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  • Author: Maria Demertzis, Nicola Viegi
  • Publication Date: 03-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: In both Europe and the United States, interest rates have been declining for more than fifteen years. For much of this period, real interest rates have been negative and they are expected to remain negative for at least another decade. The literature associates this decline in interest rates with a similarly protracted decline in productivity. But the decline in productivity appears paradoxical given major technological advances. The decline in the price of capital is underpinned by the factors that have caused a decline in demand for capital, as well as a relative increase in its supply. On the supply side, aging and an increase in overall macroeconomic risk since the financial crisis have both led to increased savings. On the demand side, the increase in the importance of intangible capital in production has reduced the demand for physical capital. Nevertheless, for the US, the literature has identified the increase in market concentration as the biggest factor responsible for the reduction in the overall demand for capital. Digital innovation has led to the creation of champion firms that have captured big market shares and have been able to prevent others from entering not only the US market, but markets globally. This has dampened investment. Europe is affected by US digital dominance, but other factors, including aging and increased risk, are more prominent in sustaining the downward pressure on interest rates. In particular, the lack of risk capital, in the context of capital markets, contributes to this downward pressure in the EU. As the knowledge economy relies increasingly on intangible capital, a bank-based system that requires collateral is not well suited to finance investments. A lack of suitable finance will remain an important factor in the downward pressure on interest rates. The structural factors behind the downward pressure on interest rates imply that macroeconomic policy will have a reduced role in managing aggregate demand. Monetary policy in the euro area will be more about preventing financial fragmentation and less about stimulating demand. Equally, fiscal policy will have more of a supporting rather than stimulating role. Tackling the structural decline in market dynamism and therefore in real rates will require structural policies to reduce market power globally and ensure the creation of capital markets in the EU.
  • Topic: Monetary Policy, Governance, European Union, Finance, Macroeconomics
  • Political Geography: Europe, North America, United States of America
  • Author: Gregory Claeys, Maria Demertzis
  • Publication Date: 01-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Productivity growth in Europe has been on a downward trend for several decades. Given that productivity growth is a crucial source of output growth, particularly in an aging society like the European Union, it is crucial to understand what is driving this slowdown and what the potential consequences are for our economic model and for citizens’ welfare. Some explanations for this trend are global in nature, but there are also significant differences in country structures in Europe that have led to different outcomes and that need to be accounted for before policy prescriptions can be made. The objective of MICROPROD, an EU-wide research project that runs until the end of 2021, is to contribute to this research strand by using data from various European countries to study the microeconomic mechanisms behind this macroeconomic phenomenon. In particular, the aim is to understand the challenges posed to Europe by the fourth industrial revolution and its impact on productivity in the context of globalisation and digitalisation, and to recommend policies to address these challenges. MICROPROD researchers have so far delivered 20 papers on four broad issues relevant for today’s policy debates: the measurement and effects of intangible capital on productivity; the impact of globalisation, international trade and the integration of global value chains (GVCs) on productivity; factor allocation and allocative efficiency; and finally the social consequences of the two structural shocks Europe has faced in the last two decades: globalisation and technological progress. This Policy Contribution reviews the main conclusions of these 20 MICROPROD papers and how they inform policy debates. However, the mid-point of the three-year MICROPROD project also coincided with the start of the COVID-19 crisis, which might have accelerated some trends or possibly reversed others. We therefore discuss how some of the messages of MICROPROD research may contribute to our understanding of the current crisis and its aftermath.
  • Topic: Globalization, Governance, European Union, Macroeconomics, Productivity, Digitalization
  • Political Geography: Europe
  • Author: Zsolt Darvas
  • Publication Date: 01-2021
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The estimation of payments from the European Union’s COVID-19 economic recovery fund, Next Generation EU (NGEU), to each EU country in 2021-2026 involves uncertainties, yet the overall magnitudes can be estimated with a reasonable degree of precision. In contrast, estimating member states’ contributions to the repayment of EU debt (which will be issued to finance NGEU spending) is burdened with enormous difficulties, primarily related to the uncertainty of gross national income projections up to 2058. Some numerical scenarios can be put forward to illustrate the difficulties in estimating the amounts of such future contributions.
  • Topic: Economics, Governance, European Union, Macroeconomics, COVID-19
  • Political Geography: Europe
  • Author: Marek Dabrowski, Marta Dominguez-Jimenez, Georg Zachmann
  • Publication Date: 06-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: Since the Euromaidan protests (2013-2014), Ukraine has had two presidents and four governments. In a difficult environment of external aggression, they have initiated various reforms aimed at bringing the country closer to the European Union and boosting growth. Progress has been partial and relies on international backing, with limited domestic appetite for reform.
  • Topic: Corruption, Privatization, Foreign Aid, Governance, Reform, European Union, Finance, Macroeconomics
  • Political Geography: Europe, Ukraine
  • Author: Maria Demertzis, Marta Dominguez-Jimenez, Annamaria Lusardi
  • Publication Date: 07-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The concept of household financial fragility emerged in the United States after the 2007-2008 financial crisis. It grew out of the need to understand whether households’ lack of capacity to face shocks could itself become a source of financial instability.
  • Topic: Governance, European Union, Finance, Macroeconomics, COVID-19
  • Political Geography: Europe
  • Author: Maria Demertzis, André Sapir, Simone Tagliapietra, Guntram B. Wolff
  • Publication Date: 03-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: 'Whatever it takes' needs to be the motto to preserve lives and reduce the impact on the economy of the epidemic.
  • Topic: Governance, Economy, Central Bank, Macroeconomics, COVID-19
  • Political Geography: Europe
  • Author: Rebecca Christie, Thomas Wieser
  • Publication Date: 05-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: In the negotiations between the European Union and the United Kingdom over their future relationship, we see a high probability of a weak contractual outcome, given the dominance of politics over considerations of market efficiency.
  • Topic: Markets, Governance, Europe , Brexit, Negotiation, Macroeconomics
  • Political Geography: United Kingdom, Europe
  • Author: Gregory Claeys
  • Publication Date: 05-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: To keep the euro-area economy afloat, the European Central Bank has put in place a large number of measures since the beginning of the COVID-19 crisis. This response has triggered fears of a future increase in inflation. However, the ECB's new measures and the resulting increase in the size of its balance sheet, even if it were to be permanent, should not restrict its ability to achieve its price-stability mandate, within its legal obligations.
  • Topic: Governance, Central Bank, Macroeconomics, Judiciary, COVID-19
  • Political Geography: Europe
  • Author: Alienor Cameron, Gregory Claeys, Catarina Midoes, Simone Tagliapietra
  • Publication Date: 02-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: On 14 January 2020, the European Commission published its proposal for a Just Transition Mechanism, intended to provide support to territories facing serious socioeconomic challenges related to the transition towards climate neutrality. This brief provides an overview and a critical assessment of the first pillar of this Mechanism, the Just Transition Fund (JTF).
  • Topic: Climate Change, Governance, Budget, European Union, Macroeconomics, Renewable Energy, Transition
  • Political Geography: Europe
  • Author: Zsolt Darvas, Marta Dominguez-Jimenez, Guntram B. Wolff
  • Publication Date: 02-2020
  • Content Type: Policy Brief
  • Institution: Bruegel
  • Abstract: The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability, we highlight issues that deserve more attention.
  • Topic: Governance, Finance, Central Bank, Macroeconomics
  • Political Geography: Europe