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How high local public debt and local public banks crowd out private investment in Germany – and what the debt brake has to do with it

In a recent column in VoxEU together with Michael Stiefel (UZH) and Iryna Stewen (JGU Mainz)) we discuss our new CEPR discussion paper Growing Like Germany: Local public debt, local banks, low private investment. The paper shows that local government debt in Germany crowds out private investment to the tune of 1 percent of GDP per year. The reason: Forced to lend to local governments by their statutory mandate, local public banks try to  “make up” for the low-yields on municipal debt by charging SME higher rates in what are locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, as we argue, is a direct consequence of the debt brake at the federal and state levels which shifted a lot of expensive government task to municipalities.

Radio debate on RSI taking stock of the economics of Mr. Trump

I had the privilege to be invited to a Radio debate on Radio della Svizzera Italiana with former IMF director Carlo Cottarelli to discuss the economic consequences of Mr. Trump’s (first?) administration. Listen to the debate (in Italian) here.

Here is the Upshot of my argument:

For the first three years of his mandate, Trump presided over a goldilocks economy which largely was not of his own making, even though he created a strawfire with an ill-timed and unbalanced fiscal reform that favors the rich and limited fiscal space. The economic consequences of his denial of the COVID challenge will pose the greatest threat to his re-election.

Regarding his America-first agenda, his promise to bring back jobs in the classical manufacturing sector remains largely unfulfilled. His unilateralism alienated European allies and led to a trade war with China which is ill-targeted in its focus on traditional trade in goods. More recently the focus has shifted to a strategic rivalry with China in high technology and the internet as well as to issues regarding IP protection and the level playing field in foreign direct investment. Here he has a point and this is a key issue that will stick around under future administrations, be they republican or democrat.

Future administrations will have to deal with built-in injustices of the tax system that have been reinforced by Trump’s reform. The focus here will not necessarily have to be on fiscal consolidation — the US can afford to borrow and , provided it is doing well economically, it can outgrow even very high levels of public debt — but on tackling economic inequality.

Softening the Blow of the China Trade Shock — and lessons for EMU in the times of COVID19

My new paper with Lilia Ruslanova: Softening the Blow: U.S. State-Level Banking Deregulation and Sectoral Reallocation after the China Trade Shock is now online as UZH discussion paper.
The upshot: U.S. state-level banking deregulation during the 1980s  considerably dampened the fallout on local economies of the China trade shock a decade later. The reason: households in financially integrated areas could more easily borrow against their housing wealth to smooth consumption. This kept house prices and wages in the non-tradable sector up, facilitating labor reallocation away from manufacturing.

The paper has a a clear take-away for European policy makers in the time of COVID19: the pandemic is likely to be a major reallocation shock, similar to the China Trade Shock, with very heterogeneous effects across regional economies in Europe. But,as our results show, for efficient reallocation to take place, household-level access to finance is paramount. However, cross-border retail financial integration in the EMU basically does not exist because banking integration is still superficial and fragile. Therefore, even in the current situation, EMU policymakers’ homework remains the same: complete the banking union, get an EDIS done, encourage cross-border banking consolidation …

Open Source software for Online Teaching in the times of Corona

As schools and universities have been shutting down around the globe, many of us in academia are wondering how we can get up to speed and to establish a stable workflow that allows us to get our podcasts, on-line lectures and tutorials out there for our students. In this post I provide a subjective list of open source tools that I am using.

There are at least two reasons why open source has a key role to play in the current situation:

  • OSS is easy to roll out quickly and in large numbers (e.g. to an army of teaching assistants for multiple tutorial session in big lectures) , without any licensing issues and in a decentralized manner.
  • OSS is cheap . Actually it’s free. Hence, no need for financially stretched schools and universities to spend heaps of non-budgeted money on proprietary software at very short notice.

Banking consolidation and risk sharing in the eurozone

In a note summarizing my panel presentation at the recent Belgian Financial Forum /SUERF Conference “Cross border financial services: Europe’s Cinderella?” now appearing in the Revue bancaire et financière, I argue that cross-border banking consolidation is a prerequisite for better risk sharing in the eurozone. However, the incomplete banking union perpetuates regulatory fragmentation an d prevents cross-border consolidation from becoming economically viable. Last but not least, the regional fragmentation of banking markets within many EMU member countries remains one of the biggest obstacles to consolidation, both within and across borders. Download the note here

New paper in the IMF Economic Review

Our paper Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve? (with Egor Maslov, Iryna Stewen and Bent E. Sorensen) is now forthcoming in the IMF Economic Review.

In the paper, we argue that the interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, “direct” banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.