Public spending

Pundits from all quarters harshly criticized the German Federal Constitutional Court of Karlsruhe after its judgment of last 5 May 2020.

The Court raised constitutional complaints in regard to the Bundesbank’s approval of the European Central Bank (ECB)’s Public Sector Purchase Programme (PSPP). According to the Court, PSPP potentially violated the principle of proportionality, and thus jeopardized the ability of the ECB (and thus of the Bundesbank) to achieve its price stability mandate. In June 2020, the ECB provided the Karlsruhe Court with documents including detailed considerations on proportionality behind PSPP. Even though these documents met the requirements of the Karlsruhe Court, the ECB will nonetheless be forced to consider the issue of proportionality much more carefully when purchasing government bonds in the future.

Germany introduced the so-called ‘bureaucracy brake’ in January 2015. Whenever new legislation is passed, the ‘one-in-one-out’ principle applies: it obliges the bureaucracy to eliminate old regulation whenever new rules are introduced, to avoid that that regulatory layers multiply and the burden for businesses increases. Since 2015, bureaucratic requirements actually decreased, and shows the German government does intend to cut red tape. Yet, it could do more. For example, the “bureaucracy brake” does not apply to EU guidelines and regulations; it ignores the cost of changing the rules; and leaves the size of the bureaucratic apparatus untouched.

Populism Italian Style and some bizarre ideas about representative democracy came to an end when prime minister Giuseppe Conte resigned and Mario Draghi took his place. Draghi has become a national hero and people have been changing their minds. They no longer trust that bombastic stories could replace lack of content, and that MPs can be appropriately selected through a fanciful internet-based contest where candidates would flaunt their qualities and air their promises.

In a new IREF Working Paper Stefano Adamo of the University of Banja Luka turns to a young genre of Italian literature. Adamo analyzes four novels that revolve around the financial crises of the year 2008 and the government debt crises of the 2010s. What is special is that the authors of the novels can look back at a career in finance. As insiders they can illustrate processes within banks and on financial markets in Italy from first hand experience. In the working paper, Adamo unpacks in detail how the authors depict the financial industry. The industry as well as its protagonists do not fare well. According to the authors, the world of finance is populated by irrational, overly risk-loving individuals. Many of them are questionably entangled with politics. In a sentence, all the novels contain a strong plea for more regulation.

WP 2021-02.

Young people’s attitudes towards retirement are contradictory: on the one hand, they don’t trust public pay-as-you-go pensions. According to recent surveys, around half of the respondents do not expect significant retirement income from this source. On the other hand, private efforts are insufficient to close the expected pensions gap.

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.

WP 2020-04.

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.