VOX, CEPR Policy Portal

Urgent reform of the EU resolution framework is needed

Mathias Dewatripont, Lucrezia Reichlin, André Sapir, 16 April 2021

The existing European resolution framework, an essential part of the European banking union, is still largely deficient. National resolution authorities often bypass the European framework, with the result that, since its creation in 2015, the Single Resolution Board has adopted only one resolution decision. This column argues that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and proposes a reform of both.

Brown assets might be the next subprime

Eric Jondeau, Benoit Mojon, Cyril Monnet, 16 April 2021

The momentum towards greening the economy implies transition risks that represent new threats to financial stability. The risk of a run on brown assets, similar to that seen during the subprime crisis, can have widespread destabilising effects. This column proposes a liquidity backstop with an access fee proportional to carbon emissions, and a borrowing rate independent of emissions. It argues that such a facility will help green the economy, re-establish production efficiency, and avoid highly inefficient runs. An orderly reallocation of capital to a greener economy can lift long-term growth and facilitate the post-Covid recovery.

Pandemics make us more averse to inequality

Miqdad Asaria, Joan Costa-Font, Frank Cowell, 15 April 2021

COVID-19 has not only impacted inequality, it has also affected preferences for inequality. This column examines inequality aversion in Italy, Germany, and the UK. Surveys taken during the early stages of the pandemic higher aversion to income inequality than to health inequality in all three countries, consistent with the findings of other studies conducted before COVID-19. Focusing on the UK, it also finds that people have become more averse to inequality since the onset of the pandemic, especially when it comes to health. This effect is stronger among those not directly affected by the COVID-19 pandemic.

Inflation in the aftermath of wars and pandemics

Kevin Daly, Rositsa D. Chankova, 15 April 2021

The economic consequences of Covid-19 are often compared to a war, prompting fears of rising inflation and high bond yields. However, historically, pandemics and wars have had diverging effects. This column uses data extending to the 1300s to compare inflation and government bond yield behaviour in the aftermath of the world’s 12 largest wars and pandemics. It shows that both inflation and bond yields typically rise in wartime but remain relatively stable during pandemics. Although every such event is unique, history suggests high inflation and bond yields are not a natural consequence of pandemics.

A solution to the mystery of excess trade balances

Gabriel Felbermayr, Yoto Yotov, 14 April 2021

Whether or not large bilateral trade imbalances are a signal of non-reciprocal (or ‘unfair’) trade costs has been the subject of debate for some time, and was brought to the fore during President Trump’s time in office. This column argues that if the trading partners’ average trade costs with the whole of the world are taken into account, then the ‘unfair trade’ argument does not hold up. Using standard gravity modeling, the authors find that up to 88% of the variance in bilateral balances can be explained without making any reference to asymmetries in bilateral trade costs.