Directorate-General for Economic and Financial Affairs

ABSTRACT We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.

The assessment of the criticality of raw materials allows the identification of the likelihood of a supply disruption of a material and the vulnerability of a system (e.g. a national economy, technology, or company) to this disruption. Inconclusive outcomes of various studies suggest that criticality assessments would benefit from the identification of best practices. To prepare the field for such guidance, this paper aims to clarify the mechanisms that affect methodological choices which influence the results of a study. This is achieved via literature review and round table discussions among international experts. The paper demonstrates that criticality studies are divergent in the system under study, the anticipated risk, the purpose of the study, and material selection. These differences in goal and scope naturally result in different choices regarding indicator selection, the required level of aggregation as well as the subsequent choice of aggregation method, and the need for a threshold value. However, this link is often weak, which suggests a lack of understanding of cause-and-effect mechanisms of indicators and outcomes. Data availability is a key factor that limits the evaluation of criticality. Furthermore, data quality, including both data uncertainty and data representativeness, is rarely addressed in the interpretation and communication of results. Clear guidance in the formulation of goals and scopes of criticality studies, the selection of adequate indicators and aggregation methods, and the interpretation of the outcomes, are important initial steps in improving the quality of criticality assessments.

ARE OFFICIAL OUTPUT FORECASTS BIASED? We point out that official forecasts of output dynamics are crucial to the assessment of cyclically adjusted budget balances, and provide evidence that in some euro-area countries biased forecasts have played a thus far neglected role in generating excessive deficits. We suggest that the forecast bias may be politically motivated, and that forecasts produced by an independent authority would be better than in-house Ministry of Finance forecasts for the purpose of monitoring budget formation and budget outcomes. — Lars Jonung and Martin Larch

This paper investigates whether and how a recent entrepreneurial exit relates to subsequent engagement. We discriminate between six levels of engagement including none, potential, intentional, nascent, young and established entrepreneurship. We use individual-level data for 24 countries that participated in the Global Entrepreneurship Monitor during 2004, 2005 and 2006 (some 350,000 observations). Our findings indeed show that a recent exit decreases the probability of undertaking no entrepreneurial activity, whereas it substantially increases the probabilities of being involved in all other engagement levels. Investigating the conditions under which an exit increases engagement in entrepreneurial activities, we find that the probability of entrepreneurial engagement after exit is higher for males, for persons who know an entrepreneur and for persons with a low fear of failure. Educational attainment does not seem to be relevant. Moreover, there exists large cross-country variation in the probability of entrepreneurial engagement after exit.

The recent development of new and innovative home battery systems has been seen by many as a catalyst for a solar energy revolution, and has created high expectations in the sector. Many observers have predicted an uptake of combined PV/battery units which could ultimately disconnect from the grid and lead to autonomous homes or micro-grids. However, most of the comments in social media, blogs or press articles lack proper cost evaluation and realistic simulations. We aim to bridge this gap by simulating self-consumption in various EU countries, for various household profiles, with or without battery. Results indicate that (1) self-consumption is a non-linear, almost asymptotic function of PV and battery sizes. Achieving 100% self-consumption (i.e. allowing for full off-grid operation) is not realistic for the studied countries without excessively oversizing the PV system and/or the battery; (2) although falling fast, the cost of domestic Li-Ion storage is most likely still too high for a large-scale market uptake in Europe; (3) home battery profitability and future uptake depend mainly on the indirect subsidies for self-consumption provided by the structure of retail prices; (4) the self-sufficiency rate varies widely between households. For a given household, the volume of self-consumption cannot be predicted in a deterministic way. Along with these results, this study also provides a database of synthetic household profiles, a simulation tool for the prediction of self-consumption and a method for the optimal sizing of such systems.

This paper assesses whether both the levels and the degree of change in government quality influence regional economic performance in the European Union and, in particular, in its lagging regions. The results of the econometric analysis, covering 249 NUTS-2 regions for the period 1999–2013, suggest that (1) government quality matters for regional growth; (2) relative improvements in quality of government are a powerful driver of development; (3) one-size-fits-all policies for lagging regions are not the solution; (4) government quality improvements are essential for low-growth regions; and (5) in low-income regions basic endowment shortages are still the main barrier to development. In particular, low-growth regions in Southern Europe stand to benefit the most from improvements in government quality, while in low-income regions of Central and Eastern Europe, investments in the traditional drivers of growth remain the main factors behind successful economic trajectories.

In all Central and Eastern European countries (CEECs) land reform has been a key part of the overall agrarian reforms and land reform procedures differ significantly among CEECs. This paper, by focusing on distributional effects and political economy implications, explains why thirteen CEEC governments chose particular reform procedures. Key factors in their choices are the history of the land ownership, including the post‐collectivization ownership status, length of Communist rule, the ethnicity of pre‐collectivization owners, and the equality of pre‐collectivization asset distribution. These factors influence the distributional consequences of the land reform, including the (potential) conflicts between efficiency, social equity, and historical justice, and thus the political economy equilibrium.

Under the Stability and Growth Pact, countries are committed to achieve medium‐term budget positions of ‘close‐to‐balance or in surplus’. The rationale for this commitment is that such budgetary positions would allow for the full working of the built‐in stabilizers without triggering the sanctions procedures of the Pact. This article sets out to show how quantifications of the medium‐term (structural) requirement can accommodate the desired aim and suggests how fiscal measurement and forecasting errors as well as the budgetary effects of ageing may be allowed for. All in all, broadly balanced budgets in the medium term appear to be ‘roughly right’ for most euro‐zone countries. Of course, as the cyclical behaviour of the euro‐zone economy adapts to the new EMU environment, the medium‐term targets will need to be addressed again.

Abstract The economic and financial crisis and its aftermath have put economic and monetary union (EMU) to the test and exposed gaps in its initial policy architecture. Collective rules of fiscal discipline have proven difficult fully to enforce and excessive public indebtedness has been confirmed as a potential source of systemic instability. Broader economic and financial imbalances have also been shown to carry important risks for individual Member States' and area‐wide stability. Recent governance reforms have sought to address these shortcomings. In particular, the so‐called ‘Six‐Pack’ has brought changes strengthening the ability to prevent and correct economic and fiscal imbalances in the future. With the crisis not terminated, however, the debate over optimal policy arrangements continues and additional governance reforms have been put forward. This article reviews some lessons drawn from the crisis episode for the economic and budgetary framework of EMU and describes the governance reforms that have been undertaken as part of the comprehensive solution needed to underpin the single currency.

En 1993, le numéro spécial de la Revue d’Economie Régionale et Urbaine consacré aux économies de proximité fondait une approche originale de la dimension spatiale des phénomènes économiques, et donnait une première expression aux travaux du groupe « Dynamiques de proximité », dont le postulat de base consiste à dissocier la proximité dans l’espace physique d’autres formes de proximité, d’essence non spatiale. Dans cet article, nous proposons une nouvelle typologie qui s’enrichit de certains travaux de la sociologie économique. Nous opérons d’abord une distinction de base entre une proximité spatiale et une proximité socio-économique. Dans un deuxième temps, la proximité socio-économique est décomposée en une proximité de ressources et une proximité de coordination. Cette dernière est enfin décomposée en une proximité relationnelle et une proximité de médiation. Sur cette base, nous insistons sur les interdépendances entre les formes de proximité et sur l’importance des processus d’encastrement et de découplage.

This request for a preliminary ruling concerns the interpretation of Article 13A(1) (b) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes -Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 2005/92/EC of 12 December 2005 (OJ 2005 L 345, p. 19, 'the Sixth Directive').The request has been made in proceedings between Klinikum Dortmund gGmbH (KD) and Finanzamt Dortmund-West (tax authorities of Dortmund-West, the Finanzamt) concerning the latter's refusal to exempt from value added tax ('VAT') the production and dispensing of cytostatic drugs (cytostatics) in the context of cancer treatment provided within the hospital managed by KD. FactsKD is a non-profit-making limited liability company which manages a hospital.

We estimate a three-country model using 1995–2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyse the determinants of Germany’s current account (CA) surplus after the launch of the euro. Our results suggest that the German surplus reflects a succession of distinct shocks. Mono-causal explanations of the surplus are thus insufficient. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The key shocks that drove the rise in the German CA tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German CA surplus. An expansion in German government consumption and investment would raise German GDP and reduce the CA surplus, but the effects on the surplus would be weak.

The article analyses in a simple setting a game between an inflation‐conservative central bank and a fiscal authority subject to an upper limit on the budget deficit. It is shown that complementarity or substitutability between the policies and the preference of each authority for the other authority's behaviour crucially depends on the type of shock hitting the economy. If the government attempts to stimulate output beyond its natural level, a ‘deficit bias’ emerges under non‐co‐operation; under co‐operation, the equilibrium is characterized by both a ‘deficit bias’ and an ‘inflation bias’. However, if the government only pursues cyclical stabilization these biases disappear and there are positive gains from co‐ordinating the policy responses to shocks.

In current practice, changes in the cyclically-adjusted budget balance (CAB) are interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, as, in some cases, it may conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, systematic optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion compared to plans, even in the absence of discretionary measures. In order to track down this kind of passive behaviour in the light of growth surprises or sanguine growth assumptions the traditional reading of the CAB needs to be adjusted. This is achieved by relaxing the benchmark assumption according to which, under unchanged fiscal policy, the deficit-to-GDP ratio is invariant to growth. An empirical application to public finance data of four large EU countries shows that passive behaviour is an important element in practice, as forecast errors are significant in explaining changes in the CAB. Moreover, in some cases official growth forecasts appear to have a clear upward bias.

ABSTRACT: This paper investigates whether and how managerial incentives influence the decision to elect optional exemptions when first adopting International Financial Reporting Standards (IFRS). It also examines the value-relevance of the mandatory and optional equity adjustments that must be recognized as a result of the first-time adoption of IFRS. Both questions are addressed in the context of the mandatory adoption of IFRS by French firms in 2005. Three major findings emerge from our analyses. First, managerial incentives influence the decision to strategically elect one or more optional exemptions at the transition date. Second, mandatory equity adjustments are more valued than French generally accepted accounting principles (GAAP) equity, suggesting that the first-time adoption of IFRS by French firms is perceived as a signal of an increase in the quality of their financial statements. Third, the value-relevance of optional IFRS equity adjustments depends on whether they result in the disclosure of new information.

SUMMARY With a view to an improved taxonomy of the genus Agrobacterium, 45 strains. including representatives of all nomen-species, were used to investigate the following features: base composition and compositional distribution of pure deoxyribonucleic acid (DNA); type of flagellation; 3-ketoglycoside formation; phytopathogenicity for tomato and Datura. It is proposed to limit the genus Agrobacterium to two, or possibly three, species: (I) Agrobacterium radiobacter and its phytopathogenic variety A. radiobacter var. rumefaciens; (2) A. rhizogenes; and (3) possibly A. pseudotsugae. More work on the latter two species is required before they can definitely be accepted as separate species of this genus. The DNA of all the strains of the former two species has a Tm value in the narrow range of 93.8°-95. The corresponding with an average molar guanine + cytosine (GC) content of 59.5–62.8%. The variance σ of the compositional distribution of the DNA molecules ranges between 0 and 0.88% with an average of GC). The only available strain of A. pseudotsugae, with 67.7% GC, was mpletely out of this range and its chromosomal DNA was clearly different from that of the other two species. All strains of Agrobacterium proper were peritrichous, frequently with 5–6 flagella. All 8 strains of A. radiobacter and 24 of 28 strains of the variety ‘tumefaciens’ converted lactose into 3-ketolactose; all the other strains were negative in this respet. Several arguments are advanced to include the strain A. stellulatum and A. gypsophilae from this genus. The relationship between Agrobacterium and some other genera is shown graphically in a plot of mean similarity vermus DNA base composition.

The concept of a circular economy has been widely accepted by governments and industries. In Europe, the European Commission adopted the Circular Economy package in 2015. The Ecodesign Directive has been identified as one of the most suitable legislative tools for achieving some of the objectives in the package because it has the potential to translate the circular economy principles into specific product material efficiency requirements. This paper applies the Ecodesign policy process to "enterprise servers" to illustrate how circular economy strategies can be implemented by European product policies. Indeed, the paper introduces a potential novel approach to "operationalize" circular economy principles in product policies. The evolution of the material efficiency requirements for a more circular economy is described up to their final formulation, which is the one in the published Ecodesign regulation. This legal act includes requirements on design for disassembly, firmware availability, data deletion, and presence of critical raw materials. The process for enterprise servers has been successful as the early discussions between stakeholders, policymakers and experts, supported by appropriate metrics along an iterative debate, comes to the publications of material efficiency requirements in a regulation. This study represents a 'first-of-a-kind' experience, and sets precedents for the development of similar requirements for other product groups.

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Although the importance of reusing products has been stated frequently, both in legislation and by academics, the scientific literature does not provide comprehensive and systematic methods of assessing the reuse of a generic product from an environmental point of view. Moreover, the definitions of reuse provided in the literature and legislation are not always consistent. This article introduces an original classification of different types of reuse, including some suggested definitions. It then focuses on remanufacturing, a type of reuse in which a used product (or its components) is returned to at least its original performance level. The article describes the development of a method for assessing, from a life-cycle perspective, the potential environmental benefits of remanufacturing energy-related products. The method includes several novel aspects: it helps to analyse possible trade-offs between potential environmental impacts and energy efficiency; it allows the independent modelling of some parameters that influence product reuse; and it can be applied even at the early stages of the design process, when some specifications may not yet have been defined. The environmental impacts of a product's life-cycle stages are used as input parameters for the assessment. The method is then applied to an enterprise server, a case-study product for which remanufacturing is a current market practice. A sensitivity analysis is included to check how uncertainties could affect the overall results. The results of the case study show that remanufactured servers, even those that are less energy efficient, can have lower environmental impacts than new ones. For example, reusing some components (e.g. hard disk drives and memory cards) is environmentally beneficial even if the remanufactured server consumes up to 7% more energy than a newly manufactured server. The case study also demonstrates how the method proposed could be used in the context of product policy discussions.

We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).