The spine of the letter represents the fall in activity at the start of the pandemic. Then there is a split, which leads to the two ‘arms’ that capture the different directions taken by economic activity in different sectors.
By:
Maria Demertzis
Date: March 2, 2021
Topic: European Macroeconomics & Governance

This opinion piece was originally published in the Money Review Section of Kathimerini and is forthcoming in El Economista.

The shape of the post-pandemic economic recovery has gone through many letter characterisations, from V to W, to land more or less on the letter K. The spine of the letter represents the fall in activity at the start of the pandemic. Then there is a split, which leads to the two ‘arms’ that capture the different directions taken by economic activity

New approaches and new tools are needed to prevent excessive concentration of economic power in the hands of a few matchmaking digital platforms that form multi-sided markets. Regulation in this area is only just emerging.
By:
Maria Demertzis
Date: January 5, 2021
Topic: European Macroeconomics & Governance

This piece was originally published in the Money Review section of Kathimerini.

The best characterisation I have heard of the economic role of digital platforms is that they are matchmakers. They serve two distinct types of customers in a given market: say, the traveller who wants to find a holiday house, and the host who has a house to let. These two distinct customers need the platform to find each other. And if there is a value in connecting, there is scope for the

In the eyes of Europeans, Joe Biden’s US election win brings the promise of major change with global relevance. From climate to multilateralism, to trade and managing global public goods, here is a take on how to understand this promise.

This opinion piece was originally published on Kathimerini.

In the eyes of Europeans, Joe Biden’s US election win brings the promise of major change with global relevance. From climate to multilateralism, to trade and managing global public goods, here is a take on how to understand this promise.
What can we expect?
At the very least we can expect a clear change in the tone of the US leadership. There will no longer be a total disrespect for facts and expert opinion. In-depth knowledge and understanding will become again a virtue, not a vice, in

The return to normal may just have to wait.
By:
Maria Demertzis
Date: December 14, 2020
Topic: European Macroeconomics & Governance

This opinion piece was originally published on Kathimerini.

Finally, the vaccine is here. Stock markets have reacted exuberantly and we can see the light at the end of the tunnel. The confinement and isolation that have weighed on old and young alike will come to an end and the economy can rebound back from its semi-comatose state. We can then all go back to business as usual.
Not so fast. Four in 10 doctors in Belgium, the country where I reside, are not themselves keen to take the COVID-19 vaccine. Similar results have been found also in the UK. It is likely that such concerns exist in other countries as well.
These doctors are not vaccine

It’s time for the EU to make quick and indispensable progress in forming a capital markets union.
By:
Maria Demertzis
Date: May 15, 2020
Topic: European Macroeconomics & Governance

Necessary though it was, the temporary relaxation of state aid rules in the EU has brought grave unintended consequences. Through indiscriminate support, the EU is rapidly moving from an even playing field that promotes the “survival of the fittest” to a situation where only those with the “richest parents” survive.
The EU economic system will come out battered and unbalanced. Countries in the south will lose a substantial part of their production fibre as they lack the means to save those in need. But indiscriminate help in the richer north will also delay the natural sorting between productive and

Compromises hammered out in the next 11 months, by both British and European negotiators, will dictate the UK’s economic landscape for decades to come By: Maria Demertzis Date: January 31, 2020 Topic: European Macroeconomics & Governance This piece forms part of Bruegel’s ongoing work in EU3D, a research project that examines differentiation in the European political order. The EU3D project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 822419.So, Brexit is done tonight at 12.00 am. The UK will no longer be a member of the European Union.Now negotiators must move on to harder things. To quote a famous British Europhile, Winston Churchill “…this is not the end. It is not even the beginning of the end. But it

Should the EU fight to save the WTO when the US seeks to dismantle it? We argue that the only way for the EU to decide that is to first understand the US’s strategy (as distinct from its tactics) and then make up its mind in terms of how much of a threat it perceives China to be.The World Trade Organisation (WTO) is pivotal in enabling and protecting trade between countries. The recent US failure to appoint a judge at the WTO’s appellate court has meant that it will no longer be able to intermediate trade disputes. This means that the WTO, is at least partially, dead. The EU, while acknowledging its faults, ultimately wishes to save it.But what is the best way of protecting the multilateral system?Should the EU fight to save the WTO or is that equivalent to fighting the last war? Should it

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action? By: Maria Demertzis Date: September 10, 2019 Topic: European Macroeconomics & Governance Europe is no longer in crisis mode. But it remains vulnerable, it is unprepared and it is procrastinating. Challenges ahead cannot be met by simply more of the same, and this is a good time to be reminded

Είναι γεγονός ότι οι τωρινές εκλογές λόγω της ανάπτυξης των κομμάτων του λαϊκισμού είναι κάπως διαφορετικές από τις προηγούμενες. Αλλά πιστεύω ότι όλες οι εκλογικές διαδικασίες, εθνικές και ευρωπαϊκές, έχουν πάντα πολύ μεγάλη σημασία γιατί θέτουν μια ατζέντα για τα επόμενα πέντε χρόνια και εμείς ως πολίτες καλούμαστε να επιλέξουμε τις σωστές προτεραιότητες και να δώσουμε την εμπιστοσύνη μας στους κατάλληλους ανθρώπους.
By:
Maria Demertzis
Date: May 28, 2019
Topic: European Macroeconomics & Governance

This opinion was also published on ETHNOS

Οι προκλήσεις της επόμενης πενταετίας κατά την άποψή μου είναι δύο: η πρώτη είναι η κλιματική αλλαγή. Δεν υπάρχει πια καμία αμφιβολία στο θέμα της κλιματικής αλλαγής, είναι πάρα πολύ

The global multilateral system is being challenged by the US and China, which prompts the EU to rethink how well it can compete in the world.

This article was published by Capital.

Preferential trading agreements under the global trading system (known as the WTO) cover between one third and one half of world trade. EU countries do the greatest part of their trade under such preferential rules (including intra-EU) and have always been a big defender of open and free trade for all, and of the support system created around it.
However, there are two reasons for the EU to worry about a potential disruption to this global working system. The first threat is immediate and it comes from the US, while the second is much more structural and comes from China.
The unexpected election of

Testimony at the Committee for External Relations of the Belgium Federal Parliament

On 25 September Bruegel’s deputy director Maria Demertzis presented a testimony on transatlantic relations and EU-US cooperation at the Belgian Federal Parliament.

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Bruegel Annual Meetings 2018
The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Barbara Botos, Maria Demertzis, Benjamin Denis, Lowri Evans, Mariya Gabriel, Svend E. Hougaard Jensen, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Rachel Lomax, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Johan Van Overtveldt, Martin Sandbu, Margrethe Vestager, Reinhilde Veugelers, Nicolas Véron, Thomas Wieser, Guntram B. Wolff and Georg Zachmann
Topic: Energy & Climate, European Macroeconomics & Governance,

The US threat of trade sanctions has put the EU in a difficult position. Nevertheless, the EU must respond decisively – not just to protect its own interests but those of the multilateral trading system, and to demonstrate to the US and other partners that trade is not a zero-sum game.
By:
Maria Demertzis
Date: May 17, 2018
Topic: European Macroeconomics & Governance

The threat of trade sanctions,  via direct tariffs or the breaking of the Iran deal, is an act of diplomatic aggression the like of which we have not seen in a long time.
Who wins when the US takes such a stance? Will America be great again? And how should the EU – the greatest (de facto) economic and diplomatic ally of the US – respond to this ‘invitation’ to

The challenges that Europe faces both from within and from outside require immediate, concerted counter-efforts. While efforts to advance the European economic architecture are desirable and useful, can Europe realistically attempt to integrate further on the basis of such little trust?
By:
Maria Demertzis
Date: February 9, 2018
Topic: European Macroeconomics & Governance

Current efforts to reform and advance European integration are stalled by a ‘lack of trust’. And while the issue of trust is not necessarily seen and understood in the same way by all, I believe that this deficit in trust in Europe refers to (at least) two specific issues: lack of trust between countries, and countries’ lack of trust in European

Populist shocks in the UK and US threaten the multilateral order on which the EU depends. What lies behind these earthquakes, and what does it mean for Europe? Withdrawing from the world is no solution to geo-political upheavals, but Europe needs to reassess the future of globalisation.
By:
Maria Demertzis
Date: November 7, 2017
Topic: European Macroeconomics & Governance

European integration, the ‘ever closer union’ of Europe’s states and economies, has faced a very difficult 10 years. Even as growth finally re-emerges, the legacy of the financial crisis is far from resolved. Meanwhile, poorly managed migration and refugee pressures saw huge population flows into and around the continent from the South and South-East. For

Europe’s post-crisis recovery has been disappointing in comparison with the USA. But lower rates of inequality are staving off populism and bolstering support for globalisation. With the USA an increasingly unpredictable partner, the EU must address internal imbalances and build alliances to defend the multilateral order.

The legacy of the financial crisis has left a different trail in the EU economy by comparison to that of the US. Almost a decade after the start of what was undoubtedly the worst financial crisis in the last 50 years, the US has managed to restore financial stability and deliver a convincing path back to growth. The EU, by contrast, has not achieved a credible return to economic vigour. It is true that Europe has seen some renewed growth recently, but it remains

In an unexpected move, the Federal Reserve Chair Janet Yellet has recently brought up the issue of raising the inflation target. This blog argues that an increase in inflation targets may prove to be beneficial in achieving price stability in the long run. This would increase the credibility of central banks in achieving inflation goals and stave off the distortionary effects of deflation.
By:
Maria Demertzis
Date: June 22, 2017
Topic: European Macroeconomics & Governance

The discussion on raising the inflation target to 4% has just gotten a new impetus after the Fed Chair, Janet Yellen, urged in a recent press conference to rethink the issue. Ms Yellen, asked for more research to be done to understand what this would

An important guiding principle in resolving non-performing loans (NPLs) should be to ensure that viable debt remains serviced, while non-viable debt gets resolved. We present here a framework to approach the issue.

The attempt to address the problem of non-performing loans in the EU should tackle both sides of credit creation at once.  On the demand side, new credit is not picking up as long as the problem of the debt overhang, namely the disincentive of undertaking new investments and consumption while old debts are prohibitively high, remains.  This, hinders the creation of new productive capacity, necessary to absorb factors formerly misallocated to sectors hit by the crisis. By implication, as long as private debts remain at high levels, economic activity will struggle to pick up. On the supply side of credit, progress has been slow in resolving impaired loans, which persist in banks’ balance sheets. This is problematic for both their overall health but also the creation of new credit.
Figure 1: Gross non-performing debt instruments, % of total gross debt instruments

Source: ECB, Note: peak year to 2016Q1

And while a number of countries (namely the Baltics) have managed to decisively resolve bad debts to the benefit of new credit creation, others have made less progress and some have even been unable to make any (Figure 1).

After a sharp increase in corporate bond issuance following the ECB’s announcement in March this year, corporates continue to respond to the Corporate Sector Purchase Program.

Corporate bond issuance is continuing to pick up for a third month on a trot. We are interpreting this to mean that companies are responding to the ECB’s Corporate Sector Purchase Program. There still remains to be seen what companies do with the cash obtained, to be able to evaluate the effectiveness of this new program.

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In the past five days a number of banks have seen their stock value decline by large amounts.

UK banks are the hardest hit, followed by Italian banks which saw their stocks lose over 20% of their value. But other euro area banks also face reductions of over 15% of the stock value.
The pound exchange rate also continued to decline on the 27th vis a vis most currencies.

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Markets have reacted strongly to this morning’s news. Stock prices have fallen throughout the world, the yields on government bonds of EU periphery countries have increased, and the pound has experienced its largest fall in years.
Table 1: Stock markets
Country
Stock market index
23 June – closing
24 June – opening lowest value
24 June – latest to 4pm
Index
% change from 23 June
Index
% change from 23 June
UK
FTSE 100
6,316
5,805
-8.09
6,182
-2.12
Germany
DAX
10,226
9,318
-8.88
9,618
-5.95
France
CAC
4,465
4,038
-9.56
4,152
-7.01
Spain
IBEX
8,873
7,795
-12.15
7,892
-11.06
Italy
FTSE MIB
17,945
15,856
-11.64
16,109
-10.23
Greece
ASE
928.85
785.38
-15.45
800.64
-14
Portugal
PSI 20
4,689
4,346
-7.31
4,368
-6.85
Japan
NIKKEI 225
16,238
15,871
-2.26
14,652
-9.77
Table 2: 10 Year Government Bond Yields

23/06/2016 18:00
24/06/2016 12:00
24/06/2016 16:00
UK
1.38
1.09
1.09
DE
0.09
-0.08
-0.06
IT
1.32
1.41
1.46
ES
1.47
1.56
1.60
FR
0.46
0.33
0.37
PT
3.10
3.26
3.35
US
1.73
1.51
1.57

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We have observed a sharp increase in corporate bond issuance following the ECB’s announcement in March this year, but it is too early to see the effects on investment by non-financial corporations.

With the ECB’s purchases of corporate bonds, which started on the 8th of June, the ECB’s interventions in bond markets have become much more targeted. The Corporate Sector Purchase Programme (CSPP) involves outright purchases of investment grade euro-denominated bonds issued by non-bank corporations in the euro-area.
CSPP is carried out by six central banks – Belgium, Germany, Spain, France, Italy and Finland. Purchases are conducted both in primary and secondary markets.
There is some evidence that corporates have sought to take advantage of the ECB decision by issuing a greater amount of securities, following the announcement in March this year.

It is too early to judge whether the ECB action is proving effective. It may be useful to bypass the banks, but it is not sufficient. For this measure to be successful, the corporate sector needs to funnel the money borrowed to the real economy. If the money borrowed from the ECB is used to make progress with deleveraging, then the economy will not benefit in the short run (although there will eventually be benefits, by having healthier corporations).

Both the Fed and the ECB have managed to remain credible since the financial crisis, but their credibility levels have evolved differently. Since inflation in the US and the euro area has been similar in the past 8 years, the difference in the way that credibility has evolved is the result of the different macroeconomic policy mix applied.

As policymakers prepare to go to unexplored lengths in using unconventional monetary measures (Gürkaynak and Davig 2015; Roubini 2016; Demertzis and Viegi 2010),  the key to the effectiveness of monetary policy remains, as always, ‘expectations’:  what people believe the future holds and the confidence they have in a central banks’ ability to achieve their objectives.  In other words, credibility.  When markets have trust in central banks’ ability to deliver price stability, the central bank needs to do less to deliver it. And conversely, without credibility more aggressive action is needed to achieve the same objective.
Credibility becomes more important in times of high uncertainty (Demertzis and Viegi 2010). This is because it becomes less about specific policies, and more about confidence in policymakers’ ability to manage uncertainty (Drazen and Masson 1994; Posen 2010).
When markets have trust in central banks’ ability to deliver price stability, the central bank needs to do less to deliver it.