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11. The value added of central bank digital currencies: a view from the euro area

Author:
Maria Demertzis and Catarina Martins
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Different jurisdictions have set out different reasons for creating central bank digital currencies (CBDCs). Some countries, particularly those with already-operational CBDCs for retail purposes, aim to to promote financial inclusion. But in countries where most citizens have access to financial services, central banks are interested in CBDCs as an aspect of the increasing digitalisation of finance. Central banks could also choose to use CBDCs to guarantee in full citizen’s holdings (currently, deposits in commercial bank are only partially guaranteed), but this would trigger major changes in the financial system in terms of the role of commercial banks in intermediation and the role of fiat money. So far, central banks have not opted to go this way. In the euro area, consumers have multiple payment options and a very efficient retail payments system. The currency enjoys high levels of trust and is not challenged by the emergence of private currencies, such as Bitcoin, or by the risk that cash, a monetary system’s anchor, will disappear. Therefore, creating a CBDC for retail purposes in the euro area offers little obvious value added, at least for the foreseeable future. However, there is a strong case for building a CBDC that banks could use for cross-border wholesale purposes (ie with other currencies). Wholesale CBDCs could revolutionise the way that cross-border, cross-currency payments are made for two reasons. Cross-border payments are currently slow and inefficient. Pilot projects have shown that wholesale payments with CBDCs can generate substantial time and cost savings. Any two central banks that have operational wholesale CBDCs could settle transactions between themselves. This would be very different from the current system, as most settlements today are done via the dollar (and then the euro) infrastructure and use correspondent banks. The euro area and the United States would have to consider carefully from a geopolitical perspective how wholesale CBDCs might affect their global economic standing. By developing a CBDC for wholesale purposes, the European Union would be able to contribute to developing the global standard.
Topic:
Monetary Policy, Governance, Regulation, Central Bank, Digital Currency, and Euro
Political Geography:
Europe

12. The longer-term fiscal challenges facing the European Union

Author:
Jeromin Zettelmeyer, Gregory Claeys, Zsolt Darvas, Lennard Welslau, and Stavros Zenios
Publication Date:
04-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The pandemic and subsequent price shocks triggered by Russia’s invasion of Ukraine, have increased longer-term fiscal pressures in the European Union through higher debt, higher expected real interest rates and higher public investment needs. This Policy Brief makes some simple quantitative assessments of those effects and discusses policy implications, with the following results. First, long-term increases in primary fiscal balances required to offset higher debt and higher expected real interest rates are in the range of 0.5 percent to 1.5 percent of GDP for most EU countries. However, because of pre-existing differences in fiscal space, not all countries will need to undertake that adjustment, while some countries may need to adjust by substantially more. Among the 21 EU countries for which we have data to undertake this analysis, 14 will need to adjust by more than they were planning to do by 2025. Second, the required additional fiscal adjustment looks manageable, although it is substantial in some cases. To achieve medium-term debt-reducing primary balances, several EU countries will need to raise primary balances by more than 2 percent of GDP above their 2025 target, but no country will need additional fiscal adjustment of more than 3 percent of GDP. Third, market data suggests that the future path of real interest rates is very uncertain. Compared to the period immediately preceding the pandemic, longer-term expected real interest rates have increased by about 2 percentage points but remain low on average, at about 1 percent in real terms. Future developments depend on whether the structural factors that led to low interest rates in the first place persist or unwind. While interest rates might decline again, fiscal policymakers should not make plans that assume such a decline. Fourth, public spending needs for additional defence and climate spending run well above 1 percent of GDP per year. These needs do not appear to have been incorporated into current fiscal baselines, and hence will come on top of the adjustment described above. To ensure that fiscal adjustment does not defeat its purpose by slowing growth, it is essential that it is conducted gradually. In countries that require such adjustment, it should start as soon as cyclical conditions allow.
Topic:
Governance, European Union, Finance, and Fiscal Policy
Political Geography:
Europe

13. How Europe should answer the US Inflation Reduction Act

Author:
David Kleimann, Niclas Poitiers, André Sapir, Simone Tagliapietra, Nicolas Veron, Reinhilde Veugelers, and Jeromin Zettelmeyer
Publication Date:
02-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The 2022 United States Inflation Reduction Act (IRA) is a significant and welcome climate law. It also includes trade-distortive subsidies, including local-content requirements prohibited under World Trade Organisation rules – the first time the US has done this and a blow to the international trading system that could trigger protectionism in other countries. The expected IRA green subsidies are of similar size to those available in the European Union, except in renewable energy production, where EU subsidies remain far larger. However, there are important qualitative differences. Some IRA subsidies discriminate against foreign producers while EU subsidies do not. IRA clean-tech subsidies are simpler and less fragmented, and they focus mainly on mass deployment of green technologies rather than innovation. The IRA will likely harm Europe through its competitiveness effect, while it will likely benefit climate transition in Europe and most of the rest of the world. However, the magnitude of both effects is very uncertain, partly because the IRA will induce substitution away from Chinese inputs. By forcing the reorganisation of supply chains, the IRA may make the EU and other economies more competitive relative to China. It may also initially slow the green transition. But in the longer run, this effect should be outweighed by the reduction in the cost of clean tech driven by the IRA. In responding to the IRA, the EU should not just seek to protect its competitiveness relative to the US but to pursue broader aims, including competitiveness in general, speedy decarbonisation and broad foreign policy and development policy goals. These aims imply that the EU should not impose local-content requirements of its own, should not loosen state-aid rules and should not mimic the IRA’s approach to manufacturing subsidies. Rather, it should focus on boosting its structural competitiveness, formulate a trade policy response that includes reform of the international subsidies regime, and develop an instrument for EU-level subsidies that focuses on early-stage development and increasing EU resilience to trade disruptions.
Topic:
Governance, European Union, Inflation, and Trade
Political Geography:
Europe

14. The state of economic convergence in the Eurozone: Two decades of monetary union and economic governance

Author:
Adriaan Schout
Publication Date:
01-2023
Content Type:
Special Report
Institution:
Clingendael Netherlands Institute of International Relations
Abstract:
What is the state of economic convergence in the euro area? And will the redefinition of the Stability and Growth Pact result in a more effective policy for achieving convergence? A common currency, together with the four freedoms, was assumed to lead to economic convergence. This Clingendael Report reviews the state of convergence in the euro area by focusing on nominal, real and institutional convergence. Despite a range of policy initiatives and monitoring systems, convergence has not been achieved neither in terms of monetary and economic performance nor of the quality of governance at the national level. Despite some major successes in convergence, welfare has continued to diverge in some countries and differences in debt levels have increased up to the point of threatening the - economic and political - coherence of the euro area. Public spending also varies considerably while higher public spending does not ensure higher growth levels. The paradoxical situation has arisen in which countries that (drastically) reduced debt levels performed better in terms of growth and reduction in unemployment.
Topic:
Economics, Governance, European Union, Economic Growth, and Economic Stability
Political Geography:
Europe

15. Russia’s War in Ukraine: Rethinking the EU’s Eastern Enlargement and Neighborhood Policy

Author:
Guntram Wolff, Alexandra Gritz, Stefan Meister, and Milan Nič
Publication Date:
01-2023
Content Type:
Special Report
Institution:
German Council on Foreign Relations (DGAP)
Abstract:
The stagnating EU accession process needs political will and procedural changes allowing eastern candidates to advance. In the meantime, they should be more supported to use the full potential of existing opportunities for gradual economic and sectoral integration with the EU. An upgraded Eastern Partnership needs a comprehensive security dimension linking resilience, connectivity, and defense policy, as well as cooperation in the area of the Common Security and Defence Policy. The protracted regional conflicts (in Moldova and the South Caucasus) require a more active EU engagement as existing OSCE formats continue to be blocked, and Russia’s role and military presence weaken. New openings for conflict resolution mean higher demand for the EU’s diplomatic, monitoring, and peacekeeping capacities. A new eastern Neighborhood Policy should be designed for the wider region, connecting the Black Sea and the South Caucasus with Central Asia and thus creating viable alternatives to the competing geoeconomic and governance “offers” of China, Russia, and Turkey.
Topic:
Foreign Policy, Governance, European Union, International Order, and Russia-Ukraine War
Political Geography:
Russia, Europe, Central Asia, Ukraine, and Eastern Europe

16. US-EU climate change industrial policy: Pulling in different directions for cooperation, competition, and compromise

Author:
Cordelia Buchanan Ponczek
Publication Date:
08-2023
Content Type:
Policy Brief
Institution:
Finnish Institute of International Affairs
Abstract:
The United States and the European Union agree on prioritizing policies to address climate change, which includes securing supply chains for components essential to low-carbon technology. Despite this agreement, their policies to address climate change and low-carbon technology could foster competition. The US Inflation Reduction Act (IRA) reflects the competitive advantage of the US to draw in the best talents, capabilities, and resources from outside sources. This leads to a disconnect between the industrial policy benefits of the IRA within the US and the potential competitive impact the IRA has on US relationships with allies. The EU’s policies are shaped by the bloc’s desire to respond to external actors—including China and Russia—while protecting the common market and building up its internal capability to ensure security of supply. This is complicated by individual member-state objectives. The 2024 US presidential election could bring change: A Republican administration might not share the EU’s outlook on climate change, the need for government intervention, or even the close transatlantic relationship seen during the Biden administration.
Topic:
Climate Change, Governance, European Union, Economic Policy, and Geoeconomics
Political Geography:
Europe, Finland, and United States of America

17. The geoeconomics of the hydrogen era: Towards a new global energy architecture

Author:
Timo Behr
Publication Date:
07-2023
Content Type:
Policy Brief
Institution:
Finnish Institute of International Affairs
Abstract:
Clean hydrogen is crucial for ensuring the transition to a carbon-neutral economy, and large quantities of it will be needed in the future. The transition from a hydrocarbon to a hydrogen economy will have significant geopolitical and geoeconomic consequences. Due to its unique properties, hydrogen will not become the “new oil”. While oil and gas have encouraged a concentration of power – in the hands of producer countries, major oil companies, and around strategic choke points – hydrogen will favour a dispersion of power. The transition to a hydrogen economy will see strong competition over technologies, raw materials, and regulatory standards. Hydrogen has the potential to make the world energy trading system more balanced, more democratic, and less prone to price fluctuations, but it could equally lead to fragmentation, inadvertently contributing to current geopolitical divisions. For the EU and Finland, the transition towards a hydrogen economy presents both challenges and opportunities. Concerted action and active diplomacy will be needed to prevent Europe from being overtaken by others and slipping into new dependencies.
Topic:
Climate Change, Governance, Hydrogen, Energy, and Geoeconomics
Political Geography:
Europe and Finland

18. Is There Life in the Desert? Russian Civil Society After the Full-Scale Invasion of Ukraine

Author:
Igor Gretskiy
Publication Date:
05-2023
Content Type:
Special Report
Institution:
International Centre for Defence and Security - ICDS
Abstract:
By the end of 2021, all leading independent NGOs and individual human rights activists had been completely suppressed, and all issues deemed inconvenient for the Kremlin had been removed from the agenda of those still operating. This report focuses on the state of Russian civil society at the outset of Russia’s full-scale military invasion of Ukraine, as well as on how it was affected by the war and what are the prospects for its development in the future. Since Vladimir Putin came to power, Russia has been moving along the path of creating a fully state-controlled civil society in which the political potential of independent civil activism would be completely undermined. To achieve this goal, the Kremlin pro-actively advanced its network of government-organised non-governmental organisations (GONGOs) while simultaneously limiting foreign funding for NGOs. Those who did not abide by the Kremlin’s rules were systematically discriminated against and persecuted under the so-called “foreign agent” laws. Meanwhile, local authorities have stopped all formal and informal interaction with “politicised” civil actors. Russia’s invasion of Ukraine added further impetus to these trends and strengthened the Kremlin’s resolve to root out any sources of potential defiance. The independent professional NGOs that remained were in a deep crisis. Since February 2022, they have switched to survival mode. In all likelihood, they will either be co-opted by the state through a centralised system of financial support or cease to exist in the near future. The niches that they have left – including in the field of human rights advocacy – are being quickly filled by GONGOs. With their colossal resources, wider media access, and connections in the government, GONGOs are able to attract more young people to join their ranks. In many regions, even the scanty of organised independent civic activism that existed before the war was neither there nor likely to re-emerge in the coming years. In Russia, the level of involvement in NGOs has always been low and the population at large indifferent to the problems of civil society. Therefore, one should be wary of inflated expectations when contemplating the future of Russian civil activism. Even if Putin’s regime collapses, one can hardly anticipate a quick transition towards a truly independent and vibrant civil society. The study was conducted on the basis of interviews with representatives of independent NGOs from various regions who, as of February 2022, were based in Russia. The geography of this survey was expanded as much as possible to make the study more reliable and better reflect the content of the processes underway in the country. This analysis also shows that representatives from Moscow, large provincial cities, and the North Caucasus differ significantly in their perception of the current situation with civil society, whereas their visions for the future diverge considerably. A profound lack of communication among them only amplifies the divisions and fragmentations in Russia’s civil society. The situation in the North Caucasus is of particular note. Albeit being severely weakened, local independent NGOs and activists are – in contrast with the rest of Russia – more disapproving of the war unleashed by Russia against Ukraine but more optimistic about the future of their home regions. They pin their hopes on the revival of indigenous languages and cultures with the help of diasporas abroad and the emergence of civil society.
Topic:
Civil Society, Human Rights, Politics, War, Governance, and Russia-Ukraine War
Political Geography:
Russia, Europe, and Ukraine

19. Drafting Greece’s “Internal Security Strategy” – Challenges and Prospects

Author:
Panayotis Tsakonas and Triandafyllos Karatrantos
Publication Date:
03-2023
Content Type:
Working Paper
Institution:
Hellenic Foundation for European and Foreign Policy (ELIAMEP)
Abstract:
The radical change in the structure of the international system caused a scientific and political revolution in the definition and concept of security. Issues such as the climate crisis, forced displacements and extreme nationalism have led the interest and especially the debate on achieving security from external to internal threats. The focus is now on the main “object of reference” of security which is not the state or some sub-state groups, but “the individual”/”the citizen”. In the modern globalized environment, all the risks that threaten the daily life of citizens require dealing with the concept of security in a “holistic” and, at the same time, more “human-centered” way. Greece lacks an institutional document for the internal security strategy. There are structural reasons that make a comprehensive reform of the internal security sector necessary. In addition to the established weaknesses and inadequacies of specific agencies and/or services of the internal security system, the overall organic interconnection between crisis management services is still required. The first lesson from the effects of the pandemic is the need for the evolution of Greece into a “Modern National Security State”. Greece, due to its geographical position on the external borders of the EU, as well as the crises it has experienced in recent years, faces a series of internal security threats and challenges. Security and respect for fundamental rights are not mutually conflicting but coherent and complementary objectives. The Strategy will help build an internal security governance system and a central coordination process.
Topic:
Security, Governance, and European Union
Political Geography:
Europe and Greece

20. Addressing Cohesion Policy’s identity crisis in a changing European Union

Author:
Alison Hunter
Publication Date:
02-2023
Content Type:
Working Paper
Institution:
European Policy Centre (EPC)
Abstract:
Since the late 1980s Cohesion Policy has been one of the cornerstone policies of the European Union. However, nowadays, a different, bolder Cohesion Policy debate is needed, reflecting a radically changed global environment. This Discussion Paper focuses on the upcoming review of the post-2027 Multi Annual Financial Framework and the debate concerning the future EU Cohesion Policy. It argues that Cohesion Policy’s purpose requires reinvention, not an incremental upgrade. Four overarching themes are analysed, reframing Cohesion Policy with a strategic, long-term investment perspective: EU resilience, security, strategic autonomy, and reforms. The author then proposes five recommendations which weave together these themes with the policy’s long-standing core features: Acknowledge the need to review the Cohesion Policy’s purpose. The EU should breathe new life into the Cohesion Policy debate. Revitalise Cohesion Policy’s long-term value by defending its pillars. The EU should re-confirm Cohesion Policy’s role as a structural policy. Position Cohesion Policy as the ‘guardian’ of EU place-based policymaking. Cohesion Policy should champion the “future-proofing” of regional resilience. Articulate Cohesion Policy’s role in the evolving EU governance and reform agenda. The EU should reach beyond the Recovery and Resilience Facility to reclaim Cohesion Policy’s role in structural reform. Improve Cohesion Policy’s convening power to catalyse deeper EU innovation cooperation. The future Cohesion Policy must deliver a more coordinated approach to the EU’s innovation agenda. The Paper concludes that the future Cohesion Policy should evolve in lockstep with citizens’ needs. This will not be easy. As discussions on the EU’s future have been sidelined in this crisis-prone area, the challenges ahead require strong leadership and coordination. The post-2027 EU Cohesion Policy will have much to contribute to rebuilding the EU’s future vision.
Topic:
Security, Governance, Reform, European Union, Regional Integration, Social Cohesion, Resilience, and Strategic Autonomy
Political Geography:
Europe