Economic Papers

  • Banking Union: made of concrete or straw?

    NUMBER 09

    Jordi Gual

    The vicious loop between sovereign and bank debt threatens the integrity of the euro zone. This article examines why the banking union is a prerequisite to break this loop and concludes that the current design is clearly insuffi cient to achieve this goal. In particular, the transitional phase poses serious risks for the euro zone as fi nancial markets remain fragmented and the crisis is far from being resolved.

    The article discusses the components of a solid banking union, what I call a banking union made of concrete. Current plans by the euro area envisage a union that seeks to limit the use of taxpayer funds by extending the principle of "bail-in". It is a banking union that runs the risk of being insuffi cient to face a systemic crisis.

    This banking union, albeit limited, is diffi cult to implement in the short term given the current legal framework of the economic and monetary union. As a result, the union designed for the transitional period, which can be lengthy, will lack key elements such as a pan- European backstop that operates as a lender of last resort for sovereigns. Therefore, it is far from being a banking union made of concrete. This can be a fl imsy construction, not even made of wood but of straw. The risk is that it may be unable to withstand the challenges of the current crisis. Keywords: banking union, bank.

  • European Integration at the Crossroads

    NUMBER 08

    Jordi Gual

    This paper argues that deep economic integration, which includes the single market plus monetary union, leads to economic divergences if the integration process does not comprise an appropriate set of mutually complementary policies. The Eurozone is an example of an almost fully integrated area, which faces an extreme case of unbalanced integration. The paper argues that unless domestic structural reforms are adopted by the less competitive Member States, this is a policy framework that is unworkable without more political union. The gradual move to such an institutional setup would allow either the financing of chronic current account imbalances or the enforcement of the needed institutional changes at a Member State level to reduce those imbalances. The paper concludes that the new EU legislation, regarding budget deficits, current account disequilibria and banking, could even be counterproductive if it is only based on sanctions and does not incorporate positive incentive schemes.

  • Capital requirements under Basel III and their impact on the banking industry

    NUMBER 07

    Jordi Gual

    This paper reviews the theoretical and empirical arguments behind the increase in capital requirements proposed by the Basel III regulations. The detailed analysis of both theory and evidence casts doubts on the benefi cial effects of Basel III. It is shown that the new regulations are unlikely to diminish risk taking in the banking industry and that the increased capital requirements most likely will lead to increased costs of funding for the industry with adverse consequences for the real economy.

  • Explaining Inflation Differentials between Spain and the Euro Area

    NUMBER 02

    Pau Rabanal

    This paper investigates the behavior of inflation differentials between Spain and the rest of the euro area member countries. Cross country studies of inflation differentials, and in particular in the EMU, have focused on three explanations: (i) the role of tradable and nontradable sector productivity improvements, and the Balassa-Samuelson effect, (ii) the role of the demand-side effects, and (iii) heterogeneity of inflationary processes inside the EMU. First, the paper documents that, during the 2002-2006 period, inflation differentials in the tradable goods sector have been driving the inflation differentials in the headline HICP inflation. Second, the paper uses the estimates of a two country, two sector Dynamic Stochastic General Equilibrium (DSGE) model with nominal rigidities in a currency union using data for Spain and the euro area, to understand the role of each feature in shaping inflation differentials. The paper finds that fluctuations in productivity improvements in the tradable sector are the most important source of headline HICP inflation differentials. Demand shocks help explain a fraction of output growth, but not of inflation dispersion. In addition, the estimated model finds no evidence that inflation dynamics are different in Spain and in the rest of the euro area.