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Zsolt Darvas

Zsolt Darvas

Zsolt Darvas joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Research Fellow at the Institute of Economics of the Hungarian Academy of Sciences and Associate Professor at the Corvinus University of Budapest.

Articles by Zsolt Darvas

The Economic growth and income distribution implications of public spending and tax decisions

9 days ago

European Union countries can reduce inequality of opportunity through public spending and tax decisions. Broadly, the most effective approach includes progressive taxes and inheritance taxes, spending on education, health and public infrastructure, and better government effectiveness. Better fiscal rules and institutions also increase resilience against crises.
By:
Zsolt Darvas
Date: October 19, 2020
Topic: European Macroeconomics & Governance

The level and composition of public expenditures and revenues both have implications for economic development, as shown by the ‘fiscal multiplier’ and the ‘quality of public finance’ literature. Public finance decisions also influence the distribution of income. Based on a review of the literature, I argue for a fair distribution of

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Will European Union countries be able to absorb and spend well the bloc’s recovery funding?

September 24, 2020

To help finance the post-coronavirus recovery, the European Union is raising large amounts to pass on to its members. But absorption of EU funds is typically slow and some countries might struggle to spend what they can get, even if they will have broad freedom to design spending programmes. The focus should be on worthwhile spending, not just on absorbing EU funds.
By:
Zsolt Darvas
Date: September 24, 2020
Topic: European Macroeconomics & Governance

The European Union’s landmark recovery instrument, Next Generation EU (NGEU), will be embedded into the EU’s budget. This makes sense, because the EU budget is a well-established framework and hence can be deployed readily. But pay-outs from the EU budget are disbursed slowly to member states, partly because programmes have to be

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Relocating production from China to Central Europe? Not so fast!

August 20, 2020

Western European imports from central Europe have fallen dramatically, while imports from China fell much less, and had already recovered to pre-COVID level by April 2020. Central European governments should instigate new measures to foster the transition towards knowledge-intensive economic activities.

This article originally appeared in Eastern Focus.

The COVID crisis caused a major setback to global trade and disrupted the functioning of global production networks. From the perspective of Central, Eastern and South Eastern European (CESEE) countries, this has raised the hope that Western European manufacturers will bring their suppliers from East Asia closer, potentially boosting investment in CESEE.
The volume of merchandise trade is expected to drop by almost 20% in the second

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Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?

July 23, 2020

The European Commission’s original allocation mechanism really favoured lower-income countries and to a large extent was based on pre-COVID economic data. The modification adopted by the European Council gives more consideration to the country size and the adverse economic impact of COVID-19. As a consequence, by using the Commission’s May 2020 economic forecasts, I estimate that only Germany and France will get more grants from the EU’s recovery fund compared to the Commission’s original proposal, while other countries will get less.
The grand EU budget deal reached by the European Council on 21 July 2020, which includes a one-time €750 billion recovery fund named ‘Next Generation EU’ (NGEU), is unprecedented. For the first time in its history, the EU will borrow from capital markets to

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The EU’s recovery fund proposals: crisis relief with massive redistribution

June 17, 2020

Poorer European Union countries and those hardest hit economically by the COVID-19 crisis could obtain up to 15% of their GNI in grants and guarantees from the EU’s proposed recovery instruments. Yet the proposal would represent a net benefit for all EU countries, even if there is only a small positive economic impact over the long-term. The proposed very long-maturity loans would lead to non-negligible benefits, exceeding 1% of GDP for some countries.
When European leaders convene this Friday (19 June), each will mainly look at how much her or his country can expect to receive from the European Commission’s recovery proposals. However, the Commission has so far shied away from publishing an estimate of national shares.
Limited guidelines were provided however on the estimated overall

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Three-quarters of Next Generation EU payments will have to wait until 2023

June 10, 2020

Because of hurdles in designing, approving and implementing European Union programmes, less than a quarter of the €438 billion in grants planned under the new EU recovery instruments is expected to be spent in the next two and a half years, when recovery needs will be greatest. Well-functioning financial markets can help bridge the gap between urgent spending needs and late-arriving EU disbursements, but more effort is needed to frontload EU payments.
The falling government bond yields of Greece, Italy and Spain reflect the market’s positive assessments of the landmark economic initiatives unveiled last month. Following the 18 May Franco-German proposal, the European Commission proposed a new recovery facility, Next Generation EU, which would borrow money in the name of the European Union

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An uncompromising budget

May 29, 2020

Apart from decisive European Central Bank measures, the EU-wide response to the COVID crisis had been rather weak until the Commission put on the table a drastically new proposal: the creation of a new recovery facility, ‘Next Generation EU’, that would borrow money in the name of the EU to finance EU-wide expenditures. The changes to the proposed standard seven-year budget that primarily focuses on long-term structural issues are however generally small, and funding reductions are compensated by new funds from the recovery instrument, suggesting that an opportunity is missed to reform the EU budget.
Summary

The overall proposal has a number of useful aspects and some limitations.
Main advantages:
• ‘Next Generation EU’ financed by long-term EU borrowing would include €440 billion

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The fiscal consequences of the pandemic

March 30, 2020

The likely economic depression triggered by coronavirus will pose a serious fiscal challenge to some euro-area countries. Given the special circumstances of the pandemic, a European solution is needed, involving more European Central Bank purchases, a significantly increased European Stability Mechanism and some degree of mutualisation of the pandemic-related economic costs.
By:
Zsolt Darvas
Date: March 30, 2020
Topic: European Macroeconomics & Governance

Countries inside and outside the EU are working hard to contain the pandemic and address its adverse economic implications. In a new dataset, we have decomposed fiscal measures announced by governments into three categories: (1) immediate stimulus, such as additional government spending and foregone revenues; (2) deferrals of

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The EU’s poverty reduction efforts should not aim at the wrong target

February 18, 2020

The EU cannot meet its ‘poverty’ targets, because the main indicator used to measure poverty actually measures income inequality. The use of the wrong indicator could lead to a failure to monitor those who are really poor in Europe, and a risk they could be forgotten. By: Zsolt Darvas Date: February 18, 2020 Topic: European Macroeconomics & Governance The European Union’s 2010 growth strategy, Europe 2020, included a target to lift “over 20 million people out of poverty” – to reduce their number from 116 million (or 24% of the EU population) to 96 million. This was to be done between 2007 and 2019 in the first 27 EU member states – including the United Kingdom, but predating Croatian membership. Europe 2020 refers to 2008-2020, but the monitoring values published by Eurostat for

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The EU’s poverty reduction efforts should not aim at the wrong target

February 18, 2020

The EU cannot meet its ‘poverty’ targets, because the main indicator used to measure poverty actually measures income inequality. The use of the wrong indicator could lead to a failure to monitor those who are really poor in Europe, and a risk they could be forgotten. By: Zsolt Darvas Date: February 18, 2020 Topic: European Macroeconomics & Governance The European Union’s 2010 growth strategy, Europe 2020, included a target to lift “over 20 million people out of poverty” – to reduce their number from 116 million (or 24% of the EU population) to 96 million. This was to be done between 2007 and 2019 in the first 27 EU member states – including the United Kingdom, but predating Croatian membership. Europe 2020 refers to 2008-2020, but the monitoring values published by Eurostat for

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Resisting deglobalisation: the case of Europe

February 4, 2020

Global trade and finance data indicates that the pre-2008 pace of economic globalisation has stalled or even reversed. The European Union has defied this trend, with trade flows and financial claims continuing to grow after the recovery from the 2008 global economic and financial crisis. Immigration, including intra-EU mobility, has also continued to increase. By: Zsolt Darvas Date: February 4, 2020 Topic: European Macroeconomics & Governance Our analysis of public opinion in EU countries shows that support for globalisation, free trade and immigration, is on the rise. EU public opinion on these issues does not differ greatly from the rest of the world.Our panel-model estimates for EU countries from 2009 to 2019 find a strong association between the unemployment rate and the

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How could net balances change in the next EU budget?

January 23, 2020

The gap between payments into the EU budget and EU spending in a particular country has importance when EU spending does not constitute European public goods, or there are risks for their improper use. I estimate that the Juncker Commission’s proposal for the next seven-year budget would lead to big reductions (as a share of GNI) in the net payments to most central European countries, while the changes for other countries seem small By: Zsolt Darvas Date: January 23, 2020 Topic: European Macroeconomics & Governance Negotiations about the EU’s next seven-year Multiannual Financial Framework (MFF) for 2021-2027 are running over. The Juncker Commission made its proposal in May 2018 and wished to conclude the negotiations before its mandate expires, which did not work out. The

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How much will the UK contribute to the next seven-year EU budget?

December 16, 2019

This post estimates the United Kingdom’s net contribution to the 2021-2027 EU multiannual budget at close to €20 billion, taking into account the most significant items of the financial settlement according to the October 2019 EU27-UK draft withdrawal agreement. By: Zsolt Darvas Date: December 16, 2019 Topic: European Macroeconomics & Governance The exit of the United Kingdom from the EU will have an impact on the EU’s next Multiannual Financial Framework (MFF) running from 2021-2027.  The 12 December 2019 UK election result makes the ratification of the October 2019 EU27-UK draft withdrawal agreement likely. This agreement says the UK will contribute its share of the EU’s outstanding commitments and liabilities incurred until 31 December 2020. These include outstanding EU budget

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A new look at net balances in the European Union’s next multiannual budget

December 12, 2019

Whenever the European Union’s budget is discussed, much of the political focus is on net balances – whether countries pay in more than they receive – rather than on the broader overall positive effects of EU spending. The largest net contributor countries have sought to limit their contributions, leading to the build-up of an ad-hoc, complex, opaque and regressive system of revenue corrections. By: Zsolt Darvas Date: December 12, 2019 Topic: European Macroeconomics & Governance To inform debate on the 2021-2027 EU budget, I estimated the impact on net balances of the 2018 European Commission multiannual budget proposal, under three scenarios: elimination of rebates for all of the 2021-2027 new budget period, gradual elimination of rebates and non-elimination of rebates. These

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Who pays for the EU budget rebates and why?

December 4, 2019

A complex system of EU budget revenue corrections has been developed since the mid-1980s. I quantify their impacts: which countries pay and benefit from it and by how much and highlight several anomalies. The best solution would be to reform EU budget spending to provide only European public goods and eliminate all rebates. But if that’s not possible, then at least the rationale for the rebates should be spelt out clearly, and a transparent system built on clear principles should replace the current ad hoc, complicated, non-transparent and regressive system. By: Zsolt Darvas Date: December 4, 2019 Topic: European Macroeconomics & Governance The question of ‘rebates’, or revenue corrections, is one of the hot topics of the discussion about the next seven-year EU Multiannual

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With or without you: are central European countries ready for the euro?

October 10, 2019

The debate on euro adoption by central European EU countries has intensified in the last years. In this Policy Contribution the author does not review all the complex aspects of euro-area enlargement, but analyse a particularly important issue: the build-up of macroeconomic vulnerabilities and the subsequent adjustments. By: Zsolt Darvas Date: October 10, 2019 Topic: European Macroeconomics & Governance Southern European euro-area members suffered from unsustainable developments after they joined the euro in 1999 and up to 2008, and have had great difficulties since. Inadequate national policies were the main causes of these unsustainable developments, but euro membership played a role before 2008 by leading to low real interest rates (which fuelled credit booms) and by enabling

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Long term real interest rates fell below zero in all euro area countries

October 8, 2019

The 10-year real government bond yield, which is the nominal yield deflated by expected inflation, has fallen below zero in Italy and Greece, boosted by increased market confidence for their new governments. Romania is the only remaining EU country with a positive real interest rate. Negative real interest rates vastly help fiscal sustainability and provide a great opportunity to invest in much needed infrastructure and the transition to a carbon-neutral economy. By: Zsolt Darvas Date: October 8, 2019 Topic: European Macroeconomics & Governance While nominal interest rates of all euro-area countries converged to the German rates during the first decade of the euro, large differences developed with the emergence of the euro crisis after 2009: interest rates in southern European

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Why structural balances should be scrapped from EU fiscal rules

October 1, 2019

A prominent team from DG ECFIN of the European Commission challenged some of the criticisms of the EU’s methodology for estimating potential output and output gaps, as well as their role in the EU fiscal framework. In this post, I conclude that their responses to the criticisms they considered are questionable. More importantly, they overlook serious problems with the EU’s potential output methodology. By: Zsolt Darvas Date: October 1, 2019 Topic: European Macroeconomics & Governance The EU fiscal framework strongly relies on the concept of the structural budget balance of the general government, which is an intuitive concept. It is the budget balance cleaned from temporary effects, such as smaller tax revenues and larger unemployment benefit payments in a recession, and one-off

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Questions to the economy commissioner-designates

September 23, 2019

European Commission President-elect Ursula von der Leyen disseminated her mission letters to commissioner-designates. In my opinion, the letters to economy commissioners highlight several essential priorities, yet they leave a number of important questions open that I recommend Members of the European Parliament to ask at the upcoming parliamentary hearings of the designates. By: Zsolt Darvas Date: September 23, 2019 Topic: European Macroeconomics & Governance In the Von der Leyen Commission, economic issues will primarily belong to the “Executive Vice-President for An Economy that Works for People”, whose designate is Mr Vladis Dombrovskis, and the “Commissioner for Economy”, whose designate is Mr Paolo Gentiloni.In my reading, the mission letters (see here and here) contain

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Uncertainty over output gap and structural-balance estimates remains elevated

June 17, 2019

The EU fiscal framework strongly relies on the structural budget balance indicator, which aims to measure the ‘underlying’ position of the budget. But this indicator is not observed, only estimations can be made. This post shows that estimates of the European Commission, the IMF, the OECD and national governments widely differ from each other and all estimates are subject to very large annual revisions. The EU should get rid of the fiscal rules that rely on structural balance estimates and use this opportunity to fundamentally reform its fiscal framework.

The European fiscal framework involves a complex set of rules and indicators. An important indicator is the so-called structural balance of the general government, which aims to measure the underlying position of the budget balance.

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EU enlargement 15th anniversary: Upward steps on the income ladder

April 30, 2019

Since their accession to the EU 15 years ago, the incomes of most central Europeans have increased faster than the incomes of longer-standing members and, thereby, they moved upwards in the EU distribution of income. Yet the very poorest people have not progressed in some countries.
By:
Zsolt Darvas
Date: April 30, 2019
Topic: European Macroeconomics & Governance

Since the 10 central European countries joined the EU on May 1st 2004, their average income converged towards the EU average. Several aspects of EU membership could have contributed to this process, such as improved market mechanisms, institutions and business environment, access to the single market, the involvement of central European companies in European and

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EU budget implications of a no-deal Brexit

January 14, 2019

A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states.
By:
Zsolt Darvas
Date: January 14, 2019
Topic: European Macroeconomics & Governance

The United Kingdom’s financial contribution to the liabilities of the European Union – the so-called ‘exit fee’ – is, in my view, a less important aspect of Brexit. The amounts at stake are small relative to GDP both for the EU and the UK, and there are many more important issues that could also have larger direct budgetary impacts than the exit fee.
For example, I regard the

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Forecast errors and monetary policy normalisation in the euro area

December 13, 2018

What did we learn from the recent monetary policy normalisation experiences of Sweden, the United States and the United Kingdom? Zsolt Darvas consider the lessons and analyse the European Central Bank’s forecasting track record and possible factors that might explain the forecast errors.
By:
Zsolt Darvas
Date: December 13, 2018
Topic: European Macroeconomics & Governance

This Policy Contribution was prepared for the Nomura Foundation’s Macro Economy Research Conference: ‘Monetary Policy Normalization Ten Years after the Great Recession’, 24 October 2018, Tokyo. Financial support from the Nomura Foundation is gratefully acknowledged.

We consider the lessons of the recent monetary policy normalisation experiences of

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ECB’s huge forecasting errors undermine credibility of current forecasts

December 6, 2018

In the past five years ECB forecasts have proven to be systematically incorrect: core inflation remained broadly stable at 1% despite the stubbornly predicted increase, while the unemployment rate fell faster than predicted. Such forecast errors, which are also inconsistent with each other, raise serious doubts about the reliability of the ECB’s current forecast of accelerating core inflation and necessitates a reflection on the inflation aim of the ECB.
By:
Zsolt Darvas
Date: December 6, 2018
Topic: European Macroeconomics & Governance

In its latest projections, on September 13th 2018, ECB staff foresaw a core inflation increase to 1.5% on average in 2019 and further to 1.8% on average in 2020 (core inflation does not

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Greece: What to expect after the bail-out

October 9, 2018

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.
By:
Zsolt Darvas
Date: October 9, 2018
Topic: European Macroeconomics & Governance

This blog post was published by Liberal, and an abridged version appeared in Fileleftheros.

How different is the post-bail-out era from the preceding eight years?
While the bail-out is over, the

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Should central European EU members join the euro zone?

September 11, 2018

Eurozone membership (or the use of a fixed exchange rate) was not a factor determining economic success in Central Europe. There were both good and bad macroeconomic performances in both the flexible and the fixed exchange rate regimes of Central European countries. The implication is that Central European “outs” could be economically successful both with and without the euro, yet the EU is not only about economic benefits.
By:
Zsolt Darvas
Date: September 11, 2018
Topic: European Macroeconomics & Governance

The debate on euro-zone entry of central European EU Member States has intensified after Jean-Claude Juncker, president of the European Commission, expressed the Commission’s ambition to accelerate the process and

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EU income inequality decline: Views from an income shares perspective

July 5, 2018

Over the past decade, the income share of low earners has increased in the EU while that of top earners has slightly declined. Although the upward convergence of the impoverished central European population is impressive, the southern European poor have faced a major setback while the southern European rich have hardly suffered.

In a recent blog post, I showed that the EU-wide Gini coefficient of income inequality hit an almost three decade low in 2016. The large decline in 2016 was driven by both income convergence across countries and reductions in within-country income inequalities. Following a few commentators’ requests for a more granular analysis, I will provide more scrutiny on this situation by looking at income share developments.
Figure 1 shows that the poorest 20% of the

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European income inequality begins to fall once again

April 30, 2018

Following almost a decade of relative stability, income inequality within the EU recorded a sizeable decline in 2016, reaching its lowest value since 1989. The fall of both within- and between-country inequality contributed to the 2016 reduction in overall EU inequality.
By:
Zsolt Darvas
Date: April 30, 2018
Topic: European Macroeconomics & Governance

Income inequality among European Union citizens has previously shown strikingly different developments compared with income inequality among United States citizens. The economic collapse of post-communist countries after 1989 led to a rapid increase in income inequality among the combined group of citizens of the current 28 EU members until 1993. But from then on, inequality in

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Global income inequality is declining – largely thanks to China and India

April 19, 2018

Income inequality among citizens of 146 continues to fall, though at a somewhat reduced pace, according to the updated Bruegel dataset. Income convergence of China and India accounts for the bulk of the decline in global income inequality from 1988-2015.

Income inequality is typically measured at the country level, which has a clear rationale: people might be interested in knowing their relative income position compared to their compatriots, while social policies that redistribute from the rich to the poor are the strongest at the country level.
But there are alternative reference groups to consider. For example, people might be interested in their relative income position in the context of their close neighbourhood, such as people living in the same village or city. Cross-country

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Greece must capitalise on its growth momentum

March 26, 2018

Better-than-expected growth performance reflects the underlying positive changes in the Greek economy – but net investment is in fact negative, while Greece has various institutional weaknesses. Further improvements must be made regarding Greece’s attractiveness to foreign direct investment. A new (at least precautionary) financial assistance programme would improve trust in continued reforms and also address eventual public debt financing difficulties.
By:
Zsolt Darvas
Date: March 26, 2018
Topic: European Macroeconomics & Governance

This opinion piece has been published in:

Economic growth in Greece turned out to be more favourable than was projected in summer 2015, when the third financial assistance programme was agreed

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