Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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IREF Newsletter

Every month IREF publishes a Newsletter on Financial and Banking Features that are affecting the EU.

They are authored by IREF Senior Fellows Gordon Kerr and John Butler, with Prof. Enrico Colombatto, experts with first-hand insight into financial markets and their interplay with government policy.

You can subscribe to the Newsletter (for free) by entering your email address in the box on the left.

More Euro Deepening – The Currency

More Euro Deepening – The CurrencyLatest Political Developments
Given the media’s focus on the March 29th Brexit date, the views of present and former EU political leaders captivated recent mainstream media. Former Italian prime minister Paolo Gentiloni called Brexit ‘the biggest mistake by a European country since the war’. (...)

The Consequences of Future ECB Policies for Banking

The Consequences of Future ECB Policies for BankingIn January, there were two interesting speeches by senior ECB figures which provided some insight as to likely future policy.
Speaking at an event in Riga to commemorate the fifth anniversary of Latvia’s adoption of the euro, ECB vice president Luis de Guindos (also a former Finance Minister (...)

The EU To Push For EMU Deepening After May Elections

The EU To Push For EMU Deepening After May ElectionsWith little fanfare, the Eurogroup of 19 Eurozone finance ministries published in December its report detailing progress on how to strengthen and deepen the Economic and Monetary Union (EMU). Written in dry bureaucratic language, the Report Summary hardly appeared on the radar screens of (...)

The Effectiveness of MIFID II After 11 Months

The Effectiveness of MIFID II After 11 MonthsBackground to MIFID, MIFIR and EMIR
Version 2 of the Markets in Financial Instruments Directive (MIFID II) is a particularly important piece of recent European Law due to the extent and scale of its impacts on professionals operating in capital markets. MIFID II was enacted in 2014, and the (...)

The Stand-off Between Italy and the EU is a Serious Threat to the Euro

The Stand-off Between Italy and the EU is a Serious Threat to the EuroWhy all the fuss?
The nub of the dispute is Italy’s budget plans, which have been rejected by the European Commission (EC). The budget claims to increase public indebtedness by 2.4% in 2019 rather than the previously approved figure of 1.6%. However, the EC is unhappy about the violation of (...)

Central Banks in Europe Are About to Regulate Crypto-Assets.

Central Banks in Europe Are About to Regulate Crypto-Assets.In September, the UK cross party Parliamentary Committee dealing with bank regulation and central banking published its analysis of the opportunities and risks posed by ‘crypto-assets’, such as Bitcoin, Ether, as well as any other coin issued via an Initial Coin Offering.
The report makes stark (...)

The BIS Takes Aim At Cryptocurrencies:
Do They Understand The Economics Of Cool?

The BIS Takes Aim At Cryptocurrencies:To help understand the genuinely transformative business technology of blockchain in the context of cryptocurrency hype, Wharton professor David Werbach encourages the distinction to be drawn between three frequently confused concepts:
1. Cryptocurrencies such as Bitcoin, which are simply (...)

How Will Europe Deal With Italian Fiscal Defiance?

How Will Europe Deal With Italian Fiscal Defiance?Background to the looming standoff between Italy and the ECB
Italy’s new government continues to confirm its commitment to fiscal policies which have triggered sensationalist reports in mainstream media questioning whether Italy can remain a Eurozone country. The alliance between Italy’s 5 (...)

Euro Survival Depends Upon Federalization — Policy Options

Euro Survival Depends Upon Federalization — Policy OptionsDespite our regular reports highlighting some of the challenges facing those tasked with managing the euro, public concern about government debt levels appears to have subsided to its lowest level since 2008. This low level of public awareness is due to a combination of factors; the natural (...)

Buchanan’s Social Contract Unveiled
By Enrico Colombatto

Buchanan's Social Contract UnveiledWP 2018-05. Executive Summary.

What Impact Will The Open Banking Rules Have On Fintech’s Aspirations to Disrupt Traditional Banking?

What Impact Will The Open Banking Rules Have On Fintech's Aspirations to Disrupt Traditional Banking?Introduction
Given the tremendous success of technology companies in the last 15 years, nobody is surprised by the continuing enthusiasm among investors, entrepreneurs, and policymakers for disruptive financial technology (“fintech”). However, banking regulators and rule-makers have always (...)

An Appraisal of Sovereign Bond-Backed Securities

An Appraisal of Sovereign Bond-Backed SecuritiesDespite the widely held view that the European sovereign debt crisis, and the euro itself, have been stabilized, we are not alone in the opinion that the deep problems not only remain but have probably been exacerbated by the ECB’s actions. Far from being addressed, these problems have only (...)

The Looming Crisis in the Private Provision of Public Services
Close Parallels with the Systemic Failure of Banks

The Looming Crisis in the Private Provision of Public ServicesThe collapse in January of Carillion PLC, the UK’s second largest construction and outsourcing company has attracted considerable media coverage. Carillion was principally engaged in public sector contracts to build (and in some cases operate) hospitals, prisons, roads, and part of the new (...)

Our Outlook for 2018
Interest Rates To Stay Low. The Consensus View is that Europe’s Banks are Recovering but we are Not So Sure.

Our Outlook for 2018The Interest Rate Outlook
Despite their shortcomings, European banks do not seem on the verge of collapse and few commentators, analysts or policymakers think that there will be any systemic wobbles in 2018. We do not necessarily disagree; with ECB interest rates still zero to negative and a (...)

Bitcoin: A fool’s Bubble or the Libertarian’s Anti-Establishment Currency Dream?

Bitcoin: A fool's Bubble or the Libertarian's Anti-Establishment Currency Dream?Brief technical overview Let us begin with a definition of the terms ‘digital currency’ and ‘cryptocurrency’.
Digital currency – any currency that exists on a ledger. This term includes all the world’s major currencies as well as cryptocurrencies. Notes and coins are the physical form of euros, (...)

The Search for a New Risk-Free Rate

The Search for a New Risk-Free Rate The ECB has lost confidence in bank industry efforts to reform or replace Euribor; but finding a replacement, and designing transitional arrangements will not be a straightforward task. It also risks highlighting the uncomfortable truth that the volume of unsecured interbank lending is (...)

Merkel wins her fourth term in Germany; will this help drive banking union or will nationalist political parties manage to oppose it?

Merkel wins her fourth term in Germany; will this help drive banking union or will nationalist political parties manage to oppose it?Although there never seemed much doubt that Mrs. Merkel would be elected for a fourth term as Chancellor of Germany on September 23rd, it is not clear whether she will be strong enough to help the EU authorities push through banking union before any pro-nationalist political parties gain real (...)

Ten Years from the onset of the Great Financial Crisis. What has been reformed?

Ten Years from the onset of the Great Financial Crisis. What has been reformed?Ten years on from the late summer collapse of first Paribas’ money market funds and then the failure of the UK’s Northern Rock bank, the media have published a raft of reviews reflecting on the past decade of banking reforms.
Central bankers were quick to use the anniversary to make grand (...)

European Safe Bonds – Can Europe’s problems be Saved by Clever Financial Engineering?

European Safe Bonds – Can Europe's problems be Saved by Clever Financial Engineering?Electoral victories for Mark Rutte of the Netherlands in March, followed by Emanuel Macron’s presidential ascent in France in May and his landslide Parliamentary victory in June, have encouraged the view that closer integration of Europe’s banking and financial system is quite likely. The (...)

By Bailing out unimportant banks Italy has undermined Banking Union

By Bailing out unimportant banks Italy has undermined Banking UnionThe contrast between the actions of the Spanish and Italian governments in the past two months could hardly be more marked. As we reported in June, the Madrid government allowed the relevant European authority – the Single Resolution Board – to apply the bail-in rules to failed Banco Popular. (...)

Large Spanish Bank Failures Raise Investor Fears over Bail-Ins; whilst Pressure Grows in Italy over Monte Dei Paschi

Large Spanish Bank Failures Raise Investor Fears over Bail-Ins; whilst Pressure Grows in Italy over Monte Dei PaschiBail-ins Expected after Banco Popular fails in Spain. Chewing gum accounting
Just as elections of political leaders have become difficult to predict, it is becoming harder to guess which of Europe’s beleaguered banks will be bailed out and rescued, or allowed to fail thus exposing creditors (...)

Banks in the US as well as Europe Push Back Against New Rules

Banks in the US as well as Europe Push Back Against New RulesGiven the effort being invested into the banking turnaround story by the European authorities, and in particular the European Banking Authority, and the cohesive international supervisory effort being spearheaded by Commissioner Valdis Dombrovskis which we reported in March, you would have (...)

Liborgate Re-Rears Its Ugly Head

Liborgate Re-Rears Its Ugly HeadLast month, we reported on compliance failures at very senior levels of the Bank of England, resulting in the resignation of Charlotte Hogg. There was another scandal, also involving the Bank of England and Barclays Bank, which was breaking just as we were going to press. We decided to defer (...)

Accommodative Monetary Policy is Encroaching on Fiscal Policy

Accommodative Monetary Policy is Encroaching on Fiscal PolicyWe believe that the ECB is presently using monetary policy in effect to conduct fiscal, as well as monetary policy. Elected politicians should be up in arms; that they are not would imply either that they do not understand this or that they simply accept it. This may provide an interesting (...)

Compliance Meltdown at the Bank of England

Compliance Meltdown at the Bank of EnglandThe Bank of England is the focus of two separate news items. Firstly, the BBC has apparently uncovered a videotape evidencing that the Bank strongly pressured commercial banks to falsify Libor submissions in 2008. If true, this contradicts denials we reported in 2012 when such allegations (...)

Unicredit’s Rights Issue – the figures don’t add up

 Unicredit's Rights Issue – the figures don't add upUnicredit’s well-publicised rights issue was reported by the press as a resounding success. Underwritten by Morgan Stanley and UBS, the €13bn issue, priced at a 38% discount to the bank’s theoretical value before the rights, closed early. Some big Italian investors publicly declared their (...)

Supervision cannot save insolvent banks

Supervision cannot save insolvent banksRegulators Provide Misleading Reassurances as to Bank Solvency
February 10th was the fourth anniversary of David Cameron’s “Bloomberg Speech” in which he promised an ‘in or out’ EU membership referendum if re-elected in 2015. This year, the EU’s Commissioner for Financial Stability, Financial (...)

Stress Tests don’t work

Stress Tests don't workCriticisms of bank stress tests continue to mount, particularly as banks continue to struggle. A new problem recently emerged: the marked shortfall between the market capitalisation of most European banks and their book values.
This should soon lead to a new stress test methodology. This (...)

Inflation To Rise – We expect UK, ECB and US Policy to Diverge

Inflation To Rise – We expect UK, ECB and US Policy to DivergePurely for geopolitical reasons, namely frustration at the failure of the governments of individual member states to respond to repeated calls for “structural reforms”, your authors had taken the view in recent months that the ECB might increase interest rates this year.
Our views are changing. (...)

January’17 Financial and Banking Features Newsletter

January'17 Financial and Banking Features NewsletterCentral Banks Pray for Electoral “Shocks”. Forced to Nationalise Monte dei Paschi, Italy Looks in Trouble, but Cleverly Plays its Sicilian Defence.
Central Banking
How will Central Banks cope with 2017 shocks? Perhaps new rules, one-off solutions, doubtless lots more QE. Populism will (...)

December’16 Financial and Banking Features Newsletter

December'16 Financial and Banking Features NewsletterThe Eventual Impact of Rising Bond Yields. Further Cracks Appearing in the ‘Global Consensus’ of Bank Supervision.
Central Banking
Global Bond Market Yields are Rising
The ECB’s recently announced 6 month extension of its QE programme reminds us that the speed at which the programme will (...)

November’16 Financial and Banking Features Newsletter

November'16 Financial and Banking Features NewsletterThe European Banking Can Nears the End of the Road
“The key thing to know about Lehman Brothers is that it did not cause the financial crisis, it revealed the financial crisis”
Central Banking
The Credibility of Central Banks is Irreparably Damaged. Critics of Policy Grow as More Evidence (...)

October’16 Financial and Banking Features Newsletter

October'16 Financial and Banking Features NewsletterAs QE becomes widely discredited, German policymakers end their uneasy truce with the ECB. Banking woes deepen.
Central Banking
Central Banks under fire for crossing the line into fiscal policy. Claudio Borio, head of monetary and economic research at the Bank for International (...)

September’16 Financial and Banking Features Newsletter

September'16 Financial and Banking Features NewsletterThe absence of structural reforms brings the effectiveness of ECB policy increasingly into question. The Financial Stability Board claims that banking reform is largely complete. Despite a quiet summer, there is plenty of evidence that it (...)

July’16 Financial and Banking Features Newsletter

July'16 Financial and Banking Features NewsletterPost Brexit, Sterling weakens. Brexit will retest Central Banks’ Firepower. Will Scotland’s Resurgent Independence Campaign Want to Keep the Pound?
The reaction of financial markets to the Brexit vote was well covered by the press. After initial sharp falls, stock markets throughout the (...)

June’16 Financial and Banking Features Newsletter

June'16 Financial and Banking Features NewsletterCentral Banking
Brexit Fervour Underscores the Weakness of Economic Forecasting.
Increasingly Outlandish Economic Arguments on Both Sides of the Brexit Debate. The Bank of England’s intervention is questionable.
As apolitical neutral observers, your authors seek to draw attention to (...)

May’16 Financial & Banking Features Newsletter

May'16 Financial & Banking Features NewsletterCentral Banking – Embracing the Blockchain
In a recent speech, Bank of England deputy governor Ben Broadbent opined that the key innovation underlying Bitcoin is not the unit of account itself but blockchain – the digital settlement ledger in which all transactions are recorded chronologically (...)

April’16 Financial & Banking Features Newsletter
Some technical points on accounting concerns and potential ECB support of insolvent banks

April'16 Financial & Banking Features NewsletterCentral Banking
The European Commission accepts that EU law requires accounts to provide a “true and fair view” of assets, liabilities, financial position and profit or loss as specific indicators of financial health of companies, including banks. That is something that that IFRS accounting (...)

March’16 Financial & Banking Features Newsletter
“Still Talking to a Brick Wall” (OECD’s William White on central banks response to cautionary advice).

March'16 Financial & Banking Features NewsletterCentral Banking
Bank share prices recover after further falls early February. However, credibility of ECB increasingly questioned as it considers further expansionary policies.
Fears of a renewed banking crisis, which had seemed a possibility in January, abated in February. By March 7th, (...)

February’16 Financial & Banking Features Newsletter

February'16 Financial & Banking Features NewsletterJittery January Markets - Does the ECB have Contingency Plans? The ECB must be aware that investors’ confidence in stock markets, particularly bank shares, dropped in January. If contingency plans exist, they are likely to fall short of purchasing non-performing loans.
The media consensus in (...)

January’16 Financial & Banking Features Newsletter

January'16 Financial & Banking Features NewsletterCentral Banking – The Bank for International Settlements again Questions Prevailing Central Bank Policies.
The BIS has recently published two reports. In one, appearing to embrace the Austrian School of economic thought, it attributes the weakness of the present advanced economy recoveries to (...)

December’15 Financial & Fiscal Features Newsletter

December'15 Financial & Fiscal Features NewsletterProblems executing QE cause market confidence in the ECB to dip. What policy changes should we expect from the ECB in 2016?
Reports from the European Banking Authority and Bank of England claim that banks are healthy, but weak measures of capital are (...)

November’15 Financial & Fiscal Features Newsletter

November'15 Financial & Fiscal Features NewsletterUS regulations blamed for banks turning away deposits. Will this add further impetus to non-banking deposit and payment businesses?
Even More Bad news from Deutsche Bank. Can the Bank be Turned Around?

October’15 Financial & Fiscal Features Newsletter

October'15 Financial & Fiscal Features NewsletterDespite abundant and increasing evidence of loose monetary policies being the cause of emerging market economies moving from boom to bust, there are none so blind as those who refuse to see.
Central Bankers want to abolish cash in order to be able to set substantially negative interest (...)

September’15 Financial & Fiscal Features Newsletter
Special focus: Chinese devaluation

September'15 Financial & Fiscal Features NewsletterChina devalued its currency by 3%. Financial markets responded disproportionately, but we explain that it is quite understandable, given government policies in the rich countries.
We then investigate the devaluation’s effect on the US and EU financial markets as well as on the currencies of (...)

Jul-Aug’15 Financial & Fiscal Features Newsletter
BIS report | Bank Stress Tests

Jul-Aug'15 Financial & Fiscal Features NewsletterUltra Low Interest Rates have destabilized the global Economy whose capital markets now show signs of Illiquidity.
Stress testing of banks by central banking authorities has come to prominence as reliance on the traditional accounting standards has waned. Europe’s banking system was (...)

June’15 Financial & Fiscal Features Newsletter
UK & ECB | Criminal convictions for banks

June'15 Financial & Fiscal Features NewsletterAs the US vs European recovery story swings our way, what lessons can Europe learn from the strong swing to the centre right in Britain’s elections? Is there a possibility of Brexit?
Banks have been hit with more fines, but more importantly, also with Criminal Convictions. Is this banking out (...)

May’15 Financial & Fiscal Features Newsletter
Secondary US Bonds Market | Unique Bulgarian Banking Crisis

May'15 Financial & Fiscal Features NewsletterMost media optimism, both in the US and Europe, continues to focus on the dizzy levels of stock and bond markets, but in our view these index levels have been driven up by professionals front-running QE in the US and Europe.
In the past month, a Bulgarian court appointed two experts to (...)

April’15 Financial & Fiscal Features Newsletter
Easing and Volatility | More woes in Carinthia

April'15 Financial & Fiscal Features NewsletterBank for International Settlements has labelled the impact of recent European quantitative easing as “unprecedented”. Worrying effects are not only the negative interest rates, but also very high price volatilities of asset. This development may soon hit not only economic, but also legal and even (...)

March’15 Financial & Fiscal Features Newsletter
Greece has Plan B | US Stress Tests

March'15 Financial & Fiscal Features NewsletterThe ECB’s deal with Greece still leaves it exposed. Despite the rhetoric that countries must get their own finances in order, the ECB’s sister agency has started work on a new programme of $319 bn of mutualised debt.
US banks all pass their stress tests. However, that is not necessarily (...)

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