Europe

One of the widely discussed patterns of the UK-referendum vote is its demographic distribution. Some surveys find that voters older than 65 were more than twice as likely to have opted for “leave” than those younger than 25 years.* Demographic differences with respect to perceptions of Europe are not unique to the UK. [more]

Following the UK referendum, Brexit will also leave traces on German industry. After all, 7.5% of all German exports went to the UK in 2015, making it Germany’s third most important export market after the United States and France. The automotive and pharmaceutical industries are likely to be hit the hardest by Brexit. This is because the UK accounts for 12.8% and 10.5%, respectively, of these two industries’ total exports. In addition, they both generally have an above-average export ratio. The UK referendum is likely to have an impact on individual companies’ investment decisions and German companies’ UK pricing structures in the short term. [more]

What this victory for the Leave campaign ends up meaning for the future of Britain is debatable. What is not in doubt is that Europe without its brightest star will be a darker place. Adding to the gloom is the fact this was avoidable. Britain voting to go it alone mirrors a wider distrust in the European project – a manifestation of its weak economic situation. [more]

After two years of recovery, European banks suffered a setback in the first quarter of 2016. Capital market revenues were hit by concerns about global economic growth and banks’ own business models. Cost cuts and a further decline in loan loss provisions helped only somewhat to smooth the fall in profitability. Still, net income was about the same as in Q1 2014, and progress continued in other areas. [more]

The Juncker Plan set out to boost investment in Europe and can show some progress so far. After operating for about a year, a total of EUR 12.8 bn financing of the European Fund for Strategic Investments (EFSI) has been approved by the European Investment Bank and the European Investment Fund. This is expected to trigger EUR 100 bn of total investment according to estimates by the institutions. The European Commission has already called for extension of EFSI beyond the initial three year period ideally increasing its scale and scope. However, considerations about EFSI’s future need to be based on thorough evaluation of effectiveness and demonstrated added value. After the first year, there is -quite naturally- more information on activity than evidence on impact. To that effect, continuous monitoring and mid-term stock-taking are key to inform the debate about EFSI's future. [more]

Since the ECB’s announcement to include investment-grade corporate bonds in its QE programme (CSPP), corporate bond issuance has surged in the euro area. However, even though this is a boon for issuers, benefits for the real economy may be quite limited. The value added for SMEs is hard to see, and funds raised will most likely be used predominantly for refinancing of existing debt and for stock buybacks instead of new investments. Moreover, potential side effects of the corporate bond programme such as inefficiencies in the pricing of risks and deterioration in liquidity could increase the distortions in bond markets. [more]

Over the past century central banks have become the guardians of our economic and financial security. The Bundesbank and Federal Reserve are respected for achieving monetary stability, often in the face of political opposition. But central bankers can also lose the plot, usually by following the economic dogma of the day. When they do, their mistakes can be catastrophic.
Today the behaviour of the European Central Bank suggests that it too has gone awry. After seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone. [more]

Fiscal councils can improve the sustainability of public finances. They can increase transparency and accountability of fiscal policymaking by providing unbiased information to the public and stakeholders in the budget process. The design of their mandates, independence, and their public role are key conditions determining effectiveness. The new European Advisory Fiscal Board (EAFB) can be a valuable addition but is unlikely to be a game changer. Far-reaching reforms on the Union’s fiscal framework remain contingent on political will. Independence is crucial for fiscal councils to have an impact. This holds for both the EAFB and national fiscal councils. In addition, cooperation between the new EAFB and national bodies is a necessary requirement for a “European System of Fiscal Boards” to work effectively. [more]

In September 2015, the European Commission set out its action plan to establish a Capital Markets Union in order to push for stronger and more integrated capital markets in the EU to better complement bank finance. Creating deeper and more liquid stock markets is crucial in this respect, and also a precondition for European financial centres to regain their position in a global context. Indeed, the total number of stock exchanges operating independently in the EU is astonishingly high, especially in eastern and south-eastern European countries. In addition, market capitalisation is highly concentrated in only a handful of exchanges, and in smaller markets also tends to be lower relative to economic size. [more]

With the Single Resolution Mechanism taking full effect in 2016, winding-up large European banks in distress has become a more realistic scenario than ever before. One of the key elements of such a resolution is the bail-in tool. It is supposed to ensure that for investors, higher returns also involve higher risk, thereby establishing greater discipline and differentiation in markets for bank debt. Indeed, our analysis shows that market participants see the new bail-in regime as credible, which is a necessary precondition for a successful application. Important issues that still remain are the market depth for bail-in instruments and legal clarity about bail-in hierarchies. In any case, banks’ funding costs are likely to rise as a result, especially in the medium term. [more]