Overview publications

This Working Papaer analyses the relation between Portugal’s government budget balance and current account balance from 1999 (Q1) – when Portugal joined the Euro – until 2019 (Q4). The study arrives at three main conclusions: First, a tightening of fiscal policy improves the external balance of the Portuguese economy, although not substantially. Second, the share of public consumption on GDP has a negative impact on the current account balance. This means, that any policy that stimulates economic activity leading to an increase in public consumption needs to be applied carefully. Finally, the research shows that the investment rate negatively affects the cyclical component of the current account balance, suggesting a high degree of integration of the Portuguese economy in international financial markets. Even though public policy measures promoting investment have a negative impact on external accounts in the short-term, they contribute to the structural improvement of the government balance in the long-run.

The implementation of recovery funds under the EU’s Covid-19 recovery program NextGenerationEU should be aligned with business cycle phases. This could ensure that financial support will have the most even and efficient impact across regions. This is one of the key conclusions derived from this EconPol Working Paper. The study analyzed the impact of the European Structural and Investment Funds on regional development over the period 1986–2018, identifying lessons for the EU's Covid recovery program NGEU. The study finds that European Structural and Investment Funds distributed between 1986 and 2018 had a positive impact overall on regional growth in the recipient regions: In the long run, an increase of 1% in the EU aid led to permanent increases of personal income around 0.03% - 0.04%. However, the research shows that the business cycle affects the speed of convergence of the regions. The funds were least effective during downturn phases, especially in the least developed regions. This effect can partially be attributed to lower absorption rates in these regions and liquidity traps. According to the research, one way to mitigate this effect is to ease co-financing requirements during economic downturn phases and to adapt funds to the business cycle phase.

The latest OECD tax reform will affect only 78 of the world’s 500 largest companies and only about 37 European companies, this EconPol Policy Brief reveals. The number of companies is so low, mainly because the tax applies only to companies with revenues above USD 20 billion which earn a rate of return on revenue above 10%. Reducing the revenue threshold for multinational companies from USD 20 billion to EUR 750 million would increase the number of companies affected by a factor of 13. The relative gain of reducing the threshold below USD 5 billion is small relative to the increase in the number of companies involved, the authors estimate. These are some of the key findings of the study examining the consequences of the OECD’s Pillar 1 reform.

The EMU should create monetary and fiscal mechanisms to safeguard its irreversibility in exceptional situations, according to this EconPol Working Paper. The financial crisis and the coronavirus crisis have shown that the EMU's integrity can only be saved by relaxing either monetary orthodoxy, or fiscal orthodoxy, or both, when exposed to large, systemic shocks. The authors illustrate how such monetary and fiscal mechanisms could be designed by using a fiscal target zone model, where EU member governments are willing to abide with the commitment to debt stability under the no-bailout clause only up to an upper limit of their feasible fiscal effort. The study also shows that EMU completion means providing a monetary and/or fiscal emergency backstop to the irreversibility principle. The alternative to such mechanisms is to include an explicit exit clause in the treaties, the authors conclude.

Economic upswing phases are strongly linked to a rise in CO2 emissions. The effect is strongest in countries that depend on energy-intensive sectors, this latest EconPol Working paper finds. The research further shows that an increase in the share of renewable energy in the primary energy supply during an upswing has the greatest impact on reducing CO2 emissions. According to the authors, the study’s results lead to an important conclusion: European environmental policy should be adjusted over the economic cycle, e.g. by introducing procyclical green taxation.  

We conduct a large-scale incentivized survey experiment in nine EU countries to study how priming common economic interests (EU trade), a shared identity (EU common values), and a major health crisis (COVID-19), influences altruism, reciprocity and trust of EU citizens. We find that the COVID-19 treatment increases altruism and reciprocity towards compatriots, as well as altruism towards citizens of other EU countries. The EU common values treatment has similar effects and in addition also boosts reciprocity towards fellow Europeans. The EU trade treatment has no tangible impact on behavior. Trust in others is not affected by any treatment. Our results suggest that both a shared identity and a shared crisis can have a unifying effect among EU citizens, while shared economic interests (alone) do not significantly affect European cohesion.

In the context of a changed digital economy, the OECD has put forward a proposal that requires large multinational companies to pay some of their income taxes where revenue is generated; i.e. in countries where the consumers or users are located. It is suggested that taxing rights should be allocated using a revenue-based formula. This policy brief argues against the use of such a rule that requires the multilateral assessment of MNEs’ worldwide profit. The need to define a common consolidated tax base would disproportionately complicate the search for political agreement within the Inclusive Framework. Instead, the OECD should apply more practical rules that rely on unilateral profit splitting and do not require uniform international rules on ac-counting. Countries could be granted the right to impose a withholding tax on outbound pay-ments, such as payments for digital services. To the extent that there are allocable costs, as for example with pharmaceuticals and vaccines, these should be tax-deductible on the condition that the country receiving the payments adopt the new tax regime.  

In the face of shifting demographics capital-funded old-age provision is increasingly becoming important in many European countries. Generating sufficient capital for old-age provision, however, poses a challenge to private households. Homeowners can resort to illiquid housing wealth by using home reversion plans or reverse mort-gages. While reverse mortgages are common in the USA and the UK, a German market is quasi non-existent. This Policy Report provides evidence on the demand- and supply-side reasons for the absence of a reverse mortgage market in Germany. It finds that there is potential for the market to grow in the medium term and could benefit cash-poor but house-rich households, hence decreasing old-age poverty. While the analysis focuses on Germany, its implications are equally relevant for other European countries, in particular for those with higher homeownership rates and less generous public pension schemes.

Facing a third Covid-19 outbreak in the spring of 2021 a central question for European policymakers is at what point a vaccination campaign has acquired sufficient speed to overcome the increase in infections, so as to justify lifting NPIs at least partially. The authors of this study derive an expression for a critical threshold that is shaped by three factors: First, the mortality risk from a Covid-19 infection increases exponentially with age. Second, the sizes of age cohorts decrease linearly at the top of the population pyramid. And third, vaccination proceeds at an increasing speed. The study finds that it is easier for countries with a comparatively young population and fast vaccination programs to reach this critical threshold than for countries with an older population and slower vaccination programs. An important conclusion of the research is, that slow vaccination hurts twice: The number of vaccinated people increases only at a slow rate. But it also means that vaccination programs’ ability to control aggressive new Covid-19 strains is strongly reduced. 

The functioning of public bureaucracies is considered a principal driver of government effectiveness and state capacity. Surveying more than 900 real-life procurement officials in Finland and Germany on the basis of hypothetical choice experiments the authors of this study find that bureaucratic decision-making is based to a large extent on intrinsic motivation. While bureaucrats lack important career or pay incentives, they have substantial discretion at work. Contracting officers value a certain degree of competition and consider (too) rigid regulation as the biggest threat to the procurement process. This supports previous research finding that in countries with high public sector capacity more rules are detrimental to procurement outcomes. Another important conclusion that can be drawn from the survey is that procurement bureaucrats aim to avoid negative risks concerning prices and supplier reputation as well as awarding public contracts to bidders with prior bad performance.