Bruegel’s Director, Guntram Wolff, was invited to speak at the European Parliament’s Committee on Constitutional Affairs on 29 September 2016.

The Committee on Constitutional Affairs held an exchange of views on the future constitutional relationship of the United Kingdom with the European Union after the June 23 referendum in the UK.
Watch the video recording

Last week the Renzi government approved the 2016 budget law proposal. Although the detailed text is not available yet, the broad picture is clear.
The Italian government intends to postpone the fiscal adjustment decided last year in accordance with European authorities, and to increase instead the budget deficit in 2016 by about 0,8 GDP points, from an estimated 1,4% to 2,2% (or even to 2,4%, depending on whether the Commission will grant some extra budget flexibility to cope with the refugee crisis). The extra fiscal space will be used to avoid an automatic tax rate increase in VAT and other excises for about 1% of GDP, to eliminate the property tax on the main house of residence of taxpayers (about 4 billion euro), and to offer a tax incentive to private companies to promote investments.
Apart from the increased deficit, the funding comes from a limited spending cut of about 5,8 billion, half of what was planned in the official budget documents just few months ago; from the one-off tax revenues of the “voluntary disclosure” on capital illegally transferred abroad; and by the expected extra revenues generated by increased economic activity, with real GDP assumed to grow by 1,6% in 2016.

The ECB will have its next monetary decision meeting on Thursday. Instead of following politically motivated statements that complain about low nominal rates, the ECB needs to focus on its mandate: price stability, defined as inflation rates close to but below 2% in the medium-run. So what do data on inflation dynamics and on the risks for euro area inflation tell us?
Let’s start from the observable facts. Euro area inflation has been falling since 2011Q4 and while there was a short pick-up in early 2015, it has fallen again recently. The recent fall, however, is less clearly visible in core inflation rates. Core inflation, i.e. inflation rates excluding prices for commodities that have recently fallen, has been rather stable at slightly below 1% since mid-2013. Observable inflation rates therefore speak for an easing bias rather than a tightening bias in monetary policy.
Figure 1: Headline and core inflation in the euro area

Source: Datastream

Second, the price stability mandate is, of course, not about current inflation rates but rather medium-term expected inflation rates. A number of worrying indicators appear. Market-based inflation expectations have fallen since the summer. While in July markets were still expecting inflation to be at 1% in 2017, the expectation is now only slightly above 0.5%.

This paper outlines guidelines for policymakers pursuing financial stability in developing Asia. It aims at supporting Asian policymakers’ judgment by providing policy views and recommendations that are based on the analysis of the recent sequence of events in the United States and Europe and of earlier crisis episodes, including those in Asia during the 1990s
Highlights
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• Given no generally accepted framework for financial stability, policymakers in developing Asia need to manage, not avoid, financial deepening.
• This paper supports Asian policymakers’ judgement through analysis of the recent events in the United States and Europe and of earlier crisis episodes, including Asia during the 1990s. There is no simple linear relationship between financial repression and stability – financial repression not only has costs but, so doing can itself undermine stability.
• Bank-centric financial systems are not inherently safer than systems that include meaningful roles for securities and capital markets. Domestic financial systems should be steadily diversified in terms of both number of domestic competitors and types of savings and lending instruments available (and thus probably types of institutions). Financial repression should be focused on regulating the activities of financial intermediaries, not on compressing interest rates for domestic savers.

Despite a slowing Chinese economy, decelerating inflation and a stronger euro, European Central Bank President Mario Draghi has said he will do more to support euro-area growth only “if necessary.” He should stop listening to Europe’s scolds and do the right thing.

Ben Bernanke, the former chairman of the U.S. Federal Reserve, has reminded us that in November 2010, German Finance Minister Wolfgang Schaeuble described U.S. monetary policy as “clueless.” The Fed had decided to step up purchases of Treasury securities to help lower long-term interest rates, in an effort to ward off a small risk of debilitating deflation. Schaeuble described the move as a “sly” effort to weaken the dollar, apparently forgetting how an undervalued euro was boosting Germany’s trade surplus and weakening global growth.
Schaeuble’s intemperate language illustrates a mindset that is blocking debate of European policy priorities and the economic myths that sustain them. The groupthink was evident as early as 2008, when the financial crisis rendered banks on both sides of the Atlantic desperately in need of capital and short-term loans. Joaquin Almunia, the European commissioner for monetary affairs, portrayed it as a U.S. problem, saying that “we are well prepared to weather this situation.

The Finance Ministry of Greece has published the preliminary budget execution bulletin for September, covering the first 9 months of the year. It reveals a decline in the primary surplus, compared to the over performance recorded in recent months.
While it has to be stressed that the targets considered in the budget execution bulletins are still those from the old 2015 budget (not the new targets under the new programme), this development is nevertheless an interesting reversal of previous tendencies.
The cumulated state budget balance for the first 9 months of the year presented a deficit of 1.9 billion, against a target deficit of 1.4 billion. The state budget primary balance for January – September 2015 remains in surplus, but came in at 3.1 billion against a target surplus of 3.6 billion. Primary surplus overperformance had already eased in July and August, but September has shown the worst reading of primary surplus against the target since February (figure 1).

Source: Ministry of Economy and Finance, Greece

Revenues for the month of September fell back below expectations, reaching 3.5 billion euros, i.e. 762 million or 18% lower than the monthly target. On a cumulative basis, total revenues for the period January-September 2015 stood at 34.3 billion euro, against a target of 39.2 billion.

What’s at stake: The continuing wave of refugees arriving at the borders of the European Union has sparked discussions all around Europe on how to deal with it, and what the impact will be on the European economies. We review the blog discussions on the economic impact of the refugees, and the challenges that they raise.
The impact on public finances
The Economist points to a study in the OECD’s International Migration Outlook, which estimates the net fiscal contributions of migrants in 27 advanced countries. The net direct contribution of migrants tends to be smaller than that of native-borns, but this is because they pay less taxes, not because they claim more benefits. The main reason behind them paying less taxes is lower levels of employment, especially among women. The net fiscal contributions of migrants could therefore be increased by increasing their labour force participation. Their overall conclusion is that migration is “neither a significant gain nor drain for the public purse”
Mark Schieritz looks into the debate of how much refugees will cost Germany and cites estimates from RWI Essen, which amount to 10 bn EUR for 2015, and should be even higher for 2016. This is similar to the estimates from the German government, which estimates costs to amount to 12000 Eur per refugee per year.

Recession in Russia has become a fact since mid-2014. What are the structural and institutional roots behind it?
Highlights:
The Russian economy grew rapidly between 2000 and 2007, but growth decelerated after the 2008-09 global financial crisis, and since mid-2014 Russia has moved into recession. A number of short-term factors have caused recession: lower oil prices, the conflict with Ukraine, European Union and United States sanctions against Russia and Russian counter-sanctions. However Russia’s negative output trends have deeper structural and institutional roots. They can be tracked back about a decade to when previous market-reform policies started to be reversed in favour of dirigisme, leading to further deterioration of the business and investment climate.
Russia must address its short-term problems, but in the medium-to-long term it must deal with its fundamental structural and institutional disadvantages: oil and commodity dependence and an unfriendly business and investment climate underpinned by poor governance. Compared to many other commodity producers, Russia is better placed to diversify its economy, mostly due to its excellent human capital. Ruble depreciation makes this task easier.
1. From growth slowdown to GDP decline
Recession in Russia has become a fact. Seasonally adjusted quarterly GDP peaked in the second quarter of 2014 and then started declining.

This blog describes the extent of the foreign exchange borrowing and the respective macro-prudential provisions adopted following the Swiss’ national banks’ decision to end the peg to the Euro in January 2015
The recent decision in Poland and Croatia to limit the adverse consequences of Swiss franc denominated loans for households, has put a spotlight on foreign loan hangovers in Central and Eastern Europe. This came after the Swiss national bank’s decision to end the peg to the Euro in January 2015 (Hungary already set steps in November 2014). This blog describes (i) the extent of the foreign exchange borrowing (and the prominent role of the Swiss Franc) and (ii) the respective macro-prudential provisions adopted.
Borrowing in foreign currency increased substantially in the mid-2000s, supported by a carry trade motive, as households (as well as corporations and local authorities) borrowed in lower-yielding foreign currencies to finance the purchase of domestic assets such as housing. As Figure 1 shows, interest rates on mortgage loans in CHF in Hungary amounted to 5.1% in January 2005, less than half the domestic rate of 13.8%. A similar picture can be observed in Poland, but with a somewhat lower spread between domestic and Swiss-franc loan interest rates.

The Volkswagen scandal has raised questions about the German model of production. If the success of the company’s diesel-powered vehicles was due in part to fraudulent efforts to conceal the amount of harmful pollutants they emitted, will similar revelations at other companies call into questions the country’s transformation from “the sick man of Europe” to an export-driven economic powerhouse?

Fortunately, the answer is almost certainly no. Germany’s competitive advantage has less to do with chicanery than with how its firms are structured and the culture in which they operate. Germany’s leading car company is an exception to the manufacturing rules that have driven the country’s success, not an example of them.
Indeed, Germany’s success is frequently cited as a model that other countries should emulate, and rightly so. Since the beginning of the century, the country has grown to become one of the world’s leading exporters, outstripping all other major European countries. From 2000 to 2013, Germany’s exports grew by 154%, compared to 127% for Spain, 98% for the United Kingdom, 79% for France, and 72% for Italy.
The leading explanation for Germany’s impressive recent export performance is wage restraint. But, as a comparison with Spain reveals, faster wage growth elsewhere cannot be the entire story.

What’s at stake: The failure of Abenomics to boost net exports despite the large currency depreciation has raised the question of a possible more general disconnect between exchange rates and trade, namely because of the international fragmentation of production.
Unusually large currency movements
The IMF writes that recent currency movements have been unusually large. The U.S. dollar is up more than 10 percent in real effective terms since mid-2014. The yen is down more than 30 percent since mid-2012 and the euro by more than 10 percent since early 2014. Such movements, although not unprecedented, are well outside these currencies’ normal fluctuation ranges. Even for emerging market and developing economies, whose currencies typically fluctuate more than those of advanced economies, the recent movements have been unusually large.
The IMF writes that concerns about a disconnect between exchange rates and trade are not new. Back in the 1980s, the U.S. dollar depreciated, and the yen appreciated sharply after the 1985 Plaza Accord, but trade volumes were slow to adjust. By the early 1990s, U.S. and Japanese trade balances had adjusted, largely in line with the predictions of conventional models. The question is whether this time is different, or whether the apparent disconnect between exchange rates and trade will once again dissipate.

Further democratic legitimacy is a pre-requisite to economic union. This article explores how economic policies in the euro area should be coordinated, but this cannot be done in a mechanical rules-based manner. Arguing the contrary suggests a cavalier understanding of the complexity of economic policymaking.
Over the past weeks, EU finance ministers and institutions have been keeping their powder dry for what was set to become only the latest chapter of the controversy between the champions of a “rule-based” approach to European governance and those in favour of discretion and flexibility. On October 6, the ECOFIN discussed how flexibility should be applied when implementing the Stability and Growth Pact; a topic on which the Commission issued a contentious communication in January 2015.
The argument of those banging their fists on the table was that excessive fiscal flexibility is being granted to countries on the basis of dubious or partial structural reform efforts. These claims have a certain degree of legitimacy and expose deeper problems that will irremediably come to the fore when, as part of the longer-term strategy detailed in the Five Presidents’ Report, discussions will start on how to set up an economic union (or structural reform coordination framework).

The aim of this blog post is to clarify different options of how to organize European deposit insurance without yet settling on the best option. We aim to explain and to highlight what different options can and cannot achieve. We end by drawing some tentative conclusions on potentially adequate quid-pro-quo measures for different forms of deposit insurances given the problem of transition.
The five presidents’ report on Completing Europe’s Economic and Monetary Union in June this year called for European Deposit Insurance to complete the Banking Union. European Council President Tusk also called for completing banking union by creating a European deposit insurance and he argued that this could be done without treaty change. A German “non-paper”, on the other hand, argued that a “discussion on further mutualization of bank risks through a common deposit insurance or an European deposit reinsurance scheme is unacceptable” unless a number of other measures are taken earlier that would render bail-in more likely, reduce the exposure of banks to sovereigns and reduce the link between banks and sovereigns. The non-paper also considers treaty change indispensable.
Reducing the link between banks and sovereigns is indeed a key issue that banking union aims to achieve.

China has recently started to express interest in the Juncker plan. There have been rumours that China would like to initially invest between €5 and €10 billion. However no clarity exists yet as to how China will invest.
Right after being nominated in 2014, European Commission President Jean-Claude Juncker announced a grandiose investment plan, which plans to pump €315 billion ($361 billion) into long-term projects, and the financing of SMEs and mid-caps during the next three years (2015-17).
One of the most common criticisms of the Juncker plan is that there are no new sources of public funds, and that it is just the same money being recycled (see Grégory Claeys’ recent blog).  In the same vein, there is scepticism about whether the private sector will be willing to provide so much funding. So far there is seed capital of €21 billion, and national development banks have pledged €42.5 billion, which is far from the total target of €315 billion.  Attempts by European officials to attract private money, especially outside Europe, have been futile.
Only recently has China started to express interest in the programme. After Li Keqiang’s comments at the Europe-China Summit on June 29 in Brussels, there have been rumours that China would like to initially invest between €5 and €10 billion. However no clarity exists yet as to how China will invest.

After five years of struggle, a massive trade pact has been signed among the US, Japan and 10 other economies (mostly in Asia but also Latin America): the Trans-Pacific Partnership (TPP).
The winners are obvious: Obama and Shinzo Abe, arguably also the US and Japanese economies. Obama can leave office with a strong demonstration of the US pivot to Asia, and Abe can finally argue that the third arrow of his Abenomics program is not empty.
The losers are also obvious: China and Europe. China not only has been left out of the deal, but it has been left out on purpose. If anybody had any doubt (at some point China was invited into the negotiations and some still expect China to continue discussing membership in the future), Obama’s official statement on TPP yesterday makes it very clear: “when more than 95 percent of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy”. For China the issue is not only losing access to the US market but also the fact that its most important trading partners are in the deal, with the notable exception of Europe.

The Iranian nuclear deal reached in July can potentially reshape the Iranian economy in general and its energy sector in particular. On the basis of this historical step, many voices suggested that Iran might (or should) become a new gas supplier to Europe. We suggest that there are important impediments to significant commercial gas flows from Iran to the EU in the foreseeable future. We argue, however, that cooperation on a limited pilot project could have strategic value.

This blog post was originally published in the Financial Times blog beyondbrics.

With its 34 trillion cubic metres of natural gas reserves, a level sufficient to satisfy current EU natural gas demand for 90 years, Iran has the highest reserves in the world. Despite this rich natural endowment, the country has not yet translated potential into reality. Paradoxically, its natural gas production continues to be barely sufficient to satisfy its domestic consumption.
There are two reasons for the under-exploitation of Iran’s natural gas resources: the international sanctions regime (that has targeted the country’s energy sector since 2007, completely halting the activities of international energy companies) and the country’s legal petroleum framework (the so-called ‘buyback scheme’, encumbered by very unattractive terms for international energy companies).

Fibre-based next generation access (NGA) roll-out across the European Union is one of the goals of the European Commission’s Digital Agenda strategy, however, there remains considerable uncertainty about how the roll-out goal can best be achieved.

Footnotes, references, and the technical annex can be found in the PDF version of this publication.

Highlights
Fibre-based next generation access (NGA) roll-out across the European Union is one of the goals of the European Commission’s Digital Agenda strategy. By enabling entirely new broadband services, NGA networks have the potential to trigger productivity gains on a massive scale. There remains considerable uncertainty, however, about how the roll-out goal can best be achieved.
The underlying differences between the economics of copper-based and new fibre-based broadband infrastructures should lead to a revision of the regulatory framework for telecommunications markets. While the current regulatory measures have been useful in the past decade to sustain competition and facilitate entry into a market with already-existing infrastructures, the need to create new, much faster broadband networks calls for a rethink of the scope and strictness of regulation.

Nicolas Véron comments on the Capital Markets Union Action Plan launched by the European Commission on 30 September 2015.
In mid-July 2014, in his maiden policy speech at the European Parliament as President-elect of the European Commission, Jean-Claude Juncker promised to create a European “Capital Markets Union.” As he explained it, “To improve the financing of our economy, we should further develop and integrate capital markets. This would cut the cost of raising capital, notably for SMEs, and help reduce our very high dependence on bank funding.” Following up on this promise, Jonathan Hill, a Brit appointed last year by Juncker as European Commissioner for Financial Stability, Financial Services and Capital Markets Union, on Wednesday announced an action plan on how to transform this vision into reality. The plan includes more favourable frameworks for loan securitization and insurers’ investment in infrastructure projects; the start of consultations on the markets for venture capital and covered bonds and the cumulative impact of past EU regulatory decisions; and many more reviews and reports to be produced by the Commission in the years ahead.
There is much to be commended in this document.

The significance of the initial rate hike
Eric S. Rosengren writes that macroeconomic models of the economy overwhelmingly suggest little impact on the broader economic landscape from moving the timing of initial interest rate hikes forward or backward by a couple of months. However, the future trajectory of interest rate increases – that is, whether increases to more normalized levels occur quickly or more gradually – is, by contrast, likely to have a meaningful impact on employment and inflation.
Martin Wolf writes that any increase would be significant: first, it would indicate the Fed’s belief that the policy can be “normalized” after almost seven years of post-crisis healing; second, it would indicate the beginning of a tightening cycle. One of the reasons for believing the latter is that this is how the Fed has historically behaved: the last such cycle began with rates at 1 per cent in June 2004 and ended with rates at 5.25 per cent two years later. Without doubt, beginning a tightening cycle for the first time in more than 11 years would be a significant moment. It would also signal more than an immediate rise in rates. Lawrence Summers agree and write that arguments of the “one and done” variety or arguments that the Fed can safely raise rates by 25 BP as long as it’s clear that there is no commitment to a series of hikes are specious.

An extended version of this paper was presented at the ECOFIN meeting in Luxembourg on 11 September 2015. Click here to download it.

The issue
Combating climate change is perhaps the most formidable public policy challenge of our times. Unmitigated climate change will be irreversible. It will place significant costs on future generations, and expose them to unexplored risks. To mitigate climate change, global coordination is indispensable. European Union citizens consider climate change a central problem. The EU and its member states have therefore put in place signficant and costly climate mitigation policies.
Policy challenge
Without an ambitious deal at the United Nations climate summit in Paris in late 2015, much of EU climate policy will be futile. Climate finance is the most important tool the EU has to make a deal likely. A strong and unified EU position backed by common resources would increase the EU’s ability to shape the emerging international climate institutions and their governance, to ensure that climate finance is used to reduce mitigation costs and to ensure that European industry benefits from the opportunities related to climate finance. A redirection of domestic mitigation costs to climate finance and the crowding-in of private money would reduce the burden on taxpayers.

A short version of this op-ed was originally published in the Financial Times

When religious persecution around 1700 drove the Huguenots to Prussia’s Berlin and Brandenburg, they added more than 1% to the native population and brought skills, knowledge and technology, with lasting positive effects on Germany’s productivity. 300 years later, religious persecution, war and poverty are driving hundreds of thousands to Germany again. Germany’s authorities expect up to 800000 asylum seekers in 2015, an estimate that may be too high but would represent about 1% of Germany’s population. Immigrants other than asylum seekers would increase that number to far more than 1 million. In 2014, more than 600000 asylum seekers reached the EU. How quickly these immigrants are integrated (or not) will be decisive for Germany’s economy and Europe’s monetary union.
Immigrants are significantly younger than the domestic population. Given Germany’s major demographic challenges , this is welcome news. As Wolfgang Schäuble, Germany’s finance minister, has pointed out, the immediate costs of handling refugees and immigrants are manageable. Long-term benefits to public finance and the sustainability of pensions can be substantial. Research has documented that foreigners currently living in Germany pay more to the state than they receive in social benefits.

The United States grants permanent lawful resident status [1]—with benefits similar to full citizenship save the right to vote—to approximately one million immigrants every year. Could Europe do the same?
An immigrant can obtain lawful permanent resident status in the US (i.e. receive a “green card”) through family, employment, refugee or asylee status, or other specific and exceptional conditions. Once immigrants are granted status, they have it for life, as long as they do not leave the US for an extended period or commit a serious crime. They can travel freely outside the United States, work for any US company or start their own, get social security benefits upon retirement if they have worked for more than 10 years, and petition for their spouses and children under the age of 21 to receive green card status. Above all, they can apply for full US citizenship just five years after receiving a green card.
The largest portion of newly issued green cards goes to family members of US citizens or direct family members of permanent residents (65% in 2013) [2], and a smaller but nevertheless substantial portion is obtained through employment (about 16% in 2013, which is about 160 000 people). Remarkably, approximately 12% (about 120 000 in 2013) of new lawful permanent residents each year are former asylees or refugees.

10 years is a very young age. If you are a human being, you’re still a young child and not even a teenager. For a think tank, which has to gain credibility and authority progressively, by repeatedly proving the wisdom of its analysis and demonstrating the pertinence of its policy recommendations over time, ten years represents even more extreme youth.
The paradox of Bruegel is that we are simultaneously celebrating a very early anniversary, and our extraordinary success in terms of global and European excellence. According to the 2014 report Global go to think tanks, published by the University of Pennsylvania, Bruegel ranked as the 2nd non-US think tank in the world; the 5th think tank in the world (US included); and the think tank with the 3rd most significant impact on public policy worldwide.
To explain such success one has to take into account many factors.
First is the lucidity of the people, including Jean Pisani-Ferry, who launched the initial idea in late 2002. They were joined by policy makers, business leaders and individuals who demonstrated their enthusiasm for this project. They gradually gained the support of Germany and France, and then of 12 European governments and 17 leading European corporations, in order to found the think tank.
Secondly, let us note the professional excellence and intellectual boldness of Bruegel’s first team.

In October 2002 I had lunch with Nicolas Véron. He and I had separately developed an interest in the role of economic think tanks. I had just ended my term as Executive President of the French Prime Minister’s Council of Economic Analysis and had joined the Treasury on a temporary basis to contribute to the preparation of the French G-7 presidency. I was planning to later join the IMF. Nicolas had started a financial consultancy after having worked in government and in an internet start-up.
We had both learned in government that good ideas are the scarcest of all policy ingredients, and we had both observed that in Europe, the dialogue between researchers, practitioners and policymakers lacked intensity and relevance. For these reasons we were both keen on finding ways to promote evidence-based policy thinking in Europe and together we came up with the idea of an economic policy research organisation that would emulate the best US think tanks. We concluded from our exchange that this was an idea worth turning into a real project. Most likely, it would not succeed. But we felt that it had to be tried.
I started discussing the idea with colleagues within the French Treasury. I spoke first to those in charge of European policies: Claire Waysand, Odile Renaud-Basso and Stéphane Pallez.

In Summer 2004 I was about to leave the European Commission. The prospect of returning to the world of academia had a mixed flavour. For sure, it had been quite hard, ten years earlier, to abandon economic research and Bocconi University to become Commissioner, so a return to my origins had considerable appeal. However, losing contact with the EU institutions and concrete policymaking would not have made me happy at all. Precisely when I was in that state of mind, Jean Pisani-Ferry came to my office with an idea. Of course I had known Jean, the reputed economist, for a long time. But on that occasion I discovered Jean, the psychologist, the gentle persuader. I mention this because I am convinced that a part of Bruegel’s astonishingly rapid success is due to the affable, yet steely, way in which its first Director approached prospective members, be they state or corporate members, scholars he intended to hire, the European institutions, national governments – or, indeed, the person he had decided should become the founding Chairman of Bruegel.
As we spoke, Jean capitalised – with grace – on my ambivalent mood.

I was very proud to have been elected as successor to Mario Monti.
My time as a Chairman of Bruegel (2008-2011) overlapped with the global financial crisis.
This situation had increased the need for fact-based, high quality policy research, which would be widely communicated to the public and policy makers. I think that Bruegel successfully met this challenge.
For example, the number of media mentions about Breugel’s work increased from 400 in 2007 to 3,548 in 2011. Bruegel has also expanded in presence in the EU member states, especially in Central and Eastern Europe.
Of course, these successes were due, first of all, to the staff of Bruegel, ably directed by Jean Pisani-Ferry. It was a pleasure for me to work with them, and especially with Jean.

A decades-old rule of thumb has it that trade grows faster than GDP, mainly as a result of globalisation. And yet, since the crisis-induced ‘Great Trade Collapse’ of 2008/2009, followed by a brisk but brief recovery in 2010, international trade has been growing roughly in line with world GDP. This pace is markedly slower than in the previous fifteen years, in which yearly trade growth at times even doubled global GDP growth (Figure 1). In addition, the last spell of data shows that trade might have slowed down even more during the first part of 2015.
Is this ‘Global Trade Slowdown’ a signal that globalisation has structurally ‘peaked’, and thus we should expect a stagnation of trade growth also in the future? Or is the slowdown just the result of cyclical drivers, e.g. the fragile European recovery and slower growth in China?
Figure 1: World GDP and exports in volumes – index 2008=100

Source: World Bank – World Development Indicators

The ongoing debate, summarized in a previous Bruegel’s blogpost, acknowledges the fact that, besides the well-known cyclical explanations, a more structural reason behind the trade slowdown might be associated to the role of Global Value Chains (GVCs), i.e. the break-up of production processes into ever-narrower discreet activities and tasks, combined with the international dispersion of these activities and tasks across countries.

Olivier Blanchard and David Johnson write that (HT Mark Thoma) from 9% in 1979, the three-month Treasury bill rate was increased to 15% in August 1981.
No credibility miracle and the presence of inflation inertia
Paul Krugman writes that there is a curious belief about history namely that the experience of disinflation in the 1980s was a huge shock to Keynesians, refuting everything they believed. What makes this belief curious is that it’s the exact opposite of the truth. Keynesians came into the Volcker disinflation with a standard, indeed textbook, model of what should happen. And events matched their expectations almost precisely. Unemployment shot up faster than in Tobin’s simulation (see graph below), then came down faster. But the basic shape — a clockwise spiral, with inflation coming down thanks to a period of very high unemployment — was very much in line with what standard Keynesian macro said would happen.
Paul Krugman writes that there was, on the other hand, no sign whatsoever of the kind of painless disinflation rational-expectations models suggested would happen if the Fed credibly announced its disinflation plans. Olivier Blanchard and David Johnson write that there was indeed no credibility miracle: Disinflation was associated with a sharp recession, with negative growth in both 1980 and 1982, and with a large and long-lasting increase in unemployment.

What went wrong with macro redux
Simon Wren-Lewis writes that you can describe what happened in two ways. You could say that the New Classicals always had the goal of overthrowing (rather than improving) Keynesian economics, thought that they had succeeded, and simply ignored New Keynesian economics as a result. Or you could say that the initially unyielding reaction of traditional Keynesians created an adversarial way of doing things whose persistence Paul Romer both deplores and is trying to explain.
Paul Romer writes that, within a few years after presenting their famous critique, Lucas and his supporters seem to have stopped engaging with any macroeconomists outside of their well-defined circle of supporters, even though some of these outsiders were taking them seriously. The ensuing self-imposed isolation let real business cycle models take root and persist for far too long. Their group-think allowed a coordinated move away from the use of data to evaluate or test a theory, and toward the use of calibration instead. Loyalty seems to have precluded any internal criticism as theory became opaque and misleading.
Paul Romer writes that that the problems cannot be attributed solely to obstinacy on the part of Lucas and his supporters.

The issue
Combating climate change on the global level will be much easier when abundant low-carbon technologies that are competitive in their cost and capabilities are available. But private companies underinvest in low-carbon innovation because they cannot capture the climate benefits. There are three policies to address this issue: pricing carbon, supporting deployment of as-yet uncompetitive technologies and supporting research and development.
Policy challenge
Funding all possible low-carbon technologies with all types of support instruments is not a sensible or viable option. Finite budgets need to be allocated to different technologies, but not all innovation policies are equally efficient. However, the combination of the three support policies and their coordination at European level can improve results and reduce costs. To make low-carbon technology support smarter the European Union should (1) improve carbon pricing, especially provide more long-term visibility for the carbon price; (2) enhance European cooperation, both in terms of deployment and R&D support; (3) balance support for deployment and RD&D; and (4) develop a more methodological approach to technology selection.

Source: Bruegel.

This Policy Brief summarises previous papers that have benefited from funding under the Simpatic project (http://www.simpatic.eu).