The world economy is at a critical point where 1) continuing economic uncertainty, 2) sustained economic imbalances, 3) re-emerging fragility in the financial sector and 4) an emerging divergence amongst major economies in the world on approaches to financial regulation all pose serious risks to achieving sustainable growth.
While on the one hand, some emerging economies face the danger of overheating and are having to confront massive capital inflows and raise interest rates much of the ‘old’ developed world remains under the shadow of anaemic growth, decimated public finances and high unemployment. Many low income countries are somewhere in between but remain prone to many risks. The world economy is unlikely to recover on a sustainable basis with just one engine of growth.
Investments that are growth-enhancing, that generate employment and that improve the sustainability of the economy are good and desirable. However, even before the crisis hit, the European Union suffered form a lack of optimal levels of investments in infrastructure, green energy and energy efficiency measures and small and medium sized enterprises. This was driven by a number of factors inherent to these kinds of desirable investments for example high upfront costs and long payoff periods in the case of infrastructure investments and a lack of policy certainty on carbon price for green investments. An additional problem was misallocation of resources by the financial sector because of excessive short-termism and crowding out by speculative investments.
The crisis exacerbated the paucity of investments flowing to these desirable categories. However, policy makers have been handed a unique opportunity to address many of these deficiencies for example through a more informed reform of the financial system and through the introduction of new and innovative sources of financing. This Policy Brief for the European Parliament identifies the main obstacles that impede desirable investments in the real econmomy and puts forward a set of concrete suggestions on how to tackle these and stimulate more investments in infrastructure, energy effeciency, green energy and SMEs.
The European Union is in a state of flux both on matters of policy and on decision making processes. The Lison Treaty, the Financial Crisis and the Sovereign Debt Crisis have been three major shocks to status quo and it is not yet completely clear what long-term impacts these three drivers of change might have on the European Union. Some trends, such as a drift from the Community method of decision-making towards intergovernmentalism are controversial. This Policy Brief for the European Parliament examines the drivers and direction of changes in the governance of the EU in some detail.
The Lisbon Treaty introduced statutory changes to the role and authority of various EU institutions and to decision-making processes in the EU. The ongoing financial and economic crisis, the biggest in a generation, underscored an unprecedented degree of interconnectivity between Member State economies and revealed serious gaps in economic governance in the EU. The impacts of these two developments on economic governance in the EU and the relative authority of various EU institutions and Member States are substantial and still evolving. However, some effects are already clear.
The EU is still in the midst of the most serious financial and economic crisis in a generation. It was in this context that the European Commission presented its ‘vision’ document in the form of the EU 2020 strategy that lays out its action plan for turning the EU into an economic dynamo. Two other related documents, the Monti report on the future of the Single Market and a Commission communication presenting 50 ideas on improving the functioning of the Single Market have also recently been put on the table all with the common objective of building a more dynamic European economy. This Policy Brief for the European Parliament looks into the three reports.
Amidst all the cacophony of buzzwords and the churning of papers, it is easy to lose the big picture. This brief steps back from the details of the almost 200 policy proposals and goals contained in the documents to highlight the key challenges and opportunities faced by the European Commission in fulfilling the mostly worthy goals put forward in the EU 2020. We conclude that a lack of political will shall hinder the implementation of proposals. A grand political bargain that makes EU citizens enthusiastic about the EU again may be possible but seems at the present time to be out of reach. In the absence of this and additional financial resources, the Commission should pare down its ambitions and prioritise the proposals that deliver the most bang for the buck.
The discussion on reform of the global monetary system is a central theme of the French G-20. A renewed growth of global imbalances, an increasing volatility of exchange rates, a proliferation of unilateral measures by countries to manage capital flows and exchange rates – part of the so called “currency wars”, and the continuing inefficient accumulation of foreign exchange reserves by many countries has set the context for this discussion. This Policy Brief for the European Parliament pins down the main elements of what a monetary system is, gives a brief history of what systems the world has seen in the recent past and then highlights the main problems faced by the current system.
Next we look at the various options for reform that are being considered for each of the main aspects of the monetary system namely 1) the anchor currency 2) the exchange rate system 3) the institutional structure and 4) rules of the game.
We conclude that any radical shift in the current regime does not seem to be politically feasible and that the case for the EU pushing for the Euro to become an anchor currency has not been made. There are a number of elements such as a more prominent role for SDRs, an improvement of the IMF and an agreement on principles for capital account and exchange management that are clearly both feasible and desirable.