In late January, the European parliament voted to relax capital regulations for banks. Its new official stance departs significantly from the original Basel III agreement, boosting shareholder profits but reducing bank stability. Numerous exemptions result in a decrease of additional capital requirements to just 4% by 2030 (rising to 7% by 2033) instead of the expected 20%.

Opponents of tougher rules argue that implementing stricter capital regulations would leave them at a disadvantage in comparison to their bigger and more profitable counterparts in the United States. This competitiveness argument was also put forward by German Federal Finance Minister Christian Linder at the Deutsche Bank Digital New Year’s Reception, as cited in this article:

“The priority is to reconnect financial stability with consumer protection and competitiveness. Explicitly, the competitiveness of the banking and financial centre is also one of my political goals,” he said.

There is, however, evidence that the regulatory shift in Europe is (at least in part) a capitulation to the European banking industry’s lobbying activities. As new research by Finanzwende shows, Banking industry lobbyists outnumbered civil-society representatives 176 to 2 in meetings on Basel III regulation with the European Commission since the end of 2019. And as Thierry Philiopponnat, the chief economist of the European non-profit Finance Watch, is cited in a recent opinion piece by Rana Foroohar:

Moves to make Basel III transitional arrangements permanent ‘will not defend EU banks against US ones but only protect the vested interests of European megabanks, vis-à-vis their smaller European competitors.’

Thus, the conventional wisdom that America leads on innovation, Europe on regulation, seems to be challenged, as the US is toppling the EU from its regulatory throne.

Reinventing the European Union – Article
Jean Pisani-Ferry, Project Syndicate, 02.03.2023
Russia’s invasion of Ukraine and new economic imperatives have called into question the EU’s long-standing reliance on regulatory standards as a form of soft power. To survive in a world where autocrats increasingly flout the rules governing the international order, the EU’s member states must find a new route to integration.

“Then the government has failed in its job” – “I have to defend myself against economic nonsense” – Interview (Paywall, German)
Julian Olk & Jens Münchrath, Handelsblatt, 02.03.2023
Sachverständigenrat head Monika Schnitzer and IW director Michael Hüther argue about whether the German government should raise taxes to finance the crisis and transformation.

ECB confronts a cold reality: companies are cashing in on inflation – Article
Francesco Campa, Reuters, 02.03.2023
Higher margins, not wages are driving inflation.

No fear of bans – Column (Paywall, German)
Mark Schieritz, die Zeit, 01.03.2023
Gas, combustion engines or sugar: the state sets framework conditions for production and consumption. Bans can be very helpful for both.

It’s no use: Taxes must go up – Commentary (Paywall, German)
Claus Hulverscheidt, Sueddeutsche Zeitung, 27.02.2023
The Finance Minister’s party, of all parties, has walled itself off in its “any tax increase is the devil” ideology. Germany can no longer afford this.

How much work can go? – Article (German)
Malene Gürgen, taz, 26.02.2023
In the UK, a pilot project on the 4-day week was successful. What is the argument for working less? And what can that look like in concrete terms?

Works councils help against the right – Study
Uwe Jirjahn, Thi Xuan Thu Le, January 2023
If there is employee representation in a company, the workforce tends less towards radical right-wing parties. This is the result of a study.

Where and how should the boundary between state and private activity be drawn? According to Diane Coyle’s review of Mariana Mazzucato’s newest book ‘The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments and Warps Our Economies’, this question the true topic of the book:

We wouldn’t want the government to manufacture its own stationery rather than buy it, nor hospitals to make their own wound dressings. Similarly with payroll services or couriers — although they were largely in-house in private and public sector alike until the 1980s. But what about IT systems? Or cataract surgery? Outsourcing the former seems not to have gone well in general, given the number of prominent, costly IT failures, while technological advance has made it easy and efficient for cataract operations to be contracted out to specialist private providers.

When thinking about the costs of outsourcing, one should therefore not only consider costs related to asymmetric information and the price of monitoring the agents (e.g. consultancies), but also about lock-in costs which keep state capacity low. As Henry Mance writes in the Financial Times:

Consultancies and outsourcers, Mazzucato argues, know less than they claim, cost more than they seem to, and — over the long term — prevent the public sector developing in-house capabilities. ‘We’re not against consultants. The problem is when an industry [has] no incentive to get government to be independent. A therapist who has their client in therapy forever obviously isn’t a very good therapist.’ Consultants are not ‘neutral’ about the role of the state, either, Mazzucato argues, citing their private sector work. They promoted slimming the state after 2008.

Moreover, positive spillover effects of public investments should not be missed in the calculus. Governments must learn how to get rewarded for their investments, not only de-risking private activities without reaping the benefits. Mazzucato recommends, to strengthen the civil service, to rebuild internal capacity within government, to improve the process of contracting and evaluation of outsourced outcomes, and to require consultancies to disclose conflicts of interest when they bid for public sector work.

In this article, you can read the main ideas of the book.

1.5°C – dead or alive? The risks to transformational change from reaching and breaching the Paris Agreement goal – Policy Paper
Laurie Laybourn-Langton, Henry Throp & Suzannah Sherman, IPPR Blog, 16.02.2023
The historical failure to sufficiently tackle the climate and ecological crisis could create consequences that challenge the ability of societies to tackle the root causes of this crisis.

How Christian Lindner wants to save the European debt rules – Article (German, Paywall)
Martin Greive, Handelsblatt, 15.02.2023
Southern Europe is demanding more flexibility in debt-making. The German Finance Minister wants to prevent this – and is seeking to close ranks with old allies.

The role of public debt in the ‘new normal’ – Blogpost
Peter Bofinger, Social Europe, 13.02.2023
A Schumpeterian perspective provides new insights for fiscal policy in Europe.

Preventing the collapse: Through a war economy or an eco-dictatorship? – Column (German)
Fabio de Masi, Berliner Zeitung, 11.02.2023
The state will have to intervene more strongly in the economy to prevent the ecological collapse of the economy and social upheavals. But this does not have to mean a loss of prosperity.

FDP wrestles with Habeck over paradigm shift in competition policy – and with itself – Article (German, Paywall)
Julian Olk, Handelsblatt, 10.02.2023
The German competition regulators are to be given greater power than ever before – with market interventions up to and including breaking up. The FDP is split on the question of whether it can go along with this.

An economic theory for the traffic lights – Column
Mark Schieritz, die Zeit, 08.02.2023
The government wants to advance the transformation. Unfortunately, there is a lack of skilled workers and raw materials. But there is a way out.

While some blame Italy for their unwillingness to reform, others focus on the monetary integration in the Eurozone, or take a firm-level perspective. A new study by Max Krahé argues that none of these explanations alone provide a convincing account and argues that Italy’s stagnation can be traced back to two key moments: a failed attempt in the 1990s/2000s to overcome the growth slowdown, and the retention of this policy mix in the 2000s/2010s.

The paper suggests that any credible reform package must address the deep roots of Italy’s stagnation without repeating past mistakes. Positive conditionality with a focus on companies, institutions and investment may be a promising way forward.

Read the whole study here.