EU policies

Giancarlo Corsetti, Aitor Erce, Timothy Uy, 13 February 2019

During the euro area crisis, management of official loan maturities emerged as a critical item in the discussion on which instruments and strategies are most effective at ensuring debt sustainability. Using a theoretical model calibrated to Portugal and cross-country data, this column shows that lengthening loan maturities and managing debt repayment flows has substantial effects on sustainability. It also unveils a key policy trade-off in official lending between increasing the amount of safe debt (immune from rollover risk) and strengthening the incentive to default in response to negative shocks to fundamentals.

Miguel Almunia, Pol Antràs, David Lopez Rodriguez, Eduardo Morales, 04 February 2019

The recommendation that firms reduce unit and labour costs to gain international competitiveness in response to domestic economic crises is based on the assumption that domestic and foreign supply decisions are not linked at the firm level. This column shows that in a monetary union, exports can have a significant impact in mitigating domestic slumps through the ‘venting-out’ mechanism. By reducing their use of flexible inputs relative to fixed, firms can achieve a short-term decrease in marginal costs to gain competitiveness abroad. This explains how an economic crisis and an export boom can take place at the same time.

Jan Stráský, Guillaume Claveres, 28 January 2019

Calls to complement national automatic stabilisers and the ongoing financial integration in the euro area with a common fiscal instrument have provoked a mixed response. This column, part of the VoxEU debate on euro area reform, uses a dynamic stochastic general equilibrium model of the euro area to show that fiscal risk sharing brings an additional layer of stabilisation compared to national stabilisers, particularly when monetary policy is constrained by the effective lower bound. It also argues that an unemployment reinsurance scheme could be designed in such a way that it would benefit all members of the currency area and would not lead to permanent transfers among countries.

Debora Revoltella, 22 January 2019

Europe is at risk of falling behind its global competitors. In a period of radical technological transformation, European firms are investing too little, with a gap both in tangible and intangible investment compared to the US. This column calls for a ‘retooling’ of Europe’s economy in relation to skills, innovation finance, the business environment, infrastructure, and deepening the Single Market.

Ralf Fendel, Nicola Mai, Oliver Mohr, 17 January 2019

The flattening of the US yield curve has left academics, central bankers and market commentators divided, with one camp interpreting it as a sign of impending recession (in line with historical patterns), and the other camp arguing that this time is different given unprecedented changes in monetary policy and other structural forces. This column argues that the ECB’s quantitative easing programme undermined the performance of term spreads as predictors of recessions. It suggests and tests a modified term spread and several other variables that are more successful at predicting recessions. 

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