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Since in 2017 the sixtieth anniversary of the Treaty of Rome coincides with the twenty-fifth anniversary of the Maastricht Treaty, the Revue d’économie financière has taken a look back at European history and imagined what the future may hold. The context is a Europe in poor shape—the financial crisis, and following it the Eurozone crisis, have done a lot of damage in Europe; the parties of protest, which are generally anti-European, have an ever greater appeal; and the United Kingdom has decided to leave the European Union. This issue opens with the accounts of three major players, François Villeroy de Galhau, Mario Monti, and Pascal Lamy, and is then structured around three sections dedicated to, first, the birth of the single market, its strengthening, and its evolution, secondly, the challenges of financial Europe, and, finally, the future of Europe and the reforms that are still necessary. The review continues with the column on financial history devoted to the lessons to be drawn from the monetary history of Greece and with three articles on different subjects of financial economics: how the market performs when the Left is in power in France, the consequences of the low-interest rate policy, and Islamic banks.
publication : April 2017 329 pages
Since the signature of the Treaty of Rome in 1957, Europe has shown a remarkable collective determination in building the shared assets that are the single market and the euro. The path has not always been easy, and the crisis cruelly exposed the shortcomings of the European Union. But Europe's past successes in overcoming the challenges it faced stand as powerful lessons for the future. In order to control our common destiny, what we need is not less Europe, but rather a better Europe, a Europe that is more focused on its priorities. On an economic level, we need to complete the success of our monetary union with a genuine economic union, as this is the only way to provide lasting support for growth. This can be achieved through three concrete projects. The first immediate one is a Financing Union for Investment and Innovation, to better channel our abundance of savings towards investment and innovation. The second is a collective euro area economic strategy, with more national reforms where they are needed, such as in France, and more fiscal support where there is room for manoeuvre. This shared commitment by our Member States could be backed up by a euro area Finance Minister. Lastly, in the longer term, a euro area fiscal capacity would put the finishing touch to our union, by equipping it with a tool for stabilisation and solidarity.
Mario Monti, twice a European Commissioner, explains his European commitment and highlights the positive realizations of the Economic Union. He urges that in a changing world with new and huge challenges, EU members must find the intellectual and moral strength to overcome their differences and put an end to the present confidence crisis. An important issue for the EU's future is the remodelling of its budget. This has to be done on the financing side with the implementation of a more transparent and democratic taxation. On the expenditure side, external security and climate challenges must be top priorities.
Pascal Lamy, former chef de Cabinet of Jacques Delors and European Commissioner for Trade, first relates his European experiences and the evolution of the functioning of the European institutions overtime. He then highlights the main present challenges facing Europe and also stresses the fallacies found in the public debate. The first main challenge - to renew with growth as Europe lags behind the US - means investing heavily in technology and pursuing the implementation of the European Single Market Policy. Second, and most important, is the absolute necessity to create a European demos whose absence is a major obstacle on the road to a well-functioning and world-respected Europe. This anthro-political challenge needs to be tackled urgently in times of Brexit.
This paper relates the main steps of the European Union building from the end of WWII. What may today look like a coherent and well-defined project is in fact the result of numerous steps owing much to contingent circumstances. From ECCS to the treaty of Rome and beyond, the integration of Europe, is in fact as Monnet put it « the sum of the solutions adopted to crises ». Today Europe faces major crises again, especially in the euro zone periphery. Has the step by step Monnet method reached its limits? Nevertheless, it is true that autonomy in an interdependent world is a reactionary illusion.
Why should Europe opt for monetary union? “One Market needs one Money!”: This is, at first sight, the key argument of the influential report of the European Commission entitled “One Market, One Money”, published in 1990. Closer examination reveals a somewhat different picture, however. The extended subtitle is rather more agnostic: “An evaluation of the potential benefits and costs of forming an economic and monetary union.” A closer inspection of the report reveals that the key argument was the other way round: one money would create one market. Unfortunately, the authors in 1990 did not recognise that “one money” would foster huge cross-border financial flows that would one day lead to a very costly financial crisis.
Since the enactment, 40 years ago, of the First Banking Coordination Directive, three main decisions contributed particularly to the project of building up a European banking market: the Luxemburg Treaty which ensured the freedom of establishment and that of service offerings from 1993 on, the Maastricht Treaty, which founded the Economic and Monetary Union and on which was based the creation of the Euro in 1999, lastly the launching, in 2012, of the Banking Union in the Eurozone.
Today, this project is, by and large, a reality. All credit institutions within the European Union are now subject to a single prudential regulation and may offer to their clients a common system of payment means (the “SEPA” system). But, within Europe, the Eurozone is the place where the building up of a banking market is the most advanced, since both the refinancing and the supervision of the banks are there totally unified.
To complete this project, new steps are nevertheless still needed, inter alia the setting up of the proposed Capital Market Union.
After the crisis, European banks seem to be retreating from global banking. Moreover, they leave the investment banking market to the large US investment banks. But are these reports correct? Our findings show that the global Asian banks are not affected, while the large US banks resumed business after a swift and decisive recapitalisation in March 2009. The European picture is mixed. Global banks from the UK and Switzerland experienced a major downsizing and reduction in global reach. Euro-area banks have an intermediate position: they show a moderate downsizing but upheld their geographical reach.
Policy-makers face a choice. We recommend completing Banking Union with the ECB as prudential supervisor and the ESM as fiscal backstop. That would bring the euro-area at par with the US and China, which can provide a credible fiscal backstop to their banking system. Following Brexit, we suggest that the European Securities Markets Authority should become the central markets supervisor to support vibrant capital markets, where not only US investment banks but also European banks can play a role.
The construction of the Europe insurance has dramatically changed the landscape of the European insurance market with the penetration of national insurance markets by European competitors and the diversification of investment portfolios through holdings of foreign, mainly European, assets. It has also strengthened the security of the European insurance companies thanks to customized prudential requirements. But the final achievement of this insurance single market still requires new advances on the regulatory and the supervision sides.
One of European Commission President Juncker's key priorities is to build a true single market for capital – a Capital Markets Union (CMU) for all Member States – in order to strengthen Europe's economy and stimulate investment to create jobs. Despite the progress that has been made on the free movement of capital – a long-standing objective of the European Union – Europe's capital markets remain fragmented along national lines and European economies remain heavily reliant on the banking sector for their funding needs. More than half of the initial 33 initiatives have been completed by the Commission in the first year since the publication of the CMU Action Plan providing the building blocks of a CMU by 2019. However, the current economic environment necessitates stepping up the efforts. As such, a CMU Mid-Term Review will allow taking stock of what has been done, its effectiveness in addressing policy challenges, and how to build on these foundations.
On 23 June 2016, the British People voted out of the EU. Brexit will trigger long and complex “divorce” negotiations on a wide range of topics. These negotiations are likely to drag on and will be followed by another negotiation on a new cooperation agreement. There will be substantial consequences for the European financial sector. As number one financial centre in Europe, London benefits fully from the European financial “passport” system, that is being put into question. The City is going to try and preserve its access to the Single Market, with few chances of success as PM Theresa May is leading Britain towards a “hard Brexit” – which means taking the country out of the Single market. Britain's financial sector still hopes to benefit from a transitory period and an equivalence regime after Brexit, allowing its companies to sell financial products without the need of having every EU member States authorising them. In the meantime, in response to the uncertainty surrounding negotiations, London based companies started to relocate some of their activities on the Continent.
While the global economy is experiencing profound changes, the European Union (EU) is threatened with becoming marginalised. Donald Trump's election raises doubts about transatlantic cooperation and, with Brexit, the EU is losing a Member State and a leading financial centre. In this context, for the EU it is a question of maintaining a competitive European financial sector in order to conserve its ability to control its choices for the future. The 2008 crisis did however show that financial flows can only be effectively regulated at the global level. In order to defend its interests, as well as to bring about structural reforms, the EU must strive to improve its influence.
This article starts from the unexpected events that happened in 2016; the decision of British voters to exit the EU and the election of Donald Trump mark a dramatic rupture with the large adhesion, in particular in the anglo-saxon world, to an open world economy all over the last 60 years. It is too early to anticipate dramatically negative consequences of these political changes but it is at least urgent to evaluate the new challenges facing future international cooperation on trade, finance and the international monetary system. This requires urgent attention to avoid ill inspired commercial or monetary decisions that could, from provocations to reprisals, degenerate and finally push the world into an economic war of which the past gives a tragic picture. With the 1957 and 1992 Treaties, our generation received a precious heritage of which we are responsible vis à vis our grandchildren. It is, in this context, more necessary than ever to exit the euro-immobilism that is so discouraging for the European nations and adapt the EU and the eurozone to a challenging and dangerous future.
This paper examines the migration and labor mobility in the European Union and elaborates on their importance for the existence of the EU. Against all measures of success, the current public debate seems to suggest that the political consensus that migration is beneficial is broken. This comes with a crisis of European institutions in general. Migration and labor mobility have not been at the origin of the perceived cultural shift. The EU in its current form and ambition could perfectly survive or collapse even if it solves its migration challenge. But it will most likely collapse, if it fails to solve the mobility issue by not preserving free internal labor mobility and not establishing a joint external migration policy.
The Eurozone crisis has revealed three major design errors: (1) a monetary union without a banking union, (2) an inconsistency between three prohibitions, namely monetization of public debts, bail-out of a Member state by its partners, and sovereign default, and (3) the virtual absence of coordination of macroeconomic policies. Although the first two errors are being corrected, the third – the purpose of this article – is resistant to reforms because it concerns the sovereignty of the Member states. The coordination of fiscal policies could in fact prove more difficult than the introduction of a common budget based on automatic stabilizers to mitigate business cycles. As for the coordination of other macroeconomic policies, the existing schemes (macroeconomic imbalances procedure, Europe 2020 integrated guidelines) would benefit from being refocussed each on a specific objective, and assessed according to an appropriate timetable.
Classification JEL : F45
The many concerns expressed by globalisation are coinciding with recent signs of deglobalisation. But many of these concerns are in fact political and economic fallacies. It is urgent to make globalisation sustainable, consequently more efficient, more enduring and more equitable. To achieve this, global markets must be underpinned by strong states and firm governance. On the economic side, a welfare bringing free trade requires that governments manage adequately its distributional, social and environmental consequences, Globally the European construction can be regarded as the most elaborate attempt ever to mitigate the inevitable political trade-offs arising in a globalised world. Its real success should be an example. Nevertheless its sustainability implies making it more enduring with a better control of financial flows and also more equitable. Finally, when heading for sustainable globalisation in Europe, the European voice must be heard in international bodies which shape international economic rules.
Digital technologies are radically transforming the world's economy, with significant impact on trade, industry, labour markets and public services. Europe is well placed to benefit from these changes, but remains confronted to the fragmentation of its internal market. In this context, the European Commission, with the full support of the Member States, has identified the creation of a Digital Single Market as one of its top political priorities. A fully functional Digital Single Market could contribute €415 billion to the European economy and create hundreds of thousands of new jobs.
This article describes how the Digital Single Market Strategy contributes to reinforcing the digital dimension of the single market; stimulating investment in high speed broadband networks; transforming our productive system and building a European data economy; creating the framework conditions for a knowledge society (digital skills and data infrastructures); and securing and reinforcing trust in the Digital Single Market.
In the United States, stock market performance seems to be significantly higher when the Democrats are in power. Although tests are rarer, it seems that such a partisan premium also exists in France under the Left. The objective of this article is to verify whether the existence of such a premium is confirmed over the period 1981-2016 when the method used allows neutralizing the impact of the international conjuncture. The point of view is that of a US investor who manages an internationally diversified portfolio. The results confirm the existence of a partisan premium in favour of the Left.
The purpose of the Eurozone monetary policy adopted since the financial crisis, which led to very low or even negative interest rates, was to stimulate growth, which was successfully achieved, albeit slightly. It supported consumption and investment and revival of the demand for credit by economic agents who were able to. Interest rates below the nominal growth rate also facilitated the opportunity for deleveraging for agents who were heavily indebted before the crisis. They also avoided, first and foremost, the risk of a systemic crisis and deflation. These interest rates cannot, however, be kept at such low levels for much longer, given that they could trigger a real estate, or even a stock market, bubble. Moreover, by significantly and persistently reducing the profitability of banks in the future, while they must increase their solvency ratio, such a policy would eventually restrict the supply of credit, or even put the banking system at risk, and would ultimately be very unfavourable to growth.
In theory, Islamic banks are profit-and-loss-sharing (PLS) institutions. Nevertheless, literature shows that, in practice, Islamic banks rely mainly on mark-up financing techniques compared to a marginal share of PLS instruments. In this paper, we demonstrate that the Islamic banks intermediation model is not very different from the conventional banks model. First, we report pure and hybrid models to reflect the activities practiced by Islamic banks. Second, we show that Islamic banks use PLS arrangement at their liability side but mark-up financing techniques at their assets side. Islamic banks financing modes are driven by Mourabaha contract that represent almost 80% of their activities. Finally, we employ a sample of 656 banks – including 116 Islamic ones – to examine the impact of their preferred intermediation model and find that Islamic banks have higher capitalization in the form of risk-based and non-risk-based capital ratios than conventional counterparts.