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This book explores the reasons behind Europe’s poor performance in terms of overall growth and its progressively diminishing role in the global context. Recognizing that the big challenge is to restore confidence and hope in Europe, potential solutions are discussed. The volume comprises a selection of contributions to the XXVI Villa Mondragone International Economic Seminar (Rome, 2014), the most recent of a series of seminars that have provided outstanding scholars with an opportunity to discuss key topics in economic research.

In recent years the persistence of high unemployment and low growth has increased the Euroscepticism that has targeted the euro and the Brussels bureaucracy. Readers will find this book a fascinating source of information on current thinking regarding topics such as European industrial policy, European governance, unemployment, the euro and competitiveness, trade and financial integration, the Transatlantic Trade and Investment Partnership, anticorruption policies, and energy and climate policies. In particular, it examines the structural reforms and commitment to development that will be required for Europe to become a region characterized by social justice, dynamism, and opportunities for all.



Perspectives on Growth, Trade, and Social Agenda Expenditures in the Eurozone During the Rest of this Decade, With and Without the EU-US Transatlantic Trade and Investment Partnership (TTIP)

The Euro Zone countries have been experiencing slow growth of real GDP during the last decade. Without the increase in exports and national income estimated to result from a successful EU-US Transatlantic Trade and Investment Partnership (TTIP) now being negotiated, most members of the Eurozone would be unable to maintain the same share of government expenditures in gross domestic product and finance their social agenda in the same degree during the rest of this decade, as they did during the last decade. In this paper, we project the trends in GDP growth, national savings, household consumption and import demand for the seventeen countries that comprised the Eurozone in 2013. The exports of Eurozone members are determined by their share of the import demand of their most important trading partners and the rest of the world. We find that without TTIP, most members of the Eurozone would be unable to maintain the same share of government expenditures in gross domestic product and finance their social agenda in the same degree during the rest of this decade, as they did during the last decade. This conclusion would change with a successful TTIP. Even without a successful TTIP, however, most member nations would still be able to increase the absolute amount of government expenditure and social expenditures even as their shares decline.
Fred Campano, Lucio Laureti, Dominick Salvatore

Can Trade Become Again an Engine of Growth for Europe and the World?

Global trade collapsed in dramatic fashion in 2009, after growing exponentially in the two decades prior to the crisis. In recent years it has failed to regain its pre-crisis dynamism. At a time when the G20 is trying to provide new momentum to global growth, a critical issue is whether trade can become, once again, one of its engines. While the conditions to conclude ambitious multilateral trade negotiations are not in place, there is room and political capital to finalise ‘super’ Free Trade Agreements (FTA) (like TTIP) that can unlock the trade potential and support GDP growth in the future. Should this happen, trade can become again one of the major engines of growth of the global economy. The main challenge ahead will be to ensure that, as they come close to conclusion, super-FTA negotiations are not watered down and keep an adequate level of ambition. Once this has happened, it will then be important to find ways to effectively and comprehensively multilateralise the progress FTAs will have made on regulatory convergence and other non-tariff related issues. In this respect the EU can play a critical role, given its weight in the global trade system, the FTA negotiations it is carrying out with key partners, and its commitment to the development of a multilateral trade system. The EU has a strong incentive to move in this direction. With the European recovery stalling, the EU has a lot to gain from successful FTA agreements and further positive developments at multilateral level (and a lot to lose from the current lacklustre global trade performance).
Moreno Bertoldi, Christopher Mc Innes

Trade Margins and Exchange Rate Regimes: New Evidence from a Panel VARX Model

This paper studies the dynamics of output and export margins in the aftermath of external shocks in fixed and floating exchange rate regimes. Using a panel VARX model, it traces the mean responses of output, terms of trade, extensive and intensive margins to real and nominal shocks in 22 developed economies over the period 1988–2011. It finds remarkable differences in the transmission of shocks depending on the exchange rate regimes. Overall, our findings provide novel evidence in support of the stabilization advantages of flexible exchange rates based on their ability to smooth extensive margins. These findings are consistent with the predictions of theoretical models with firm entry.
Lilia Cavallari, Stefano D’Addona

Rebalancing and the Euro

Pushing down the euro is seen by many as a solution to stagnation and ‘lowflation’ in the euro area, but this paper argues it needs to be supported by a fiscal expansion, in particular in Germany. Unfortunately the incentives for Germany to embark on fiscal stimulus are weak. Yet without a fiscal expansion the current account surplus would widen further in response to exchange rate depreciation, thus exacerbating the current imbalances—excess saving in Germany alongside indispensable deleveraging in southern Europe. It would risk producing a protracted slump that feeds onto itself, with (core) inflation declining further and the risk of outright deflation increasing. If that risk were to materialise the ECB may have to be called to rescue the euro again, as it did in 2012 with the introduction of Outright Monetary Transactions (OMT). And it would have to do so persuasively or else Europe risks ending up in a Japanese conundrum. It is in this perspective the ECB's move towards quantitative easing should be seen.
Paul van den Noord

What Kind of Financial Integration Under Banking Union?

This paper reviews the experience of financial integration in the euro area since the start of the EMU and focuses on the possible impact that the implementation of the Banking Union (in particular the Single Supervisory Mechanism and the Single Resolution Mechanism) might have on the future process of financial integration. To that end, the paper first describes the main past developments in financial integration both at the euro area level and at a disaggregated level (e.g. in specific market segments) through a wide range of indicators. Second, it assesses the degree to which the integration process achieved the main benefits usually expected from financial integration (i.e. enhanced risk-sharing and improved capital allocation) while avoiding potential negative effects in terms of financial stability as well as it evaluates the experience of financial fragmentation during the crisis. Third, it provides some preliminary considerations on how the implementation of the Banking Union might affect some less positive elements of the past experience of financial integration if these tended to manifest themselves again in the future. Overall, the Banking Union is expected to have a positive impact by promoting a more balanced financial integration process and contributing to reducing the diffusion and negative effects of financial fragmentation in times of crisis. This enhanced quality of the financial integration process would be to a large extent the result of the Banking Union making the conduct of prudential supervision and bank resolution more effective.
Mauro Grande

Structural Reforms in the Eurozone: A Case of Self-defeating Expectations?

This work addresses the implications of agents’ expectations about structural reforms in a context characterized by institutional inertia. By means of a stylized small-open economy model encompassing policy-induced barriers to entry in the non-tradable sector, the paper shows that expectations about reforms affect economic performances and alter the incentives for the authorities to implement structural reforms. Moreover, the model shows that it is possible to envisage circumstances under which no set of expectations has the potential for self-fulfillment, thereby creating self-defeating expectations traps. This model sheds light on the recent problems of the Eurozone periphery, characterized by authorities exhibiting a status quo bias against reforms and by a history of self-defeating optimistic expectations about the realization of structural reforms.
Luigi Bonatti, Andrea Fracasso

Transatlantic Austerity 2010–13. A Comparative Assessment

Drawing on a large data collection, this paper offers a comprehensive assessment of fiscal austerity in twenty-nine major countries in the Transatlantic area in the aftermath of the Great Recession of 2008–09. Countries include the seventeen Euro members as of 2013, and twelve non-Euro countries, the ten other members of the European Union, United States and Canada. The paper is organized in two parts. First, an index of austerity is proposed based on the contraction of the public sector’s net contribution to the economy. Then, there follows an assessment of austerity under the two dimensions of the improvement of public finances and interest rates, and of the collateral effects on economic activity and employment. The assessment is accompanied by reasoned discussion of the theoretical motivations and underpinnings of fiscal austerity and relevant criticisms. The main conclusion is that austerity in general has so far missed its promised goals, for (1) except budget deficits, public finances have further deteriorated, (2) countries under stronger austerity have achieved neither consolidation nor faster recovery but rather lower shock absorption, worse recovery performances, and higher unemployment. Claims that austerity failures are due to country-specific factors, such as mistakes in implementation and pre-crisis structural weaknesses, are not supported by robust evidence.
Roberto Tamborini

What Went Wrong with Western Europe? An Essay on the Causes of Its Economic Decline and on Possible Remedies

This paper deals with the causes of the economic crisis of Western Europe (WE) by taking a very long run and classical approach to the slow build up of structural imbalances. It maintains that the growth beyond acceptable levels of the state sectors and labour costs and the fact that the BRIC have learned how to produce industrial goods are among the main causes. The collapse of communism, the market oriented policies of China and a very high degree of forward shifting of taxation onto wages in WE have also played an important role. The long run growth of government expenditures and taxation and their effects on wages, employment, investment and economic growth are analyzed. The crisis has also a cyclical component linked to successive waves of tax increases and to high real interest rates. Only a drastic rethinking of the role and functions of the state sectors can bring back prosperity and freedom in WE.
Giuseppe Tullio

Revitalising Europe’s Economy: Towards Growth

The Europe 2020 Strategy is under mid-term review. This paper looks at the Strategy’s objectives and the means to achieve them, considering the new socio-economic reality that has emerged from the crisis along with new data on employment and social inclusion (or exclusion). It argues that any future strategy should address, at the same time, innovative ways to: (i) enhance potential growth from a lowered post-crisis level; (ii) improve finance for growth given tight budgetary constraints and high levels of public and private debt; and (iii) ensure social and environmental sustainability. The paper contains suggestions for a new approach to Europe 2020 and considers possible structural reforms to enhance growth and employment, compatible with environmental and social goals. Moreover, it discusses the need for some ‘good imbalances’ as by-products of economic and financial integration and includes a few remarks on the current policy mix, which appears suboptimal, and as a necessary ingredient to strengthen the reform process.
Lorenzo Codogno

The Corporatist Antagonism to Economic Dynamism

This paper intends to describe the common traits of ‘corporatism’ both as an economic and political movement. The essence of corporatism is confusion in its theories and institutions and that characteristic has made its definition very complex. The paper indicates the existence of nine political myths in corporatist systems: the myth of unity, the myth of populism, the myth of the charismatic forms of power, the myth of politics as epic; the myth of progress against capitalist individualism, the myth of autarky, the myth of industrialization and the myth of politics as the dialectics of friend-enemy. Many of these political myths are effective in many present day democratic societies and prevent the development of a healthy and dynamic economy. Corporatist doctrines and institutions are the cause of the economic stagnation around the world. Corporatist doctrinaires are the “long defunct economists” that influence present day statesmen even beyond their conscious knowledge, having serious consequences in the dynamism of their economies. Corporatism is the adversary of individualism and a dynamic economy.
Juan Vicente Sola

Growing-by-Unleashing Grassroots Entrepreneurship and Alibaba Innovations

Inspired by Phelps’ book (Mass flourishing: how grassroots innovation created jobs, challenge, and change. Princeton University Press, Princeton, 2013) and drawing upon Alibaba’s experience, this paper discusses a small-business-based and digital-technology-driven new growth model—growing by unleashing grassroots entrepreneurship. Small business is an important expression of individuals’ will, capacity, and aspiration to innovate. In the digital age, technology-driven platform can assist small business to thrive. From Alibaba’s experience, building credibility and trust, providing open, transparent, efficient, and accountable finance services and establishing rules of games are crucial in the digital age for unleashing grassroots entrepreneurship and innovation that can bring sustainable mass flourishing.
Ying Lowrey

The Evolution of European Energy and Climate Policies: The View of a Market Player

In the late 1990s the EU re-designed its energy system (electricity and gas) to take advantage of the internal market by enhancing competition, transparency and efficiency. As climate change broke into the international agenda, the objective of decarbonization of the energy supply was added to this design resulting in a long-term comprehensive articulation of climate and energy policies, addressing competitiveness, sustainability and security of supply. The 2014 deadline for the completion of the internal energy market is approaching and the debate on the climate and energy policy framework to 2030 is getting into its crucial phase. It is therefore timely to assess what has been achieved so far, also to learn from the past. The European market is still fragmented, the EU ETS is in trouble and industry and consumers complain about high energy prices. Are the objectives of decarbonization and fully integrated European energy markets compatible? Has a good design been undermined by failures of implementing instruments? This paper examines the evolution of energy and climate policies in the Union in the last decades with the eyes of one of the largest electricity players in the Continent. We believe decarbonization and a functional pan-European electricity market are both achievable with a serious rethinking of the current market model toward an ‘Energy Plus Capacity’ market with a strengthened ETS. This approach can also help in reducing the wedge between the costs of producing electricity (wholesale prices) and end-users prices resulting in electricity bills reflecting more closely the costs of generation and supply.
Simone Mori, Giuseppe Montesano

Towards a Fair and Rigorous International Emissions Trading System: A Blueprint for Success

The international negotiations to mitigate the emissions of GHGs are reaching a critical phase. But to be successful the outcome must be fair and rigorous, taking into account not only a country’s historic emissions but also its capacity to pay. Furthermore, any agreement must be enforceable with failure to comply involving economic consequences. In this paper, the necessary elements of such an agreement are presented demonstrating that Europe and the United States must reduce emissions much more vigorously and an international emissions trading scheme is an absolute necessity to meet a 2 °C pathway.
Odin K. Knudsen

Corruption of the Institutional System: Remedies

The usual way of conceiving corruption refers to individual behavior, such as the payment of bribes to public officers in order to obtain benefits (which could be called the "subjective" side of corruption). This is an indispensable but insufficient approach to understand and overcome corruption. It is also essential to cope with the “objective” side of corruption, which is represented by the degeneration of the institutional system and its rules. This chapter analyses some cases of “objective” corruption of the institutional system and tries to indicate possible remedies, particularly with regard to simplifying legislation, reducing administrative procedures and discretionary powers, enhancing public controls, improving transparency in public procurement. Putting in act these remedies against “objective” corruption can help reducing the incentives and occasions of “subjective” corruption.
Marco D’Alberti

Governance, Moral and Economic Values

As for all crimes, the cost of corruption to the perpetrator is a positive function of the probability of being detected and a negative function of the severity of the sanction. The uncertainty of the sanction and the growing importance of illegal practices in our society increases the benefits of operating illegally, while cost are reduced. This paper analyses the social costs of the activities of surveillance and sanction needed to circumvent corruption. The benefits of zonitoring and sanctioning entail both decreasing and increasing costs. There will be an optimal level of such activities, in which corruption will not be eliminated. The use of real option theory suggests, contrary to the traditional theory of law and punishment that the power of politicians and men of law both depend on uncertainty. The greater the uncertainty and the value of penalty, the greater the power of the police or the magistrate. Given this perspective it may be considered desiderable restoring the credibility of the judicial administration ,such as providing somewhat prompt extra penalties, setting up anti-corruption boards, promoting transparency and openness in governmental activities. At the same time, these policies have limited power, since moral norms and standards are delicate mechanisms that rely on trust and commitment and ensure that citizens choose to act according to principles that would not necessarily increase their wellbeing.
Luigi Paganetto, Pasquale L. Scandizzo
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