WP 2020-05.
Publications
As a reaction to COVID-19, governments are making extensive financial aid available. However, beyond helping out households and companies in need, aid also attracts opportunists. Because of this, the OSCE is expecting corruption to increase. Yet, this danger differs across countries, even within Europe, where corruption is less problematic than in other regions. In Scandinavian countries, corruption within the civil service affects people’s lives very mildly. In some countries of Eastern and Southern Europe, the situation is more complex but not hopeless, as shown by recent encouraging developments in a number of countries, e.g. Estonia.
In recent years, the word “populism” has been everywhere. The first figure shows the rising use of the term by considering the frequency with which it was googled over the 2004-2020 period. As one can see, the US Presidential elections raised considerable interest. Queries reached a peak at the beginning of 2017, when Donald Trump took office. A burst of interest in populism also went hand in hand with Jair Bolsonaro’s political fortunes in Brazil. He was indeed depicted by the International Press and by many neutral observers as an ultra-right-wing populist, who took the presidency of the world’s fourth-largest democracy by virtue of people’s frustration, disillusion and anger.
Whichever candidate wins the forthcoming US election, America’s big banks expect continuing concessions in the two key areas of monetary policy and bank regulation. Monetary policy looks unlikely to change much, with the Federal Reserve (Fed) under Jerome Powell committed to keeping interest rates lower for longer, trying to create some price inflation and growth. In terms of regulation, banks expect to be allowed to increase the sizes of their balance sheets. With little investor appetite for fresh equity, this implies a relaxation of the rules restricting leverage. Do banks prefer one candidate over the other?
While Europe’s GDP declines (12.1% in the Eurozone and 11.9% in the EU) and the debate on the EU next 7-year budget becomes heated, the relations between specific countries and the EU went largely unnoticed. The fact in point is that on July 10, the ECB welcomed Bulgaria and Croatia to the ERM2, aka as “the Euro’s Waiting room”.
Google, Apple, Amazon, Facebook, Uber, Airbnb: these are only few of the numerous companies which have fundamentally changed our lives with new technologies in recent years. While their business models differ, none of the stars come from Europe. Apart from the serial entrepreneurs at Rocket Internet in Berlin, SAP is the only big digital corporation in Germany. Is there a role to play for the EU in the attempts to change this? Yes, there is. However, not by means of new subsidies and detailed regulation, but by keeping markets open.
Edward Altman is professor emeritus at NYU’s Stern School of Business and director of credit and debt market research at the NYU Salomon Center. He is also the creator of the Z-score: a heuristic index to assess the credit worthiness (and likeliness to default) of companies. The Z-score is built as a weighted sum of commonly available corporate indexes of liquidity, reinvested resources, profitability, and market capitalisation vs liabilities (here the formula). As a scoring system, it does not originate from a precise theory. Rather, it is rooted in common sense, and parameters are calibrated until they generate some useful statistical regularity. For example, for public manufacturing companies, if Z scores higher than 2.99 then the company is not likely to default; if Z scores lower than 1.81 then the risk of default is considerable.
Last month, after a long exhausting discussion, the European countries reached an agreement on the European Union’s budget, and especially on the Recovery Fund. This latter includes around €312 billion of grants for Member States and €360 billion of loans.
After many days of fierce bargaining, the EU political leaders have eventually achieved an agreement about the magnitude of the stimulus package deemed necessary to restore sound conditions for the European economy. The deal was expected. A fiasco would have badly shaken financial markets (with consequences) and raised further doubts about the ability of the current political establishment to steer the ship through stormy seas. The € 750 billion recovery package to soften the Covid-19 crisis will be particularly welcome by the Eastern and Southern European countries, as emphasized by the European Commission in its Staff Working Document, Identifying Europe’s recovery needs . Besides, it has also been agreed to widen the 2021-2027 EU budget, up to € 1,074 billion. In other words, the EU’s next seven year budget and the Next Generation EU programme (the so-called recovery plan) will provide a total package of € 1,824 billion.
