Updating the single market: Will Europe’s digital strategy succeed?

The financial and economic crisis brought development banks back in the spotlight. They are seen as part of the economic policy toolkit for overcoming cyclical and structural difficulties in economies, complementing financial systems by improving their functioning and bolstering economic resilience. Interest in development banking to promote growth and boost investment has increased especially in Europe of late. Given the current economic environment and changes in Europe’s banking and financial markets, development banks are bound to continue playing an important role in the coming years. Rather than crisis relief, their focus is shifting (back) to supporting structural change in economies. Here, they can play a useful complementary role, focusing on areas of market failure but risks lie with potential “overburdening” of development banks and setting expectations too high for what they can achieve. [more]

The creation of a European Capital Markets Union (CMU) aims to establishing a single market for capital to complement bank financing. In this paper, we make a quantitative assessment of the European stock, bond and securitisation markets to look at the CMU’s potential. Our results reveal that liquidity and IPO trends in European stock markets are similar to those in the US. However, market integration has slowed down in recent years, which the CMU could counter by harmonising company, securities and insolvency laws. European corporate bond markets have become a notable alternative to bank lending but their investor base remains restricted, which the CMU should address. The securitisation market in Europe has performed well throughout the crises and its revival is a sine qua non for lending to regain traction, especially to SMEs. The CMU should thus target a less punitive regulatory treatment for this market segment. [more]

Reform of deposit guarantee schemes (DGS) in the EU has followed a gradual approach. The latest reform established common requirements on financing for national schemes but funds remain separate. The debate about the future of DGS has been revived recently, though. The five presidents' report on completing Europe's Economic and Monetary Union put DGS reform back into the larger reform discussion and identified deposit insurance as one of the areas of the Banking Union still pending completion. While joint deposit insurance may seem a rather long-term option, several short- and mid-term suggestions to complement DGS have been raised. They put an emphasis on adapting the current setup with a view to increase back-up financing capacity of individual schemes. Ideas include i) strengthening the network of DGS and possibilities for bilateral lending, ii) establishing a reinsurance scheme, iii) developing a common fiscal backstop to national DGS. [more]

Populist parties are gaining momentum in countries across Europe. Their profiles may be fundamentally different, but they are united in rejection of further steps towards European integration. Despite successes at national level, no noteworthy influence has been wielded by Eurosceptic parties at the European level to date. However, populist parties could shape European politics in the future by blocking progress in political areas that require broad consensus in particular. Established parties could then be forced to follow a course aligned more strongly with putative national interests. This could mean that reforms are not implemented on time or in full, thus preventing the required further development of the institutions of the eurozone. [more]

In the EU there is ongoing debate about so-called "social benefit tourism". Not only supporters of populist parties, but also broader sections of the population say that the current rules on free movement and coordination of social security systems virtually invite people from southern, central and eastern Europe to migrate into the social security systems of more prosperous partner countries and thus overstrain these systems. Reforms should, at the very least, aim at making the current law less contestable and easier for national authorities to apply. Much argues in favour of taking a generally more restrictive approach. The closer coordination of the social security systems sought in various quarters is not suitable as a driver of European integration. [more]

Money market funds are important financial players in Europe and the US, offering investors capital preservation and daily liquidity on the one hand, while providing short-term funding in money markets on the other. However, the European and US markets differ in their structures and economic functions: In Europe, where the market is split into two distinct segments, MMFs’ balance sheets reflect to a large degree intermediation within the financial sector and a strong investment focus on bank debt. In the US, by contrast, a homogeneous set of industry standards exists and MMFs’ business is geared more towards direct intermediation between non-financial sectors. [more]

With the independence referendum in Scotland and unofficial polls in Catalonia and Veneto, separatist aspirations in Europe were recently given a boost. In regions seeking greater self-determination or even full secession, not only emotional and cultural aspects play a role but also concrete financial motives. Nearly all the regions seeking greater autonomy are among the wealthiest in their respective countries and far outstrip the national average in terms of per capita income. Moreover, some of them are substantial net contributors in regional redistribution systems. [more]

The introduction of a common European unemployment insurance scheme would be a conceivable option to increase the eurozone's resistance to severe asymmetric shocks. This would provide relief in the short term to countries facing cyclically induced higher unemployment. In principle, such a solution could function without redistribution between countries, but its practical implementation would be a complex undertaking. One alternative proposal would be a type of insurance for "catastrophic" shocks that only provides financial support in the event of a very strong surge in unemployment. [more]

SMEs’ access to finance remains a pressing problem in many parts of the euro area as SMEs largely rely on bank loans for funding. Our findings show that it is mainly the banks’ own refinancing costs in capital markets and their risk perceptions regarding SMEs which give rise to constraints. Of the steps taken to spur bank lending, the ECB’s LTROs seem to have had limited success. Securitisation of SME loans on the other hand has the potential to bridge the gap between SMEs’ funding needs and the availability of bank loans. Public-sector and market-based initiatives to improve SME financing are of great importance as well: for the former, private-sector involvement is crucial; as for the latter, overall success has been mixed so far. [more]

The interest for higher democratic accountability in the EU is stronger than ever. Indeed, there is scope for action for stronger involvement of national legislatures at EU level. Within the time frame of the eighth legislative period of the European Parliament (2014-2019), an interinstitutional agreement is a viable option. This could lay down a working definition of subsidiarity, enhance interparliamentary cooperation, and structure the use of ‘yellow cards’. In the medium term, a stronger role for national parliaments would require outright treaty revision. [more]

The future of the British EU membership has become one of the most pressing concerns for the EU. The EU-British relationship has always been one of special character but a number of recent developments have led to a ‘Brexit’ gaining momentum. Only the UK itself will be able to rationalise the domestic debate on EU membership. Economically, Britain and the EU are inextricably linked. Realistic estimates predict losses in the range of 1 to 3% of British GDP in case of a Brexit. Likewise, the Single Market would shrink by 15%. [more]

Sub-sovereign bonds are a segment that has attracted little attention to date. Bonds are the dominant form of funding for Germany's Länder, though, and they also play an important role for the regions in Spain. While the Länder benefit from Germany’s excellent sovereign rating, only those Spanish regions not forced to request financial assistance from the central government at the height of the debt crisis have recently been able to obtain financing via the capital market. In France the issuance by the municipalities is likely to increase due to the newly established Agence France Locale. A local authority finance agency is also in the process of being introduced in the United Kingdom. The importance of the sub-sovereign bond market crucially depends on country-specific institutional arrangements. [more]