is seen by many as an engine of productivity and economic growth. It can increase the efficiency with which things are done and vastly improve the decision-making process by analysing large amounts of data. It can also spawn the creation of new products and services, markets and industries, thereby boosting consumer demand and generating new revenue streams. However, AI may also have a highly disruptive effect on the economy and society. Some warn that it could lead to the creation of super firms – hubs of wealth and knowledge – that could have detrimental effects on the wider economy. It may also widen the gap between developed and developing countries, and boost the need for workers with certain skills while rendering others redundant; this latter trend could have far-reaching consequences for the labour market. Experts also warn of its potential to increase inequality, push down wages and shrink the tax base. While these concerns remain valid, there is no consensus on whether and to what extent the related risks will materialise. They are not a given, and carefully designed policy would be able to foster the development of AI while keeping the negative effects in check. The EU has a potential to improve its standing in global competition and direct AI onto a path that benefits its economy and citizens. In order to achieve this, it first needs to agree a common strategy that would utilise its strengths and enable the pooling of Member States' resources in the most effective way.

EU policies – Delivering for citizens: Economic policy

28-06-2019

In the European Union (EU), although economic policy falls within the remit of each Member State, there is, nevertheless, multilateral coordination of economic policies between individual countries. The global financial crisis and the European sovereign debt crisis put this framework severely to the test. Partly as a result, recovery in the EU was slower than recovery in the United States, and was not achieved equally by all Member States. Furthermore, it has to a large extent been based on accommodative ...

In the European Union (EU), although economic policy falls within the remit of each Member State, there is, nevertheless, multilateral coordination of economic policies between individual countries. The global financial crisis and the European sovereign debt crisis put this framework severely to the test. Partly as a result, recovery in the EU was slower than recovery in the United States, and was not achieved equally by all Member States. Furthermore, it has to a large extent been based on accommodative fiscal and monetary policies that only partly hide underlying signs of fiscal or financial fragility in some countries. To remedy this, the European institutions began a twofold process in 2011: initiatives were taken to strengthen the current framework for economic governance and banking supervision in the euro area while, in parallel, discussions began on possible ways to reduce the economic divergences between Member States, provide incentives for risk reduction and risk-sharing, render the governance process more transparent and ensure democratic accountability. In this latter area, several initiatives – that did not require changes to the EU Treaties – were taken between 2015 and 2017. In summer 2017, discussions on deepening the policy framework for economic and monetary union (EMU) intensified. This process, which was advocated in the Five Presidents' Report (the presidents of the main EU institutions) and should be completed by 2025, is now being considered at Member State level. The current state of play points towards two main policy preferences, dividing Member States into two groups: those that prioritise risk-sharing measures (such as France), and those that argue instead for further risk-reduction initiatives (for example, Germany). This lack of consensus has so far meant that the European Council has not been able to reach a breakthrough. This is an update of an earlier briefing issued in advance of the 2019 European elections.

EU policies – Delivering for citizens: The fight against tax fraud

28-06-2019

Tax policy, and the fight against tax fraud, have gained particular exposure over the past five years as a result of the light shed by repeated tax leaks and the related journalistic investigations. This has added to the increasing lack of acceptance of damaging tax practices, especially since the recession and the resulting budget constraints. The fight against tax fraud aims at recovering revenue not paid to the public authorities. It also aims at ensuring that fraudsters do not have an advantage ...

Tax policy, and the fight against tax fraud, have gained particular exposure over the past five years as a result of the light shed by repeated tax leaks and the related journalistic investigations. This has added to the increasing lack of acceptance of damaging tax practices, especially since the recession and the resulting budget constraints. The fight against tax fraud aims at recovering revenue not paid to the public authorities. It also aims at ensuring that fraudsters do not have an advantage over compliant taxpayers, thus ensuring tax fairness between taxpayers. Unpaid taxes result in reduced resources for national and European Union (EU) budgets. Though the scale of unpaid taxes is by nature difficult to estimate, available assessments hint at large amounts of resources lost to public finances. Citizens' evaluation of the EU's current involvement in the fight against tax fraud has improved, but the majority of citizens in each Member State still share expectations for even more intensive involvement. Despite this, there is still a considerable gap between citizens' evaluations and expectations of EU involvement. There is still room for improvement in addressing the preferences and expectations of EU citizens. The fight against tax fraud is shared between Member States and the EU. Coming under tax policy, it has remained closely linked to Member State sovereignty, protected by the requirement for unanimity and a special legislative procedure which keeps tax matters firmly under the Council's control. This has been the case since the Union's beginnings, in spite of the proposed limited changes to the tax framework. As shortcomings have been more clearly identified, the discussion has been opened anew in speeches on the State of the Union delivered by the President of the European Commission before the European Parliament. Fighting tax fraud covers not only actions against illegal behaviour, but also the deterrence of fraud and measures to foster compliance. As a result it involves a large reboot of tax provisions, to upgrade them for the scale and features of tax fraud as it is and as it evolves. In spite of the notable deliveries during the 2014-2019 parliamentary term, there remains work ahead, namely because all provisions need to be implemented, enforced, monitored and, if need be, updated, to keep up with the versatility of tax fraud and the pace of digital evolution globally. This is an update of an earlier briefing issued in advance of the 2019 European elections.

Structural Budget Balances in EU Member States - June 2019

28-06-2019

Structural budget balances play an important role in the fiscal policy frameworks of the EU both as part of the application of the Stability and Growth Pact (SGP) and in the implementation of the balanced budget rule by the contracting parties of the intergovernmental Treaty on Stability, Coordination and Governance in the EMU (the fiscal section of the Treaty is called “Fiscal Compact”). This document provides a short overview of the concept and application of the structural balance rule(s) in ...

Structural budget balances play an important role in the fiscal policy frameworks of the EU both as part of the application of the Stability and Growth Pact (SGP) and in the implementation of the balanced budget rule by the contracting parties of the intergovernmental Treaty on Stability, Coordination and Governance in the EMU (the fiscal section of the Treaty is called “Fiscal Compact”). This document provides a short overview of the concept and application of the structural balance rule(s) in the EU. It will be regularly updated, in particular, the Annex that shows progress made (based on the latest Commission forecast) by Member States in reaching their structural budget commitments under the preventive arm of the SGP.

Public finances in Euro Area Member States: selected indicators - June 2019

28-06-2019

This document presents selected indicators on public finance for the Euro Area Member States and the Euro Area as a whole. For each indicator, it gives a short explanation and the employed sources. A final section provides a summary on how the sustainability of public finances is assessed by the European and other international institutions.

This document presents selected indicators on public finance for the Euro Area Member States and the Euro Area as a whole. For each indicator, it gives a short explanation and the employed sources. A final section provides a summary on how the sustainability of public finances is assessed by the European and other international institutions.

European Parliament's Banking Union reports in 2015 - 2018

26-06-2019

This briefing provides an overview of the European Parliament’s expectations and priorities for the banking union as set out in its annual Banking Union reports during the 8th legislative term. The main themes found in these reports over the last 4 years are highlighted in the first section of this briefing, while the second part turns to the ECB Banking Supervisor’s response to the 2017 Banking Union report, the most recent response available, as well as concrete actions expected from the SRB, who ...

This briefing provides an overview of the European Parliament’s expectations and priorities for the banking union as set out in its annual Banking Union reports during the 8th legislative term. The main themes found in these reports over the last 4 years are highlighted in the first section of this briefing, while the second part turns to the ECB Banking Supervisor’s response to the 2017 Banking Union report, the most recent response available, as well as concrete actions expected from the SRB, who as yet have not provided a formal response. The annex of the briefing includes a comparison of the positions taken by the EP in the annual reports in the following policy areas: banking developments and structures; institutional and organisational issues; regulatory issues; completing the banking unions; risk assessment; supervisory issues and priorities; crisis management; and policies related to Anti-Money-Laundering (AML)

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