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61. A conceptual framework for the identification and governance of European public goods

Author:
Gregory Claeys and Armin Steinbach
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The challenging current policy environment has raised the question of which policy decisions should be taken at national level and which at European Union level. As a general rule, the EU should be responsible only for the provision of European public goods (EPGs), while countries are better placed to provide national public goods. However, in practice, the situation is rarely that simple. We offer a framework for identification of EPGs with three main insights. First, a decision to provide a public good at national level, EU level or a combination of both depends on the degree of heterogeneity of preferences across countries and the efficiency case for EU-level provision. When preferences vary and the efficiency case is weak, goods should be provided at national level. When preferences are similar and the efficiency case is strong, goods should be provided at the EU level. When preferences differ but there is a strong efficiency case, a trade-off arises. Second, institutional and legal instruments exist already to manage this trade-off. These include: competence transfers, decision-making modalities, variable participation of countries, centralisation of delivery and funding, and compensating negatively affected countries to achieve greater alignment of preferences. Third, both the efficiency case for EPGs and the distribution of preferences over their provision may change over time. This could be because the world around the EU changes (for example, giving greater weight to an efficiency case, eg in areas related to defence) or because preferences change, for example, as result of a pandemic, or because a particular institutional or compensation practice convinces dissenters that they can be better off inside than outside a multi-country arrangement governing the provision of a public good. An implication is that the question ‘should public goods be provided at the national or European level?’ may be the wrong question to ask. The right question is how to find institutional arrangements for public-good provision, to maximise the benefits of public goods for EU members.
Topic:
Governance, European Union, Institutions, and Public Goods
Political Geography:
Europe

62. Navigating the treacherous political economy of structural reform

Author:
Davide Furceri, Jonathan Ostry, and Chris Papageorgiou
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
We examine the economic and electoral effects of liberalisation measures using newly-constructed databases on structural economic reforms and the outcome of democratic elections since the 1970s. The data shows a remarkable slowdown in the pace of liberalisation in both advanced and emerging market and developing countries since the 1990s. A debate has emerged about the causes of this slowdown, including the possibility that reforms do not deliver the economic benefits that advocates, including the multilateral financial institutions, trumpeted. Some have pointed to the fact that the current and previous United States administrations have abandoned neoliberal policies in favour of more government intervention in the economy, and the effect has been globally contagious. Our empirical analysis suggests that the growth dividend from liberalisation is economically and statistically significant, but it emerges only slowly over time. Because of this delay, liberalising reforms are costly to democratic incumbents when they are implemented close to elections. Reforms may generate immediate concentrated losses, which elicit an electoral backlash, especially when the aggregate gains are only visible several years after the reform’s implementation. The electoral penalty is also sensitive to overall business-cycle conditions, being much larger when an economy is in recession. Electoral effects also differ depending on the type of reform. Notably, financial reforms generate more perceptible growth-equity trade-offs than real-economy reforms, especially when implemented during weak economic conditions. The political economy of reform is treacherous. To avoid adverse electoral effects, timing reform early in the electoral term and when business-cycle conditions are favourable is critical. So too is avoiding reforms that generate large distributional costs in the face of small aggregate gains (an adverse growth-equity trade-off). Focusing on these considerations is critical to reinvigorate support for structural reform.
Topic:
Economics, Political Economy, Reform, Elections, and Liberalization
Political Geography:
Global Focus

63. Instruments of economic security

Author:
Conor McCaffrey and Niclas Poitiers
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Geopolitical and economic developments, including Russia’s invasion of Ukraine and trade disruptions during the COVID-19 pandemic, have raised concerns about the European Union’s exposure to hostile countries. The challenge of improving European economic security (which we narrowly treat here as exposure to foreign trade or production shocks) has grown in importance, with various relevant policy measures introduced at EU level. Focusing in particular on the threat posed by economic coercion, this paper begins by assessing the nature of this threat, before outlining two lessons that can be drawn from two recent instances of this coercion in action: China’s actions against Lithuania and Australia respectively. First, while much of the policy debate has focused on imports, the threat to EU exporters should not be ignored. Second, while coercion may not cause any macroeconomically significant harm, this may mask severe impacts on the targeted industries, which should be considered in any policy responses. The EU has significantly added to its policy tools in this area, though some of the instruments introduced under the umbrella of economic security go beyond the definition we consider. An effective response should be built around: building a deeper understanding of the risks facing the EU; improving diversification of both exports and imports; using targeted industrial policy in the limited sectors where the risks warrant intervention; and managing and limiting the fallout of any shocks using ex-post instruments.
Topic:
European Union, Economic Policy, Economic Security, and Coercion
Political Geography:
Europe

64. Unpacking China’s industrial policy and its implications for Europe

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
China is often credited with a successful application of industrial policy. One important particularity of China’s industrial policy is that it aims at levelling the playing field between the state economy and the private economy in access to finance, yet within a framework of strategic goals. This aim is not relevant for market economies, such as those of the European Union, but only for those where state enterprises are clearly privileged. Notwithstanding the difficulties in making valid comparisons, our analysis of how China conducts industrial policy in a variety of sectors points to success in some sectors but not all. More importantly, productivity growth in China has already been declining for two decades. Given the very large resources that China has put into industrial policy, with subsidies being only one part, it is surprising that success is not more evident. This relates partly to factors including cronyism and regional protectionism. While the former might be less relevant for the EU given the different institutional background, the latter certainly is relevant since the EU faces the potential consequences of member country-level industrial policy for its single market. A lesson from China seems to come from the sectoral focus, with a long-term and economic-security mindset. The EU is far from this, but it is in the process of linking economic security to industrial policy. Finally, responding to China’s industrial policy involves diverse investigations and challenges in measuring subsidies accurately. Understanding China’s very diverse and complex approach to helping companies achieve the government’s industrial policy goals is crucial for anticipating the consequences of China’s actions. These could be positive, such as cheaper imports of green technology, or negative, such as Chinese overcapacity spilling over to the EU single market.
Topic:
Industrial Policy, Markets, European Union, and Economy
Political Geography:
China, Europe, and Asia

65. Using the financial system to enforce export controls

Author:
Benjamin Hilgenstock, Elina Ribakova, Guntram Wolff, and Anna Vlasyuk
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Russian imports of battlefield goods that are subject to export controls, including from Western producers, have surged since mid-2022 and reached levels close to those prior to Russia’s full-scale invasion of Ukraine. Russia thus continues to be able to acquire critical foreign components that it needs for its military industry. These imports occur via mainland China, Hong Kong, Turkey and the United Arab Emirates, while other countries including Armenia, Georgia, Kazakhstan and the Kyrgyz Republic have also seen massive increases in imports from the EU and other coalition countries that likely end up in Russia. The implementation and enforcement of export controls faces major challenges, which are multifaceted and centre around complex supply chains, lack of transparency in documentation and opaque financial structures. The issues are familiar from anti money laundering (AML) and countering financing of terrorism (CFT) frameworks, where much progress has been made in the last two decades. A similar approach could help in rendering export controls effective. We propose: First, financial institutions could be tasked to play a role in the monitoring of the trade in export-controlled goods and the blocking of illicit transactions, building on their experience with due diligence in financial transactions. Second, non-financial companies could learn from banks’ efforts in the AML/CFT sphere to implement proper due-diligence procedures and to ensure export controls compliance. Public-sector investigations and appropriate fines are critical to increase the incentives for firms to act. Technology sanctions are going to be part of the economic statecraft toolbox for the foreseeable future. The Russia case will test their effectiveness and credibility, or lack thereof.
Topic:
Sanctions, European Union, Exports, Trade, Imports, Financial Systems, and Russia-Ukraine War
Political Geography:
Russia and Europe

66. Economic arguments in favour of reducing copyright protection for generative AI inputs and outputs

Author:
Bertin Martens
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Generative artificial intelligence (GenAI) models have stirred considerable controversy about copyright protection for AI training inputs and model outputs. The European Union’s AI Act will require model developers to be transparent about their use of training inputs such as text, images and music. The EU Copyright Directive allows free text and data mining of these media inputs unless copyright holders have opted out and want license payments. The right to opt-out amounts to economically inefficient overprotection of copyright. Free use of media content for GenAI training does not affect media sales to consumers. Optouts only strengthen the bargaining position of copyright holders, who decide depending on their private interests. That generates windfall profits without any increase in consumer surplus or social welfare. The licensing of training inputs reduces the quantity of data and the quality of GenAI models, creates transaction costs and reduces competition between GenAI firms. This slows down GenAI-induced innovation in media products and production processes, and productivity gains in all service sectors that apply GenAI. Ultimately, it slows down economic growth compared to what it could be with competitive and high-quality GenAI. Bargaining over license pricing is arbitrary as there is no objective revenue benchmark to start from. Defenders of the moral right to remuneration argue that any arbitrary remuneration is better than no remuneration. But this private moral right comes at the expense of social welfare. The ongoing bargaining and court cases between media producers and GenAI developers risk entrenching this market failure in jurisprudence. Early regulatory intervention and elimination of opt-outs for GenAI training, or weakening them in AI Act implementation guidelines, would solve this. There is no need for copyright on GenAI outputs either. GenAI reduces the marginal cost of machine-production of media outputs to close to zero, on par with the marginal cost of reproduction. That eliminates incentives for piracy. Moreover, composite human-machine outputs benefit from a de-facto extension of copyright on the human component.
Topic:
Science and Technology, Intellectual Property/Copyright, European Union, Regulation, Economic Growth, and Artificial Intelligence
Political Geography:
Europe

67. The rocky road to EU accession for Western Balkan countries: obstacles and lessons from the Eastern Partnership

Author:
Armin Steinbach
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The Western Balkan countries and the countries of the Eastern Partnership are moving towards European Union accession at different speeds. We explore whether and how the variable speed towards EU accession can be traced to different legal regimes governing European integration: Stabilisation and Association Agreements (SAA) for the Western Balkan countries, and Deep and Comprehensive Free Trade Agreements (DCFTA) for the countries of the Eastern Partnership (EaP). We find that DCFTAs apply more lenient conditionality to intra-regional cooperation. They subject non-tariff barriers to a more explicit regime than the Western Balkan SAAs. The DCFTAs also offer a more rigid and comprehensive approach to the approximation of laws than the SAAs, and the DCFTAs are more inclusive with regard to the role of civil society. However, there is no indication that the differences in legal governance have translated into stronger economic performance in the EaP countries or greater integration with the EU, compared to the Western Balkans. The Western Balkan countries remain significantly more integrated than the EaP countries with the EU in trade terms, while convergence with the EU has been stagnating both for the Western Balkan and the EaP countries. Economic shortcomings in the Western Balkan still need to be addressed. Conditionality attached to both integration into the EU single market and EU funding should be nuanced; the eradication of non-tariff barriers should be prioritised both inter-regionally and intra-regionally between Western Balkan countries; the need for stronger EU investment in the region is reinforced by geopolitical concerns about Chinese investments coming without EU-type conditionality attached; and governance should give a stronger role to civil society. In order to address the shortcomings in SAAs, a pragmatic solution is to use the existing governance framework under the SAAs.
Topic:
Treaties and Agreements, European Union, Economy, Regional Integration, and Eastern Partnership
Political Geography:
Europe and Balkans

68. Incorporating the impact of social investments and reforms in the European Union’s new fiscal framework

Author:
Zsolt Darvas, Lennard Welslau, and Jeromin Zettelmeyer
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
The European Union’s new fiscal framework aims to incentivise public investment and reforms by offering the option to extend the four-year fiscal adjustment period to seven years, thereby lowering the average annual fiscal adjustment requirement. EU countries can propose investment and reforms in the context of their national medium-term fiscal structural plans. When they do, these investments and reforms can be expected to also inform the fiscal adjustment proposed by member states. Yet, the EU lacks an agreed methodology for deciding on the potential quantitative impact of investment and reforms on the fiscal adjustment required under the new rules. This paper first analyses the ‘investment friendliness’ of the new framework. Although the incentives offered for raising investment are powerful, the bar for extending the adjustment period mainly through higher investment is high, and the design of the new rules will make it hard to actually raise investment. We next propose an approach for quantifying the impact of investment and reform on debt sustainability in the context of the new framework, taking into account uncertainty about their implementation and their economic effects. Such a methodology would also help the European Commission evaluate the impacts of recently adopted measures, the impacts of which are not yet observable. Developing this methodology will require revisiting the current commonly agreed methodologies for medium- and long-term capital stock and total factor productivity projections. We illustrate the potential impact of investment on debt sustainability analyses through calculations on three social investment measures, that is, combinations of reform and public spending that aim to increase human capital and labour force participations. While the impact of individual reforms on fiscal adjustment needs is generally modest, the combined impact of several measures could be notable.
Topic:
Reform, European Union, Fiscal Policy, Public Investment, and Social Investment
Political Geography:
Europe

69. Exposure to generative artificial intelligence in the European labour market

Author:
Laura Nurski and Nina Ruer
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
We apply two sets of generative artificial intelligence (GenAI) occupational exposure scores – one task-based, one ability-based – to the European Labour Force Survey. While using different methodologies, our findings reveal consistent demographic patterns across the two approaches: jobs held by women, highly educated and younger workers are more exposed to GenAI technology in Europe. We also review the literature on the recent productivity impact of GenAI. Within the same occupations, less-experienced or less-skilled workers consistently get the largest productivity gains from GenAI support. We argue that a task-based analysis is more fruitful than an ability-based one, both for guiding GenAI adoption in organisations and their workplaces, and for assessing the employment and job quality impact on workers. Finally, we provide policy recommendations that can help workers (ie the labour supply) adjust to technological disruption, such as providing training and social safety nets. But we go further by also suggesting policy interventions that could redirect future labour demand towards better jobs, by promoting job redesign and organisational agility. Monitoring GenAI’s employment effects and researching the ‘jagged technological frontier’ is necessary to further build our understanding of the employment impact of this transformational technology.
Topic:
European Union, Artificial Intelligence, Labor Market, and Supply and Demand
Political Geography:
Europe

70. Global supply chains: lessons from a decade of disruption

Author:
Luca Léry Moffat and Niclas Poitiers
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper explores both the character and impact of three recent shocks to global supply chains: the COVID-19 pandemic, the Russian invasion of Ukraine and the US-China trade war. These were large shocks which have had significant impacts on domestic and international supply chains, but these impacts have differed in their longevity, economic impact and policy responses. We show that supply chains were remarkably resilient against shocks of such magnitude. However, this resilience was also achieved thanks to the equally remarkable size and scope of policy responses and global supply chain reorganisation. We recommend that pre-emptive policies may be justified to shield households and industry from future shocks. Given the entangled nature of these shocks and that their effects continue to reverberate, we emphasise the need for extensive future research to understand the nature of these shocks and the effectiveness of policy responses.
Topic:
Global Markets, Trade Wars, Trade, COVID-19, Supply Chains, and Russia-Ukraine War
Political Geography:
China, Global Focus, and United States of America