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  • Author: Olivier Blanchard, Thomas Philippon, Jean Pisani-Ferry
  • Publication Date: 06-2020
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The measures that most governments took in response to the sudden collapse in economic activity during the COVID-19 lockdowns nearly exclusively focused on protecting vulnerable workers and firms. These measures included unemployment benefits, grants, transfers, loans at low rates, and tax deferrals. As lockdowns are lifted, governments must shift policies toward supporting the recovery and design measures that will limit the pain of adjustment while preserving productive jobs and firms. This Policy Brief explores how such measures can be designed, with particular emphasis on Europe and the United States. The authors propose a combination of unemployment benefits to help workers, wage subsidies and partially guaranteed loans to help firms, and debt restructuring procedures for small and medium-sized companies handicapped by excessive legacy debt from the crisis.
  • Topic: Debt, Economics, Government, Labor Issues, Unemployment, Coronavirus
  • Political Geography: Europe, North America, United States of America
  • Author: Gary Clyde Hufbauer , Zhiyaou (Lucy) Lu
  • Publication Date: 10-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In early 2019, several important members of the World Trade Organization (WTO) submitted noteworthy proposals in a realm of international commerce that has evolved faster than rules to govern it: e-commerce or digital trade. While countries agree on less controversial subjects like banning unsolicited commercial electronic messages, the three leading WTO members—China, the European Union, and the United States—have big differences in their approaches to more challenging issues: data flows, data localization, privacy invasions by data collectors, transfer of source code, imposition of customs duties and internet taxes, and internet censorship. Their differing viewpoints lead Hufbauer and Lu to conclude that the prospect of reaching a high-level WTO e-commerce agreement is not promising. To reach an agreement, either most of the contentious issues must be dropped or the number of participating countries must be sharply reduced. A WTO accord, even of low ambition, would have value if only to establish basic digital norms on matters such as banning unsolicited commercial messages and protecting online consumers from fraudulent practices. A more ambitious accord covering the controversial issues should be negotiated in bilateral and/or plurilateral/regional pacts rather than in the WTO.
  • Topic: Economics, World Trade Organization, Finance, Privacy, Data
  • Political Geography: China, Europe, Asia, North America, United States of America, European Union
  • Author: Chad P. Bown, Jennifer A. Hillman
  • Publication Date: 10-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The United States, the European Union, and Japan have begun a trilateral process to confront the Chinese economic model, including its use of industrial subsidies and deployment of state-owned enterprises. This paper seeks to identify the main areas of tension and to assess the legal-economic challenges to constructing new rules to address the underlying conflict. It first provides a brief history of subsidy disciplines in the General Agreement on Tariffs and Trade and the World Trade Organization (WTO) predating any concerns introduced by China. It then describes contemporary economic problems with China’s approach to subsidies, their impact, and the apparent ineffectiveness of the WTO’s Agreement on Subsidies and Countervailing Measures to address them. Finally, it calls for increased efforts to measure and pinpoint the source of the problems—in a manner analogous to how the Organization for Economic Cooperation and Development took on agricultural subsidies in the 1980s—before providing a legal-economic assessment of proposals for reforms to notifications, evidence, remedies, enforcement, and the definition of a subsidy.
  • Topic: Economics, World Trade Organization, Tariffs, Trade
  • Political Geography: Japan, Europe, Asia, North America, United States of America, European Union
  • Author: Alvaro Leandro, Jeromin Zettelmeyer
  • Publication Date: 08-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper explains and evaluates three proposals to create “safe assets” for the euro area based on sovereign bonds, in which sovereign risk is limited through diversification and some form of seniority. These assets would be held by banks and other financial institutions, replacing concentrated exposures to their own sovereigns. The paper focuses on three ideas: (1) to create multitranche “sovereign bond-backed securities” (SBBS), of which the senior tranche would constitute a safe asset; (2) to create a senior, publicly owned financial intermediary that would issue a bond backed by a diversified portfolio of sovereign loans (“E-bonds”); and (3) to issue sovereign bonds in several tranches and induce banks to hold a diversified pool of senior sovereign bonds (“multitranche national bond issuance”). Public attention (including public criticism) has so far focused on the first idea; the other two have not yet been seriously debated. The authors find that none of the competing proposals entirely dominates the others. SBBS do not deserve most of the criticism to which they have been subjected. At the same time, E-bonds and multitranche national bond issuance have several interesting features—including inducing fiscal discipline—and warrant further exploration.
  • Topic: Economics, Sovereign Wealth Funds, Banks, Risk
  • Political Geography: Europe, Global Focus
  • Author: Jacob Funk Kirkegaard
  • Publication Date: 09-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: For years China has been one of the world’s most rapidly growing sources of outward foreign direct investment. Since peaking in 2016, however, Chinese outward investments, primarily to the United States but also the European Union, have declined dramatically, especially in response to changes in China’s domestic rules on capital outflows and in the face of rising nationalism in the United States. Concerns about growing Chinese influence in other economies, the ascendant role of an authoritarian government in Beijing, and the possible security implications of Chinese dominance in the high-technology sector have put Chinese outward investments under intense international scrutiny. This Policy Brief analyzes the most recent trends in Chinese investments in the United States and the European Union and reviews recent political and regulatory changes both have adopted toward Chinese inward investments. It also explores the emerging transatlantic difference in the regulatory response to the Chinese information technology firm Huawei. Concerned about national security and as part of the ongoing broader trade friction with China, the United States has cracked down far harder on the company than the European Union.
  • Topic: Economics, International Trade and Finance, National Security, Foreign Direct Investment, Investment
  • Political Geography: China, Europe, Asia, North America, United States of America
  • Author: Maria C. Latorre, Zoryana Olekseyuk, Hidemichi Yonezawa, Sherman Robinson
  • Publication Date: 03-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines 12 economic simulation models that estimate the impact of Brexit (Britain’s exit from the European Union). Most of the studies find adverse effects for the United Kingdom (UK) and the EU-27. The UK’s GDP losses from a hard Brexit (reversion to World Trade Organization rules due to a lack of UK-EU agreement) range from –1.2 to –4.5 percent in most of the models analyzed. A soft Brexit (e.g., Norway arrangement, which seems in line with the nonbinding text of the political declaration of November 14, 2018, on the future EU-UK relationship) has about half the negative impact of a hard Brexit. Only two of the models derive gains for the UK after Brexit because they are based on unrealistic assumptions. The authors analyze more deeply a computable general equilibrium model that includes productivity and firm selection effects within manufacturing sectors and operations of foreign multinationals in services. Based on this latest model, they explain the likely economic impact of Brexit on a wide range of macroeconomic variables, namely GDP, wages, private consumption, capital remuneration, aggregate exports, aggregate imports, and the consumer price index.
  • Topic: Economics, World Trade Organization, Brexit, Multinational Corporations
  • Political Geography: Britain, Europe, European Union
  • Author: Jeromin Zettelmeyer
  • Publication Date: 03-2019
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: ermany’s new National Industrial Strategy 2030, unveiled by Economy Minister Peter Altmaier in February 2019, advocates an aggressive industrial policy. Although it stays clear of the virulent economic nationalism of the 1930s and the protectionism of President Donald Trump, its tone and much of its content are unmistakably nationalist. Zettelmeyer concludes that three of Altmaier’s five proposals—attempting to further raise the German share of manufacturing, restricting non-EU imports of intermediate goods, and promoting national champions in Germany and the European Union—are bad policies. The two remaining ideas—preventing some foreign takeovers and ramping up state support for certain technologies—are somewhat easier to justify, based on either market failures or the risk of technological dependence on foreign companies susceptible to political interference. But even in these areas, the specific policies proposed may well do more harm than good.
  • Topic: Economics, Nationalism, European Union, Donald Trump
  • Political Geography: Europe, Germany
  • Author: Felipe González, Nicolas Véron
  • Publication Date: 08-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: China's rapid rise and unique economic system and the increasingly aggressive and disruptive US trade policy are posing an unprecedented threat to the global rules-based trading and economic system. The European Union has critical interests at stake in the current escalation, even as it has so far been comparatively spared from US trade policy belligerence and China's reactions. In this context, the European Union should adopt an independent and proactive stance, building on recent efforts and going beyond them. The European Union, even more than the United States or China, has a strategic interest in the preservation of the global rules-based order embodied by the World Trade Organization (WTO). It must play a leading role in steering WTO reform and modernization, working closely with broadly aligned third countries such as Japan and other players. It should expand its outreach beyond its immediate negotiating counterparts in both the United States and China, and leading European officials at both the EU and member state levels should work at better understanding China. While strengthening its domestic policy instruments to address new challenges, such as the screening of foreign direct investment for security purposes, the European Union must also resist its own temptations of protectionism and economic nationalism. In support of these objectives, the European Union should prepare itself for difficult decisions, which may involve revising some of its current red lines in international trade negotiations. Conversely, the European Union should stand firm on principles such as refusing one-sided agreements and rejecting abusive recourse to national security arguments in trade policies. The European Parliament, in working with the European Council and the European Commission, will have a critical role to play in steering the European Union through these challenging times.
  • Topic: International Relations, Economics, Trade Wars, Trade Policy
  • Political Geography: China, Europe, Asia, North America, United States of America, European Union
  • Author: Alvaro Leandro, Jeromin Zettelmeyer
  • Publication Date: 08-2019
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper explains and evaluates three proposals to create “safe assets” for the euro area based on sovereign bonds, in which sovereign risk is limited through diversification and some form of seniority. These assets would be held by banks and other financial institutions, replacing concentrated exposures to their own sovereigns. The paper focuses on three ideas: (1) to create multitranche “sovereign bond-backed securities” (SBBS), of which the senior tranche would constitute a safe asset; (2) to create a senior, publicly owned financial intermediary that would issue a bond backed by a diversified portfolio of sovereign loans (“E-bonds”); and (3) to issue sovereign bonds in several tranches and induce banks to hold a diversified pool of senior sovereign bonds (“multitranche national bond issuance”). Public attention (including public criticism) has so far focused on the first idea; the other two have not yet been seriously debated. The authors find that none of the competing proposals entirely dominates the others. SBBS do not deserve most of the criticism to which they have been subjected. At the same time, E-bonds and multitranche national bond issuance have several interesting features—including inducing fiscal discipline—and warrant further exploration.
  • Topic: Economics, Regional Integration, Risk, Fiscal Policy
  • Political Geography: Europe
  • Author: Simeon Djankov
  • Publication Date: 09-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In the 15 years of President Vladimir Putin's rule, state control over economic activity in Russia has increased and is greater today than in the immediate postcommunist era. The concentration of political and economic power in Putin's hands has led to an increasingly assertive foreign policy, using energy as a diplomatic tool, while plentiful revenues from extractive industries have obfuscated the need for structural reforms at home. The West's 2014 sanctions on Russia have brought about economic stagnation, and with few visible means of growth, the economy is likely to continue to struggle. Watching Europe struggle with its own growth, in part because of deficiencies in its economic model, Russia will not be convinced to divert from state capitalism without evidence of a different, successful economic model. Changing course can only be pursued in the presence of political competition; the current political landscape does not allow for such competition to flourish
  • Topic: Economics, Politics
  • Political Geography: Russia, Europe
  • Author: Jacob Funk Kirkegaard
  • Publication Date: 12-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: After surviving its worst economic downturn since the Great Depression and the near collapse of its common currency, Europe is now engulfed by hundreds of thousands of desperate migrants and refugees from the Middle East and Africa. It needs new and permanent migration institutions and resources not only to accommodate the influx of refugees but also to set up a new border control system throughout the region. These demands pose a challenge for European policymaking as serious as the euro crisis of the last five years. Kirkegaard proposes a migration and mobility union, to be implemented gradually, with the goal of comprehensively reforming European migration policy.
  • Topic: Economics, Migration, Politics, Refugee Issues
  • Political Geography: Europe
  • Author: Angel Ubide
  • Publication Date: 12-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The rules and buffers created in the last few years to enable the euro area to withstand another sudden stop of credit and market-driven panic in one or more of its member states are welcome steps, but they are widely recognized as inadequate. Ubide proposes creating a system of stability bonds in the euro area, to be issued by a new European Debt Agency, to partially finance the debt of euro area countries—up to 25 percent of GDP. These stability bonds should be initially backed by tax revenues transferred from national treasuries, but ultimately by the creation of euro area–wide tax revenues, and used to fund the operations of national governments. They could also be used for euro area–wide fiscal stimulus, to complement the fiscal policies of member states. Such bonds would strengthen the euro area economic infrastructure, creating incentives for countries to reduce their deficits but not forcing them to do so when such actions would drive their economies further into a downturn. The bonds would permit the euro area to adopt a more flexible or expansionary fiscal policy during recessions.
  • Topic: Economics, International Trade and Finance, Monetary Policy, GDP
  • Political Geography: Europe
  • Author: Ángel Ubide
  • Publication Date: 02-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Inflation in the euro area is too low, just 0.9 percent year-on-year in December 2013, and inflation expectations, measured from inflation derivative contracts, have shifted lower, indicating that markets expect some small probability of deflation in 2014 and average inflation over the next five years in the 1.25 to 1.5 percent range. The European Central Bank (ECB), however, seems to be content with this outlook. Its current projections show a very slow economic recovery and inflation at just 1.3 percent in two years' time. Yet the ECB describes the risks to inflation as balanced. This puzzling assessment might be due to the fact that the ECB's definition of price stability is less precise than that employed by other central banks, and some ECB members may interpret the definition as setting a ceiling, rather than a target, for inflation at close to but below 2 percent. But if one considers the ECB's self-assessment of success since its creation—achieving 2 percent inflation on average—its current inflation forecast of 1.3 percent would fall short of achieving its price stability mandate.
  • Topic: Economics, International Trade and Finance, Markets, Monetary Policy
  • Political Geography: Europe
  • Author: Jacob Funk Kirkegaard
  • Publication Date: 01-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Mark Twain once wrote an essay about the difficulties of learning what he called "The Awful German Language." Similar barriers to comprehension seem to plague those trying to explain recent German economic performance. By most measures, Germany has the best functioning labor market among large economies in the West, with levels of employment reaching those in the United States at the end of the turbo-charged 1990s. A debate has stirred, however, about whether this success has come with a price—specifically, whether Germany's domestic structural reforms have lowered living standards for Germany's low income workers and worsened income inequality and whether Germany is fortuitously and perhaps selfishly riding a wave of strong foreign demand for German exports.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Markets, Labor Issues
  • Political Geography: United States, Europe, Germany
  • Author: Joseph E. Gagnon
  • Publication Date: 06-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: For the major advanced economies and the world as a whole, insufficient aggregate demand—that is, too little spending—impeded recovery from the Great Recession of 2008-09. By manipulating their currencies to boost their net exports, many countries made a bad situation worse for their trading partners, which saw demand shifted away. The world needs policies that increase total demand rather than policies that fight over the allocation of the existing amount of demand.
  • Topic: Economics, International Trade and Finance, International Monetary Fund
  • Political Geography: Europe, Asia, Switzerland, Singapore
  • Author: David G. Blanchflower, David N. F. Bell
  • Publication Date: 07-2014
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines the amount of slack in the UK labor market and finds the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment invalid. Without evidence to support its assessment of the output gap, the MPC reduces the level of unemployment based on its claim that long-term unemployment does not affect wages. The authors produce evidence to the contrary and present arguments on why the MPC's halving of the level of underemployment in the United Kingdom is inappropriate. Bell and Blanchflower set out arguments on why they believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.
  • Topic: Economics, Markets, Labor Issues
  • Political Geography: United Kingdom, Europe
  • Author: Arvind Subramanian, Kevin Stahler
  • Publication Date: 11-2014
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Prima facie, competitiveness adjustments in the eurozone, based on unit labor cost developments, appear sensible and in line with what the economic analyst might have predicted and the economic doctor might have ordered. But a broader and arguably better—Balassa-Samuelson-Penn (BSP)—framework for analyzing these adjustments paints a very different picture. Taking advantage of the newly released PPP-based estimates of the International Comparison Program (2011), we identify a causal BSP relationship. We apply this framework to computing more appropriate measures of real competitiveness changes in Europe and other advanced economies in the aftermath of the recent global crises. There has been a deterioration, not improvement, in competitiveness in the periphery countries between 2007 and 2013. Second, the pattern of adjustment within the eurozone has been dramatically perverse, with Germany having improved competitiveness by 9 percent and with Greece's having deteriorated by 9 percent. Third, real competitiveness changes are strongly correlated with nominal exchange rate changes, which suggests the importance of having a flexible (and preferably independent) currency for effecting external adjustments. Fourth, internal devaluation—defined as real competitiveness improvements in excess of nominal exchange rate changes—is possible but seems limited in scope and magnitude. Our results are robust to adjusting the BSP framework to take account of the special circumstances of countries experiencing unemployment. Even if we ignore the BSP effect, the broad pattern of limited and lopsided adjustment in the eurozone remains.
  • Topic: Economics, Industrial Policy, International Trade and Finance, Monetary Policy, Financial Crisis
  • Political Geography: Europe
  • Author: Anders Åslund
  • Publication Date: 11-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Ukraine has experienced a year of unprecedented political, economic, and military turmoil. The combination of Russian military aggression in the east and a legacy of destructive policies leading to pervasive corruption has plunged the country into an existential crisis. The West, meanwhile, has been largely paralyzed with uncertainty over how to assist Ukraine without reviving Cold War hostilities. Yet all is not lost for Ukraine. A tenuous ceasefire, along with the successful elections of President Petro Poroshenko in May and a new parliament in October offer an opportunity for economic reform. If the current ceasefire in the east holds, Ukraine has a great opportunity to break out of its vicious circle of economic underperformance. Yet, the window of opportunity is likely to be brief. The new government will have to act fast and hard on many fronts to succeed.
  • Topic: Conflict Resolution, Security, Economics, Politics
  • Political Geography: Russia, Europe, Ukraine
  • Author: Natalia Aivazova
  • Publication Date: 08-2013
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Five years since the global economic crisis began in 2008, many of the world's advanced economies are still struggling with sluggish growth and high levels of joblessness, especially among younger workers. In June 2013 the European Council expressed concern that “youth unemployment has reached unprecedented levels in several Member States” and called for “urgent action.” Much of the debate in Europe and the United States has focused on fiscal and monetary measures; while macroeconomic policy can address cyclical problems, a wide consensus recognizes the need to address structural challenges. One such challenge is a mismatch between the skills demanded by employers and those available among the population, especially younger workers. This mismatch can be addressed in part through the implementation of apprenticeship programs. The European Council recently concluded that “high quality apprenticeships and work-based learning will be promoted, notably through the European Alliance for Apprenticeships.” However, in the United States, where many are struggling to find jobs after graduating, apprenticeship programs hardly draw government and private-sector resources. Boosting apprenticeships could give both European and US workers the much-needed skills and competitive edge.
  • Topic: Economics, Markets, Labor Issues, Youth Culture
  • Political Geography: United States, Europe
  • Author: Jeromin Zettelmeyer, Christoph Trebesch, Mitu Gulati
  • Publication Date: 08-2013
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief— over 50 percent of 2012 GDP—with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents—particularly in its very generous treatment of holdout creditors—that are likely to make future debt restructurings in Europe more difficult.
  • Topic: Debt, Economics, Monetary Policy, Financial Crisis
  • Political Geography: Europe, Greece