Estimates of payments countries will receive from the Next Generation EU instrument can be made with some degree of precision. But estimating countries’ repayments up to 2058 is extremely difficult.
By:
Zsolt Darvas
Date: January 27, 2021
Topic: European Macroeconomics & Governance

The estimation of payments from the European Union’s COVID-19 economic recovery fund, Next Generation EU (NGEU), to each EU country in 2021-2026 involves uncertainties, yet the overall magnitudes can be estimated with a reasonable degree of precision. In contrast, estimating member states’ contributions to the repayment of EU debt (which will be issued to finance NGEU spending) is burdened with enormous difficulties, primarily related to the uncertainty of gross national income projections up to

The 2020 pandemic economic shock has led to reassessment of fiscal policy measures in 2018 and earlier, because of faulty measurement of unobserved output gaps and structural balances. The current period of suspension of EU fiscal rules should be used to design a better fiscal framework.
By:
Zsolt Darvas
Date: January 5, 2021
Topic: European Macroeconomics & Governance

The COVID-19 pandemic and the subsequent economic distress caught everyone by surprise. In late 2019, forecasts suggested some economic growth in Europe and elsewhere in 2020, while current projections suggest a 7.4% drop in European Union GDP in 2020. No forecaster should be blamed for not foreseeing the pandemic.
It would be a rather bizarre situation, however, if a shock in 2020 changed our view of fiscal

Workers with low-educational levels suffered far worse than others in terms of COVID-19 related job losses during the first half of 2020 in the EU. Jobs for tertiary-educated workers even increased. Thus, the pandemic has increased income inequality, reinforcing the case for inclusive development.
By:
Zsolt Darvas
Date: December 3, 2020
Topic: European Macroeconomics & Governance

Though COVID-19 caught almost everyone by surprise, the inequality it has brought in its wake should have been predictable. A look back at the historical record shows us that previous epidemics increased income inequality. European governments presumably considered these outcomes when designing wide-ranging measures to protect employment and support sectors hard hit by the pandemic. Unfortunately

Testimony before the European Parliament on the subject of euro area accession.
By:
Zsolt Darvas
Date: November 19, 2020
Topic: European Macroeconomics & Governance

On November 19th, 2020 Bruegel senior fellow Zsolt Darvas gave a presentation and participated in the discussion with MEPs on ‘Euro area accession countries in the context of the pandemic’, at the meeting of the Euro Accession Countries Working Group of the European Parliament’s Committee on Economic and Monetary Affairs (ECON).

Testimony before the European Parliament on the subject of EU fiscal policies.
By:
Zsolt Darvas
Date: November 17, 2020
Topic: European Macroeconomics & Governance

On 13 November, 2020 Bruegel senior fellow Zsolt Darvas gave a presentation and participated in the discussion on ‘EU fiscal policies: how to address sustainability of public finances and economic stabilisation’, at the Shadows’ meeting of the Economic and Monetary Committee (ECON) of the European Parliament, related to the pending report ‘The review of the macroeconomic legislative framework for a better impact on Europe’s real economy and improved transparency of decision-making and democratic accountability’.

How much cake does everyone actually get and at what speed? This blogpost estimates the yearly Next Generation EU (NGEU) payments to each EU country at current prices in euros and as a share of GNI.
By:
Zsolt Darvas
Date: November 12, 2020
Topic: European Macroeconomics & Governance

The Special European Council of July 2020 defined the total amount of Next Generation EU (NGEU) commitments at 2018 prices. Existing estimates, including my earlier ones, allocated these 2018 price amounts across countries, or reported the yearly breakdown of the total, but did not include the yearly breakdown per country in current prices in euros. This blogpost fills this gap by estimating the euro amounts of NGEU payments to each EU country in each year between 2021 and 2026. I also report these

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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