European Union, 2012.

 

The Eastern Partnership (EaP) is a European Union initiative directed at six countries of Eastern Europe and the South Caucasus: Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine. The EaP was launched by 27 EU member states and the six partner countries at a summit in Prague on 7 May 2009. The initiative aims at tightening the relationship between the EU and the Eastern partners by deepening their political co-operation and economic integration. The EaP neither promises nor precludes the prospect of EU membership to the partner states. It offers deeper integration with the EU structures by encouraging and supporting them in their political, institutional and economic reforms based on EU standards, as well as facilitating trade and increasing mobility between the EU and the partner states.

Johannes HAHN and Laszlo ANDOR, European Commission, 2013

 

Social innovation is in the mouths of many today, at policy level and on the ground. It is not new as such: people have always tried to find new solutions for pressing social needs. But a number of factors have spurred its development recently.

 

There is, of course, a link with the current crisis and the severe employment and social consequences it has for many of Europe's citizens. On top of that, the ageing of Europe's population, fierce global competition and climate change became burning societal challenges. The sustainability and adequacy of Europe's health and social security systems as well as social policies in general is at stake. This means we need to have a fresh look at social, health and employment policies, but also at education, training and skills development, business support, industrial policy, urban development, etc., to ensure socially and environmentally sustainable growth, jobs and quality of life in Europe. 

 

Part of the current attractiveness of social innovation comes from the fact that it can serve as an umbrella concept for inventing and incubating solutions to all these challenges in a creative and positive way. And this is much needed in Europe today.

 

Social media have brought about fast changes in how people communicate with each other, but also in how they relate to the public sphere. Citizens and groups can act more quickly and directly, in a participative way. This is also a part of the explanation of why social innovation is gaining speed.

 

Today, there is no definite consensus about the term ‘social innovation’. There are a range of definitions and interpretations around, in which linguistic nuances and different social, economic, cultural and administrative traditions play a role. For our context, we define social innovations as innovations that are both social in their ends and in their means, remaining open to the territorial, cultural, etc. variations it might take. So, the social is both in the how, the process, and in the why, the social and societal goals you want to reach.

 

Social innovation is present in a whole range of policy initiatives of the European Commission: the European platform against poverty and social exclusion, the Innovation Union, the Social Business Initiative, the Employment and Social Investment packages, the Digital Agenda, the new industrial policy, the Innovation Partnership for Active and Healthy Ageing, and Cohesion Policy. 

 

Many social innovation projects received already Structural Fund support. For 2014-2020, social innovation has been explicitly integrated in the Structural Funds Regulations, offering further possibilities to Member States and regions to invest in social innovation both through the ERDF and the ESF. We hope this guide will offer inspiration to make it happen in practice.

Sinn, Hans-Werner, Oxford University Press, 2010

 

In Casino Capitalism, Hans-Werner Sinn examines the causes of the banking crisis, points out the flaws in the economic rescue packages, and presents a master plan for the reform of financial markets. Sinn argues that the crisis came about because limited liability induced both Wall Street and Main Street to gamble with real estate properties. He meticulously describes the process of lending to American homeowners and criticizes both the process of securitizing and selling mortgage claims to the world, as well as the poor job rating agencies did in providing transparency. He argues that the American Dream has ended because the world now realizes that this dream was built on loans that are never likely to be repaid. 

J. Pisani-Ferry, S. Jean, H. Hauschild, M. Kawai, H. Fan, and Y. Chul Park, AEF, 2013 

 

RISING STOCK MARKETS on both sides of the Atlantic and decreasing spreads on sovereign bonds in the euro area have rekindled hopes that the advanced economies could soon start contributing more robustly to global growth. Judged by the level of the output gaps as currently estimated, many advanced economies continue to produce significantly less than their potential.  demand shortfall is the remaining deleveraging  banks have to undergo. The financial crisis arguably  amount of leverage. Many households in the  that they could not refinance, and many more  has deterred consumption and housing investment.  debt approach unsafe levels and some  markets. For banks, regulatory requirements add to the private incentive to delever.

Minsky Hyman, Book, 2008. 

 

In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today. He explains why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers:

- The natural inclination of complex, capitalist economies toward instability.

- Booms and busts as unavoidable results of high-risk lending practices.

- “Speculative finance” and its effect on investment and asset prices.

- Government's role in bolstering consumption during times of high unemployment.

- The need to increase Federal Reserve oversight of banks.

 Go to article

Gros, Daniel, GEBI, 2010.

 

Key point:

• Key to debate is difference between private and social cost of capital (for banks).

• Private sector perceives high cost, partially because of micro perspective, but mostly because of tax considerations.

• (Excess) Social cost of capital = 0

• => Cost of Basle III = zero!

 

Social cost of capital for banks:

• Does not involve use of real resources!

• Only difference between debt and equity financing is the payoff matrix (promised to investors).

• Given the asset side of a bank’s balance sheet the total payoff to allinvestors combined (and government) is the same 

whatever the debt/equity ratio (MM).Social versus private cost of capital:

• Bankers argue: if capital requirements go up perceived cost of capital goes up 

(because cost of equity unchanged) =>  interest margin up (economy down).

• Wrong: cost of equity (maybe even that of debt) must go down because banks become less risky.

• => even perceived cost of capital unchanged, except for tax considerations.

Why private cost of capital might change:

• With higher capital less likely that banks has to be rescued.

• If banks is rescued as going concern authorities overpay for equity (whose ‘market’ price incorporates likelihood of public guarantees.

• => with higher capital requirements banks lose valuable franchise

• => perceived private cost of capital might go up.

Gros Daniel,CEPS Policy Brief No. 194, 2009

 

Europeans have a tendency to call the financial crisis a US problem, or a crisis precipitated by the ‘Anglo-Saxon’ model. The data suggest

otherwise. Moreover, the corporate sector in Europe has a much lower capacity to finance investment from internal sources of funds, which implies that a recovery of investment in Europe will be much more difficult than in the US, as long as the banking sector remains weakened by excessive levels of leverage. The cost of the crisis could thus be much larger in Europe than in the US.

The literature on financial crises has demonstrated that almost all major crises have been preceded by a combination of two phenomena: an increase in leverage (or credit expansion) and an unusual increase in asset prices. 1 These two alarm signals could be observed not only in the US but in Europe as well. Yet, unfortunately, they were largely ignored on both sides of the Atlantic. 2 And, contrary to a widespread perception, Europe accumulated more imbalances than the US. Moreover, the higher reliance of the European corporate sector on external financing suggests that it will take longer for Europe to recover. It is instructive to look more closely at both indicators of looming financial instability separately: a) credit expansion (or leverage) and b) the asset price bubble.

Paul De Grauwe, University of Leuven, 2009.

 

The sharp fall in economic activity in the world is the result of an interaction between stock and flow deflation spirals. These deflationary spirals have the same origin, i.e. a collective movement of fear and risk aversion (animal spirits). These lead economic agents (savers, firms and banks) to take actions that create negative externalities making these actions self-defeating. Individuals (savers, firms, banks) are unable to internalize these externalities because collective action is costly. We use a simple IS-LM model to analyze the interactions between these different deflationary spirals. We find that it is the interaction between the flow and stock spirals that create an unstable economy. The banking crisis is at the center of this vicious downward spiral. In order to solve the coordination failure implicit in the deflationary spirals, the government must take action. We describe the nature of the collective action by the government. Key is the resolution of the banking crisis, without which the economy cannot be stabilized. Modern macroeconomic models based on the paradigm of the rational (representative) agent who understands the complexities of the world, has become a misleading tool of analysis. The problems relating to coordination failures and movements of collective fears that are at the core of the present macroeconomic reality play no role in these models. It will not be surprising that these macroeconomic models have not informed us correctly about the nature of the economic crisis. 

Costello Declan, Alexandr Hobza, Gert Jan Koopman, Kieran Mc Morrow , Gilles Mourre and István P. Székely,Voxeu.org, 2009.

 

The crisis may reduce the EU’s potential output by 5% of GDP or more. This column warns that the crisis may permanently reduce the EU’s supply-side capacity unless policymakers respond with reforms. It outlines measures to address the crisis and address long-run concerns about demographic shifts, public finances, and climate change.

 

- Expect significant losses in potential output over the long run.

- What can we learn from past crises?

- Five priority areas to boost potential output, prepare for ageing, ensure public finance sustainability, and address climate change.

- Concluding remarks.

Chmelar. Ales, ECRI 2013. 

 

The fall in economic output all over Europe that is linked to the economic and sovereign debt crisis since 2008 has had important consequences for household liabilities. Major growth in demand and supply for household credit products has generated an increase in household debt, which contributed to growth rates during the pre-crisis period but – in some countries – became household-debt overhangs and helped inflate asset bubbles. In the run-up to the crisis, long-term economic lessons and theories were often overlooked and signs that the economic situation could worsen were ignored. Although not at the core of the crisis, household debt had important consequences for macroeconomic stability, robustness of growth and the depth of recessions. The last ten years in Europe have demonstrated the typical final stage of a household debt cycle: rapid increase and abrupt retrenchment. Widely varying outcomes across Europe enable us to consider the causes of the rapid growth in household debt and draw theoretical lessons that can help policy-makers and academics devise a coherent regulatory response to avoid extremes of the debt cycle in future.

Borio C. and Philip Lowe, BIS Working Papers, 2002.

 

This paper argues that financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain these imbalances. While identifying financial imbalances ex ante can be difficult, this paper presents empirical evidence that it is not impossible. In particular, sustained rapid credit growth combined with large increases in asset prices appears to increase the probability of an episode of financial instability. The paper also argues that while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability.

We test the performance of a host of real and financial variables as early warning indicators for costly aggregate asset price boom/bust cycles, using data for 18 OECD countries between 1970 and 2007.

A signalling approach is used to predict asset price booms that have relatively serious real economy consequences. We use a loss function to rank the tested indicators given policy makers’ relative preferences with respect to missed crises and false alarms. The paper analyzes the suitability of various indicators as well as the relative performance of financial versus real, global versus domestic and money versus credit based liquidity indicators.

We find that global measures of liquidity are among the best performing indicators and display forecasting records, which provide useful information for policy makers interested in timely reactions to growing financial imbalances, as long as aversion against type I and type II errors is not too unbalanced. Furthermore, we explore out-of-sample whether the most recent wave of asset price booms (2005-2007) would be predicted to be followed by a serious economic downturn.

 

The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role the dollar as the dominant international money and national money cannot be easily reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and inflation and maintaining the international public good of a stable money. To strengthen the IMS, China has advocated the revitalization of the Special Drawing Rights (SDRs). But SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration to countries’ financing needs; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a full-fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and coordination of monetary policies objectives and at expense of the maintenance of the international public good. We also discuss structural changes that would make SDRs converge to SBMs”.

Ramón Adalid and Carsten Detken, European Central Bank, 2007.

 

We provide systematic evidence for the association of liquidity shocks and aggregate asset prices during mechanically identified asset price boom/bust episodes for 18 OECD countries since the 1970s, while taking care of the endogeneity of money and credit. Our derivation of

liquidity shocks allows for frequent shifts in velocity as they are derived as structural shocks from VARs in growth rates. Residential property price developments and money growth shocks accumulated over the boom periods are able to well explain the depth of post-boom recessions. We further suggest that liquidity shocks are a driving factor for real estate prices during boom episodes. During normal times however, the relative predictive power of liquidity shocks seems to shift from asset price inflation to consumer price inflation. The results only hold for broad money growth based liquidity shocks and not for private credit growth shocks.

World Bank, 2013

 

OECD, 2013

 

While still disappointing, the global economy is moving forward, and it is doing so at multiple speeds.

These multiple speeds reflect different paths towards self-sustained growth, with each path carrying its own mix of risks.

In the United States, large imbalances had built up prior to the crisis and eventually erupted, but the economy has undergone significant adjustment, which is beginning to bear fruit. The combination of a repaired financial system and a revival in confidence is driving growth. Private sector demand is stabilising as household deleveraging is far advanced, house prices are rebounding and wealth accumulation is supporting consumption. Employment is growing, adding to confidence. Fiscal policy should reduce the effects of excessive tightening coming from across-the-board sequestration, by refocusing or limiting the cuts in the current year, while ensuring a credible medium-term consolidation path. Monetary policy should remain accommodative but vigilant, as declining benefits of further quantitative easing are likely at some point to be outweighed by increasing costs in terms of misallocation and excessive risk-taking.

In Japan, imbalances had been building up long before the crisis, but a radically new policy is being implemented only now. High debt,weak potential growth and persistent deflation are being tackled by a policy mix which includes aggressive monetary policy and the promise of decisive fiscal consolidation, as well as the implementation of structural reforms. While the policy shift is welcome, it will take a delicate balancing act to boost growth in a more sustainable way, raise inflationary expectations to beat deflation and secure the sustainability of a huge public debt.

In the euro area, still-rising unemployment is the most pressing challenge for policy makers. Protracted weakness could evolve into stagnation with negative implications for the global economy. Such a perspective would resonate negatively with large persistent risks of adverse interactions between weakly capitalised banks, public debt financing requirements and exit risks. The more positive news is that in many euro area countries adjustment, both fiscal and structural, has been going on for several years. Government debt ratios should start to decline soon with positive implications for market risk assessments. And once debt ratios begin to decline, only modest additional fiscal tightening would be needed to bring them to safe levels over the medium term. The improvement in competitiveness in some countries also reflects structural efforts. However, reform fatigue is mounting as visible results in growth and jobs still fail to materialise, in part because reforms can take time to bring results but also due to the weak macroeconomic environment. Higher wages and product market liberalisation in surplus countries would provide a more symmetric and effective rebalancing, while supporting growth.

 

Monan, Z., 2013.

 

BEIJING – China’s economic growth model is running out of steam. According to the World Bank, in the 30 years after Deng Xiaoping initiated economic reform, investment accounted for 6-8 percentage points of the country’s 9.8% average annual economic growth rate, while improved productivity contributed only 2-4 percentage points. Faced with sluggish external demand, weak domestic consumption, rising labor costs, and low productivity, China depends excessively on investment to drive economic growth.

Although this model is unsustainable, China’s over-reliance on investment is showing no signs of waning. In fact, as China undergoes a process of capital deepening (increasing capital per worker), even more investment is needed to contribute to higher output and technological advancement in various sectors.

World economic outlook, International Monetary Fund, 2013.

 

What was until now a two-speed recovery, strong in emerging market and developing economies but weaker in advanced economies, is becoming a three-speed recovery. Emerging market and developing economies are still going strong, but in advanced economies, there appears to be a growing bifurcation between the United States on one hand and the euro area on the other.

 

This is reflected in our forecasts. Growth in emerging market and developing economies is forecast to reach 5.3 percent in 2013 and 5.7 percent in 2014. Growth in the United States is forecast to be 1.9 percent in 2013 and 3.0 percent in 2014. In contrast, growth in the euro area is forecast to be –0.3 percent in 2013 and 1.1 percent in 2014. The growth figure for the United States for 2013 may not seem very high, and indeed it is insufficient to make a large dent in the still-high unemployment rate. But it will be achieved in the face of a very strong, indeed overly strong, fiscal consolidation of about 1.8 percent of GDP. Underlying private demand is actually strong, spurred in part by the

anticipation of low policy rates under the Federal Reserve’s “forward guidance” and by pent-up demand for housing and durables.