Final Report Summary - COEURE (Cooperation for European Research in Economics)
Executive Summary:
TSE coordinated the COEURE (COoperation on EUropean Research in Economics), a three-year project financed by the European Commission under the FP7 with a 1.6 million euros budget and intended to bring together the key stakeholders in the European economic research space – scientists, users of research in the policy community and the private sector, and funders of research- in a process of stocktaking, consultation and stakeholder engagement. The purpose of the COEURE project has been to evaluate the strengths and weaknesses of European research in economics.
The executed committee was formed by: Marc Ivaldi, Committee Chair and Project Coordinator (Fondation Jean-Jacques Laffont / Toulouse School of Economics); Richard Blundell (European Economic Association); Barbara Chizzolini (Bocconi University, Milano); Estelle Cantillon (Université Libre de Bruxelles); Wolfgang Leininger (Dortmund University); Ramon Marimon (European University Institute); László Mátyás (Central European University); Frode Steen (Norwegian School of Economics and Business Administration); Tessa Ogden (Center for Economic Policy Research).
The COEURE process is based on three work packages (WP)
WP1: Advances in Economic Research: Foundations for European Policies. It evaluates the strengths and weaknesses of economic research with respect to key economic issues.
WP2: Evaluating Mechanisms for Funding Economic Research in Europe. It assesses the efficiency of economic research funding sources and systems across the different European countries.
WP3: Setting an Agenda for Research Funding for Economics in Europe (the COEURE Manifesto). Based on the outcomes of this project, this Manifesto outlines the present state of European research in economics, identifies promising research avenues and proposes objectives and recommendations for fostering its efficiency and increasing its impact. The final document from the project members details 9 recommendations to improve economic research in Europe under 4 objectives:
I. Foster long-term research capacity
II. Establish Europe as a data power-house for research and analysis: Facilitate data access to researchers; Improve data design & harmonization; support economic data infrastructures in Europe
III - Reinforce outreach of economic knowledge: Establish a continued dialogue between the research and policy communities; establish a format for communication to the general public
IV - Enhance research funding: Evaluate quality/productivity of research on a regular basis; increase efficiency of funding processes; improve the incentives to access funding
The document also details what the COEURE members consider to be the future research frontiers in economics.
Project Context and Objectives:
The European Union is the world's largest economic entity, yet its ability to design and implement effective economic policies is not commensurate with its size. It is lagging, for example, in terms of policies promoting productivity, growth, scientific research and technological innovation. The Eurozone debt crisis has provided a sharp and painful reminder that the European Union must adopt a new approach to designing its economic policies and coordinating them with the policies of its Member States.
At the same time, while the field of economics in Europe has seen impressive growth in terms of global impact, the number of researchers and funding, Europe still lags behind the U.S. in terms of research productivity (as measured by the numbers of articles published in the top field journals), and European research remains fragmented across its Member States. According to recent research the share of articles in economics published by European researchers represents 34% of the total production of articles in this field in the world, while the US amounts to 53.5%. The contrast is sharper when the citation impact of these publications is taken into account. In terms of share of citations, the US represents 70.8% while the EU share is 28.4%, which illustrates the higher impact of the US research in economics.
Developing a competitive and open European research area (ERA) is essential for growth and to the process of European integration. However, different languages, a diversity of academic traditions and a variety of informal barriers often inhibit the free flow of research funding, the mobility of academic talent and, as a result, the efficient allocation of R&D funding. In times of financial restraint the latter becomes particularly important. In this context, research grants, in particular if they are allocated across national borders (e.g. by the European Research Council; ERC), can provide a viable tool to circumvent limits to integration and consequently to enhance the exchange of ideas. In fact, the relationship between openness and successful research funding is reciprocal and internationalization can benefit national and regional funding, e.g. by permitting the inflow of foreign resources. However, if not designed correctly, research funding can also aggravate the initial problem, for example by conditioning grants on nationalities and/ or local use or by failing to retain and attract the most able researchers.
A group of academic institutions with the support of the European Economic Association (EAA) created the COEURE (COoperation for EUropean Research in Economics) network, which brought together the key stakeholders in the European economic research space – scientists from the different strands of economic research in Europe, users of research in the policy community and the private sector, and funders of research. COEURE will launch a process of stocktaking, consultation and stakeholder engagement that will lead to the formulation of an “Agenda for Research Funding for Economics in Europe” (ARFEE).
The COEURE network results from an initiative of the European Economic Association (EEA) whose role, given its aims as set out by its statutes, are:
• to contribute to the development and application of economics as a science in Europe;
• to improve communication and exchange between teachers, researchers and students in economics in the different European countries;
• to develop and sponsor co-operation between teaching institutions of university level and research institutions in Europe.
In practice, Fondation Jean-Jacques Laffont / Toulouse School of Economics will effectively lead the network assembling a group of academic institutions, with the support of EEA.
The process had three work packages. The first work package (“Advances in Economic Research: Foundations for European Policies”) involved taking stock of the current state of research in key sub-fields in economics. The subfields covered the entire spectrum of mainstream economic research while addressing the thematic issues identified in the call. The stock-taking exercise was centred on a survey of each subfield by a team of scholars. Each survey mapped out the policy issues that Europe is now dealing with, the research frontier in the sub-field and the activities of European researchers working at the frontier. It went on to identify the key open research questions in the sub-field, and suggest ways in which research on these issues should evolve over the medium term, notably to better address the policy challenges that Europe will be facing in the future.
The second work package of the project (“Evaluating Mechanisms for Funding Economic Research in Europe”) involved assessing the efficiency of economic research funding sources and systems across European countries and the extent to which mechanisms for funding economic research in Europe have supported research at the frontier in the past, and suggest ways in which they might evolve in the future to support it more effectively, in terms of the scope, productivity and the dissemination of this research. It will require both surveys and the construction of databases. The task was undertaken by collecting primary data on three elements of the elements of the research production process: the global standing of research in economics undertaken in Europe, the mechanisms employed to fund this research, and the experience of researchers with utilizing these mechanisms in support of their research.
The third work package of the work (“Setting an Agenda for Research Funding for Economics in Europe”) was to formulate the Agenda for Research Funding for Economics in Europe and to propose measures to ensure that Europe has the appropriate funding mechanisms, and the coordination among them, needed to deliver this research agenda. The Agenda was renamed “The Manifesto for Economic Research in Europe”.
The fourth work package deals with the Management issues involved in the project, including budget and partner relations and the organization of the Opening and the Final conferences.
The fifth Work Package comprises the Dissemination of COEURE’s results through the workshops organized in the framework of WP1 and WP2, the projects’ website, online debates, publications, as well as the coeure manifesto (final report).
Project Results:
The most important scientific and technological results can be found in detail in the COEURE Book « Economics without Borders » and in the final report of Work Package 2. Below a summary:
The first chapter of Economics withour Borders deals with innovation and growth, which have been central to European policy-making since at least the Lisbon Agenda. The chapter argues that the Schumpeterian paradigm provides a unifying framework to organise existing empirical evidence and think about R&D, innovation and growth policies. The authors show how the Schumpeterian framework sheds new light on ongoing policy debates such as the role of competition for innovation or the consequence of innovation on inequality. They also discuss the policy implications of recent advances in our understanding of these phenomena.
The Schumpeterian growth paradigm relies on three fundamental ideas. First, in- novation (rather than simply the growth of capital or labour as in the classic growth models) drives long-term growth. Innovations may be process innovations, which increase the productivity of existing assets or labour, product innovations, or organ- isational innovations. Second, innovations result from investments by firms and entrepreneurs. This raises the question of the incentives for innovation, including the ability of firms and entrepreneurs to reap the benefits of their innovations. Third, new innovations tend to make old innovations, old technologies, or old skills obsolete (creative destruction). Thus, growth intrinsically involves a conflict between ‘the old’ and ‘the new’: the innovators of yesterday will tend to resist new innovations that render their activities obsolete. Creative destruction also explains why, in the data, higher productivity growth is associated with higher rates of firm and labour turnover.
Because firms and entrepreneurs are at its core, the Schumpeterian paradigm provides a natural link between micro phenomena, such as firm entry and exit, firm heterogeneity, firm organisation, or job turnover, and macro phenomena, such as growth and inequality. In fact, the authors show how the Schumpeterian framework is able to explain a number of existing stylised facts about firm and job turnover, the size distribution of firms, and the correlation between firm size and firm age, to name a few. They also show how the framework has been used to develop new predictions that have then been tested using new micro datasets. The scope of ap- plications is very large and this is an active field of research. For example, recent research has shown how the level of competition impacts differently the incentives for innovation of firms that are close to the technology frontier of the economy and those that are furthest away. Other research has looked at the impact of market pro- tection on innovation as a function of a country’s distance to the world technology frontier.
A central message of the chapter is that institutions and policies that foster growth depend on where a country is situated with respect to the world technology frontier. There is no one-size-fits-all. In advanced economies, competitive product markets, flexible labour markets, quality graduate education and developed equity- based financial markets form the four pillars of innovation-led growth: competition in product markets encourages innovation by firms seeking to escape the low mar- gins of neck-to-neck competition; flexible labour markets ease the process of creative destruction; quality graduate education produces the research skills necessary for innovation; and equity-based financing is more receptive to the risk intrinsic to innovation. The chapter revisits the rationale and design of competition policy, the welfare state, macroeconomic policy, and R&D policy in this light. It ends with a call for a new Growth Pact in Europe, one that relies on structural reforms aimed at liberalising product and labour markets, a renewed industrial policy and more flexible macroeconomic policies.
Chapter 2 focuses on the prevalence of ‘dual labour markets’ in the European Union. In the 1960s unemployment in Europe was no higher than in the United States, but by the end of the 20th century the ‘European unemployment problem’ was the code name for a widespread problem of inefficient allocation of human re- sources in Europe, and in Continental Europe in particular. At the beginning of the 21st century, the problem seemed to recede, with some countries undertaking critical labour reforms (e.g. Germany) and some of the ‘high unemployment’ countries showing very high rates of net job creation (e.g. Spain). Although still lower than in the United States, European employment rates were not only higher on average but also less dispersed than earlier. However, with the financial and euro crises the problem took on a different dimension, that of a divided Europe (and Euro Area), with some countries exhibiting once again very high unemployment rates (mostly Southern EU), as a reflection of their deeply entrenched structural problems.
Chapter 2 provides an overview of the research – most of it by European labour economists – that focuses on this new version of the ‘European unemployment problem’. The theoretical and empirical research provides a consensus view on who the culprit is: the ‘duality’ induced in labour markets by the existence of labour contracts with large differences in their implied employment protection legislation.
In particular, this chapter describes the highly asymmetric employment protection that distinguishes permanent from temporary contracts, tracing their historical origins and institutional arrangements. In line with the most advanced literature, the chapter takes a general equilibrium perspective. The historical perspective explains why different European countries have followed different paths, and why ‘changing paths’ has proven difficult. The theoretical, general equilibrium perspective reveals the side effects of such ‘dualism’ and why it cannot simply be identified with the coexistence of temporary and permanent contracts, which are used in all countries.
After World War I and up to the mid 70s, many European countries experienced a significant increase in employment protection legislation. Spain, Italy, France and Portugal regulated their labour markets by imposing severance payments and restrictions on dismissals, among other measures. These laws made it costly for firms to adjust in response to a changing environment, and once the oil crisis hit in the 70s, the need for higher flexibility became a more pressing priority on political agendas.
Nevertheless, dismantling the benefits that workers were entitled to was not politically feasible due to the strong political influence of highly-protected workers. Thus, reforms were made at the margin, affecting new employees only. Specifically, the emergence of temporary contracts with a lower regulatory burden was the policy response to the quest for flexibility in labour markets. These reforms thus created a dual labour market by allowing for two types of contract: temporary and permanent (open-ended). The former was designed to facilitate turnover and fast adjustments, while the latter represented the remains of stringent policies targeted at guaranteeing job and income stability.
The chapter describes how economic research – in particular, ‘insider-outsider’ theories – has helped to explain why dual labour markets have been a longstanding feature of many European economies. Insider-outsider models have set the frame- work for the analysis of the tensions between workers with permanent contracts (insiders) and the rest of the labour force (outsiders) when it comes to deciding on a reform. Beyond rationalising the pattern observed in the creation of a dual labour market and its political sustainability, these models have extended our understanding of the interplay between the political decision-making process and real business-cycle (RBC) effects – e.g. why employment is so volatile in economies with ‘dual markets’ and how these RBC effects reinforce the lack of effective political support for labour market reforms.
Nevertheless, as the chapter emphasises, the coexistence of temporary and per- manent contracts is desirable, as firms might have temporary or seasonal needs. Furthermore, a temporary contractual relationship can help workers gain experience or acquire human capital. In fact, in countries like Austria, Denmark or Sweden, temporary jobs are the first step into the labour market, and are followed by a permanent contract. On the other hand, in southern European countries, tempo- rary jobs have become ‘dead-end’ jobs. Workers tend to experience a sequence of fixed term contracts and the dream of a transition to a permanent contract rarely comes true. The chapter documents this difference and reviews relevant research, showing that market dualism is due to the large gaps in redundancy costs between permanent and temporary workers, combined with wage rigidity.
The general equilibrium formulations have helped explain the pervasive effects of ‘labour market duality’ beyond its direct effects on the level and volatility of employment: First, its composition effect, in particular the high levels of youth unemployment and NEET (‘not in education, employment, or training’), second, the lower human capital accumulation, and third, how these labour supply effects have also shaped firms’ demand for low productivity jobs, low levels of innovation and, in particular, investment in sectors of low growth potential (e.g. construction) in times of low interest rates.
The chapter closes with a review and evaluation of the reforms that have been undertaken or proposed in different countries to overcome ‘the duality disease’, demonstrating how both empirical and theoretical research reveal the need for overall reforms of labour market regulations. In particular, the chapter discusses the possibility of a single/unified contract, both from a theoretical and a practical perspective. Finally, the survey identifies three main directions in which economic research can enrich the policy debate: (i) empirical work on the differential incentives and responses induced by the two types of contracts; (ii) analysis of the political feasibility of reforms within the current scheme; and (iii) the role of labour market dualism in firms’ technology adoption.
Chapter 3 deals with the problems of population, migration, ageing and health. World migration and in particular net migration in the European Union, has been an extremely hot topic in the last few years, debated in the media as much as in the political arenas of each EU Member State and in the European Commission. A large part of the debate has, however, focused on how to deal with the current emergency inflow of undocumented migrants fleeing war zones and natural disasters.
Little is known and discussed about medium and long term causes and effects of migration. For instance, one of the recognised structural motivations of migration is the contrast between the ageing population in most destination countries and the young, more fertile population of the countries of origin. Migrants are typically younger than the host country population when they arrive, and as a result, they contribute to rejuvenating the host country’s labour supply in the short run. However, migrants age as well as natives, and it has also been shown that their fertility behaviour, and that of their descendants, tends to adapt in time to the host country’s pattern of behaviour. Is then migration a long term solution to the ageing population problem of most Western European countries? Similarly, what are the long term economic costs and benefits of migrant workers in the destination countries? Do the tax revenues and benefits of the economic activity due to changes in the composition of the working population exceed the welfare costs over the entire lifecycle of a cohort of immigrants? What exactly determines these costs and benefits? What migration policies are more effective in fostering welfare enhancing migration patterns?
Looking instead at the countries of origin, can the ‘brain drain’ phenomenon be a problem? Is their growth potential impaired by the out-migration they experience? The chapter addresses these questions from an economics standpoint, with the explicit aim of suggesting clear migration policies and indications for future research.
The main message the authors put forward is the need for a dynamic approach to simultaneously describing migration plans, human capital acquisition and labour supply. They evolve in time and both affect and are affected by the social, economic and demographic structure of the host countries. The key issue in this context is the analysis of the choice between temporary and permanent migration. Data shows that the percentage of temporary migrants is much higher in Europe than in Anglo- America, Australia and New Zealand. Why is that? What are the determinants of return migration to the countries of origin? The literature is as yet only able to provide partial answers. It is, however, quite clear that the demographic, social and economic impacts of immigration vary depending on how long migrants stay in the destination countries.
As for the fiscal effects of migration, there is consensus on the finding that host countries experience a net gain from highly skilled, young, possibly temporary, workers; but effects are less clear cut in the case of low skilled workers. In particular, the evidence collected in Norway by Bernt Bratsberg clearly outlines the tendency of low skilled migrants to exit the labour force early, and become social security dependents. In addition, migrant workers are more likely to suffer from macroeconomic downturns than natives. Nevertheless, there exists significant heterogeneity across destination countries, and migrants’ behaviour responds to incentives provided by the local welfare state, as well as to the local implementation of migration policies. Expanding on the latter issue, the effect of any migration policy strongly depends on the institutional setting: the evidence on the relative efficacy of immigrant driven versus employer driven policies in attracting the ‘best’ migrants is ambiguous. In both cases what makes the difference is the credibility of the state and the efficiency of local labour markets.
To conclude, the authors also emphasise the lack of data for certain types of studies. Analysis of the long term causes and effects of migration requires as yet unavailable long panels of information on migrants and their descendants. Even more relevant is the need to standardise and guarantee access to data across the EU, and to link EU Member States’ Immigration Registries.
Moving to the next chapter, it is well understood that the process of globalisation has reinforced the basic tenet of human capital theory, namely that the economic well-being of a society is determined not only by its stocks of financial capital, labour and natural resources but also – and increasingly so – the knowledge and skills of its individual members. Accordingly, already the 2000 Lisbon Agenda of the European Union set out the aim to turn Europe into “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”.
Indeed, research results in the economics of education show that education has a considerable impact on economic growth. Simple qualitative measures for education such as indicators based on students’ cognitive achievement turn out to be extremely good predictors for the long-run economic growth of nations. Plainly, enhancing the EU’s average student performance using a test like PISA would yield substantial returns in the EU Member States’ long-term economic growth.
From this economic perspective it appears that education systems ‘produce’ the human capital embodied in the workforce of a society. They are hence prime subjects for economic investigation. At the same time, educational attainment is an important determinant of equity and social cohesion in a society. This makes the search for educational policies and forms of political governance that influence the formation of human capital in a most favourable way, a particularly important one. Chapter 4 surveys and organises a huge body of mainly empirical work that ad- dresses the question of how education policies can advance student attainment. To understand which policies work, education economists employ advanced micro- econometric methods to perform carefully designed quasi-experimental evaluations. The main emphasis is on the identification of causal effects from the data; these methods and set-ups may require new types of datasets which are not yet uniformly available across Europe. Consequently, the survey also draws heavily on studies and evaluations of the US educational system.
The chapter is organised around the economic paradigm of a more or less competitive ‘market for education’. More precisely, it takes the special form of a matching or assignment market as students and pupils on the demand side have to be ‘matched’ with schools and other institutions of the educational system on the sup- ply side. How can such matching be accomplished as efficiently as possible if efficiency is measured by educational attainment? And what assignment methods are beneficial to what groups? The answers to these questions may be surprising, if one also takes into account the reactions of the actors in this market, parents, pupils, schools, teachers, etc. to the assignment mechanism chosen by society. The identification and assessment of such incentive effects is a hallmark of economic inquiry. The chapter performs this task for the most common assignment mechanisms: neighbourhood schooling (each pupil goes to the local school), tracking or elite schooling (schools are allocated on the basis of a test score), choice-based schooling (parental choice of school subject to a rationing mechanism) and income- based schooling (admission to private schools).
Another central concern is how the political governance of education systems affects educational success and equity. What makes an effective education system with good schools given an assignment mechanism? School accountability, i.e. the provision of rewards or sanctions for ‘good’ and ‘bad’ schools, is the key is- sue here, which – economically speaking – determines the degree of competition between schools. It can only be effective if schools also have some autonomy, and hence decision-making in the governance structure becomes decentralised. As a consequence, individual school leadership and management become more important. Indeed, evidence shows that all three components – accountability, autonomy and management, each of which can take many forms – exert an influence on school and pupil achievements.
Knowledge of the patterns of causal dependencies between student attainment and these market design features of an educational system should be extremely use- ful for progressing along the strategic framework ‘Education and Training 2020’ adopted by the European Commission. It provides some common ground to improve cooperation between the European Commission and its Members on educational matters while fully respecting Member States’ competencies in the field of education and training.
Chapter 5 deals with the issues of competition and regulation in markets for goods and services. Competition policy has become an important tool in Europe’s common work towards a more efficient and innovative economy. The major topics in competition policy and regulation are organised around four areas: collusion and cartels, abuse of dominance, merger controls and state aid. Policy and regulation have been guided by a growing research in Industrial Organization (IO), both theoretically and empirically. The EU has built national and European structures to manage competition issues both through law and regulation, and by strengthening regulative institutions’ scope and capacity for governing competition and efficiency within and across national markets.
A major new concern within both research and policy implementation is how markets work in the ‘digitalised’ economy and electronic trade. The efficient functioning of digital and online markets is crucial to welfare and is expected to become even more important in the near future. Already by 2020, more than half of total European retail sales are anticipated to be web-impacted.4 The digitalisation of the economy challenges traditional competition and regulation tools as well as theory. Several issues distinguish digitalised markets: such markets are often two-sided; search and transaction costs are different and significantly lower compared to traditional offline markets; the cost structure is tilted heavily towards the fixed cost component rather than the marginal ones; there are challenges on how to protect intellectual property rights; and new privacy issues are in focus due to the increased availability of private information on market participants. For instance, a significant part of traditional competition regulation, and partly theory, relates to firm size, dominance and market definition. In the online economy, market borders are fluid, at best and competition is geared towards competition for the market rather than competition in the market. The latter implies in its most liberal consequence that even monopolised online markets are not necessarily a problem as long as they are contestable and exposed to continuous competitive pressure. The regulation and competition problem transfers to entry barrier questions rather than dominance as such.
The challenges we are facing can be seen through the policy questions and decisions relevant in recent and ongoing competition cases. From these cases several questions emerge: the existence and the challenges with most favoured national (MFN) clauses (e.g. Amazon e-books, Online Travel Agents), selective distribution (Adidas, ASICS and Casio), the use of selective non-neutral price comparison algorithms (Google), cross border rules on fees (MasterCard) and resale price maintenance (RPM) rules (Swedish sport nutrition products), to name a few.
This chapter shows that policy makers and courts take different stances due to different views on how to solve these issues, motivating a discussion on the difficult choices policy makers now face between ex ante regulation (per se prohibition) and ex post regulation (rule of reason). It discusses the EU’s digital single market imitative and some of the economic challenges we are facing on vertical relations and pricing. The IO literature offers ‘old’ and new wisdom as regards how we can deal with these issues, still the chapter shows that there are coexisting theories suggesting different outcomes with regards to efficiency and welfare, and several open questions that need answers. For instance, the way in which we are to deal with RPM rules is not obvious, neither in the offline nor in the digitalised economy. Although RPM rules offer vertical related firms to facilitate pricing and in- crease competition, they also sometimes facilitate collusion. Likewise, it is unclear whether not allowing any restrictions on cross-border online sales is enhancing welfare in all cases.
The chapter surveys the new literature on competition and digitalised markets, and clearly advocates more work. In particular, it shows that despite the increased data availability from the online economy, there are very few empirical studies. This is surprising since the theory typically generates ambiguous predictions that depend on the size of the effects at play when it comes showing how pricing arrangements affect equilibrium prices, profits and welfare.
Many of the issues that surface as important in ‘digitalised’ markets are also evident in more traditional markets. However, the systematic presence of some key new features like two-sidedness, cost structure and vertical pricing structures, significantly modifies the nature of the models that should be used. Overall, new research on this topic needs to balance the important central results in the existing IO literature, even if re-organised and re-interpreted, against new approaches required by the new features of the digitalised economy.
Chapter 6 deals with the problems of trade, globalisation and development. It is well understood that the fortune of workers, consumers, firms, regions and countries increasingly depends on other regions and countries. This global interdependence is driven by the flow of goods, capital, information, ideas and people across them. An almost tautological conclusion of theory is that if countries choose to interact with one another, they have to be better off than being in isolation. While there are many quantifiable models to evaluate the gains from trade, the welfare gains from global production sharing, either via arm’s length global value chains or via multinational production, are less clearly quantifiable. Better understanding how multinational firms operate is central to comprehend and estimate their contribution to the costs and benefits of globalisation.
An overarching theme is that globalisation benefits some more than others. In fact, some may even become worse off as their country becomes more open to the flow of goods, ideas and people. For example, workers in import-competing industries stand to lose when countries open up to trade. There is a need for better understanding the redistributional effects of globalisation and to develop policies to mitigate the negative effects. Economists find it difficult to give definite answers to trade policy challenges, partly because the remaining policy barriers to cross- border transactions are difficult to quantify. There is broad-based evidence that these frictions are strong, but many of them cannot be captured by taxes and quotas, which are the standard tools to model them for policy analysis. We need to better understand not only protectionist, but also precautionary motives for trade policy.
There are also important challenges in measurement. Recent initiatives to match data from various national sources are promising, but the national fragmentation of data collection remains the primary data challenge facing analysts of globalisation. To be more specific, the most relevant tasks in this area are to: 1.Harmonise firm-level trade and balance sheet data across countries. 2. Develop statistical methods and computational tools to work with multidimensional data. 3. Develop new datasets on workers within firms, while ensuring privacy and consistency across studies. 4. Build harmonised firm-level data on services trade 5. Collect data on buyer-supplier links within the EU. 6. Link national administrative data, harmonise data collection and reporting. 7. Synthesise research based on ad-hoc proprietary data. 8. Construct international input-output accounts from the ground up. There are some important challenges for theory as well. We need to: 1. Reconcile model-based and reduced-form estimates of gains from trade. 2. Identify losers from globalisation and quantify their losses. 3. Understand and quantify non-tax, non-quota frictions in trade. 4. Develop a toolbox for quantitative analysis of redistribution. 5. Understand and quantify the effects of standards and harmonisation on trade and welfare. 6. Develop a quantitative theory of supply-chain trade, and of multinationals.
Chapter 7 deals with economic approaches to energy, the environment and sustainability. Different schools of economic theory hold differing views on the basic characteristics of the relationship between the economy and the environment. The two principal schools are ‘environmental and resource economics’, which con- siders environmental concerns as an aspect of broader economic issues to which the approaches of rationality, marginalism and efficiency may be suitably applied, and ‘ecological economics’, which considers the economy as a component of the global ecosystem, and employs ‘methodological pluralism’ to assess different aspects of what proponents view as a highly complex, multifaceted human-economy- environment interaction. These two opposing viewpoints produce different concepts of ‘sustainability’ and ‘sustainable development’, and different ways of measuring whether progress towards such states is being achieved. Environmental and resource economics takes the position of ‘weak’ sustainability, which advocates that as long as the total economic value of all capital stock (natural, human and man-made) can be maintained in real terms, regardless of the distribution, sustainability is achieved. The monetary valuation of natural capital and ecosystem services is a central tool in such analysis.
On the other hand, ecological economics takes the position of ‘strong’ sustain- ability, which considers some natural capital to be ‘critical’ in that it makes a unique contribution to welfare or have intrinsic value, and cannot be substituted by manufactured or other forms of capital. The insights of institutional/evolutionary economics and behavioural economics are also important to our conception of the economy/environment relationship, and challenge the core tenets of neoclassical economics (upon which environmental and resource economics is based), including assumptions of rational, maximising behaviour by all economic agents (individuals and firms) according to exogenous preferences, the absence of chronic information problems, the complexity and limits to cognitive capacity, and a theoretical focus on movements towards or attained equilibrium states of rest.
Although sometimes contradictory, these schools of thought are complementary in many respects and bring different insights to bear on both the issues of sustainability (such as the ‘wicked problem’ of the ‘Energy Trilemma’; decarbonising the energy system whilst maintaining both energy security and energy access and affordability), and policy approaches to tackle issues that threaten it. Whilst the application of economic thought and methodological approaches has advanced our understanding of interactions within and between the human and natural world, many important areas of further theoretical, empirical and methodological research remain open. These areas may be broadly delineated into four inter-related themes. Basic characteristics of the economy-environment relationship. This concerns the notions of weak and strong sustainability, central to which is valuation of natural capital and ecosystem services. Particular areas of research should show how to include or mitigate the impact of behavioural and cognitive complexities on values elucidated, how non-monetary valuation approaches may be integrated or made complementary to monetary valuation, whether monetary valuation, by framing the good or service in such terms, crowds out other forms of valuation, and the ex- tent to and nature in which monetary valuation can and does impact decision- and policy-making (including the drivers and barriers involved). Another ongoing area for research should be the refinement of robust approaches to identifying ‘critical’ natural capital, in order to further define our ‘safe operating space’ within ‘planetary boundaries’ that are not open to meaningful monetary valuation.
‘Natural’ (non-policy) drivers of changes to this relationship. This contains two principal longstanding questions. The first concerns the validity of the Environ- mental Kuznets Curve hypothesis, which suggests that the relationship between resource depletion and pollution levels and income follows an inverted ‘U’ shaped parabola; resource depletion and pollution levels increase with income until a given level of income is reached, after which environmental pressures decrease (driven by, rather than simply inversely correlated to, increasing income). Further research using structural equation models, along with an increased focus on the influence of economic and demographic structures and the political economy, is required. The second question surrounds approaches to the robust calculation of marginal social costs of pollution, and of CO2 in particular. Alongside valuation of natural capital and ecosystem services (in addition to valuation of human health and comfort, etc.), debates about appropriate social discount rates are central in this field.
The design and impact of policy interventions. Four principal, interrelated topics for further research are dominant. The first concerns the cost for firms of environ- mental policy of different designs (both individually and in a policy ‘mix’), and the effect this has on competitiveness (and in particular ‘carbon leakage’). The second surrounds the process, drivers and barriers to innovation and diffusion of innovations, and the development of innovation ‘indicators’. The third topic concerns the role, nature and impact of institutions and behaviour in policy choice, design and impact. In terms of the ‘energy trilemma’, continued research into the availability of ‘win-win’ options, and options for reducing the risks surrounding inherent un- certainty of future developments, would also be of substantial benefit. The fourth topic concerns issues of environmental justice and distributional impacts. Uncertainty surrounds whether instruments utilising monetary valuation of natural capital and ecosystem services reduces or exacerbates pre-existing economic and social inequalities, particularly at the local level. Further research is required to determine the distributional impacts of policy instruments, instrument mixes and their specific design.
Modelling approaches and techniques. Most models employed to assess the impact of environmental policy tend to focus on a particular component of the environmental-economic system. Although numerous Integrated Assessment Models (IAMs) attempt to link different components of the environment and the economy, such dynamic links are usually relatively basic. Further research should be directed at improving such links. However, improvements to the individual components of such models are also required. For example, integration of the insights provided by behavioural and institutional economics in macroeconomic models is often poor, meaning that such models mischaracterise critical, ‘real-life’ dynamics. The improved incorporation of such insights into economic-environmental models should hold a high priority on the research agenda.
Chapter 8 provides a detailed account of the general economic principles governing regional growth. It starts from the very basics of spatial economics to progress to advanced econometric testing of predictions following from models based on New Economic Geography and New Trade Theory, both of which attach prominent roles to increasing returns and network effects occurring through complex ‘linkages’. Mostly publicly provided infrastructure and transport networks are key drivers of these linkages.
The chapter provides sobering insights for advocates of such clear, politically well-intentioned goals as regional cohesion and (income) equalisation in Europe. As shown, the authors hold in particular against the background of decreasing transport and communication costs, which has recently given rise to popular catch-words like ‘the death of distance’ or ‘the flat world’. The insinuated quasi-irrelevance of distance and location in space and markets and the intuition that this should foster more equal development across different regions have no economic foundation.
It appears that regional disparities are inevitable due to the economic forces of agglomeration and dispersion at work, and the complex ways they are reinforced or dampened by transport costs. Moreover, decreasing transport costs as well as the new transport infrastructure, which better links lagging regions to thriving markets in urban agglomerations, may work against the aim of convergence of income and living standards if agglomeration forces become relatively stronger. There is ample evidence that this occurs at a European level. The crucial point to assess is economic agents’ reaction to these changes, i.e. how firm and labour mobility are affected. Results indicate that differences between regions matter less than differences between people living there. As a consequence, helping poor regions need not help poor people in that region. Thus, investments into training and human capital may be a better development strategy than additional transport infrastructure.
What are the consequences of these findings for the transport and infrastructure policy of the European Union? Firstly, the selection and assessment of large transport infrastructure projects must be improved. Standard piecemeal cost-benefit analysis does not suffice as system-wide consequences have to be accounted for. Secondly, the present use of the existing transport infrastructure in Europe has to be put to much better use. The EU does not do well in comparison to the US in using its rail and air transport systems. Both suffer from national fragmentation of regulations and operation standards as well as the ‘protectionist’ interests of large domestic firms. In particular, the proportion of rail transport of goods in the EU is very low compared to the US, as most goods are transported by trucks across Europe. Simple fuel taxes have given way to new distance-based ‘truck taxes’ imposed by countries with a high share in transit traffic, such as Germany or Austria. This instrument for more efficient pricing is very promising. The present implementation of distance charges, however, is suboptimal as distance-based charges for trucks have considerably lowered diesel taxes due to tax competition initiated by neighbouring countries. Moreover, distance is not necessarily a good proxy for the external costs of a road trip, which also depend on local conditions such as congestion, air pollution and accidents. Taking account of these factors in more sophisticated formulas for road pricing of trucks cannot ignore the impact of traffic by passenger cars. Already today the diesel tax is likely to be too low for passenger cars and too high (combined with distance charges) for trucks. The political shift in road pricing for trucks must also pave the way to a new system of road pricing for cars.
The treatment of urban development and spatial planning within the social sciences underplays the importance of economics in a serious way. This is mostly self-inflicted by the field, as Urban Economics has never formed a central part of mainstream economics. Originally, the development of spatial economic theory was almost exclusively driven by German contributors: Heinrich von Thünen, Wil- helm Launhardt, Alfred Weber, Walter Christaller and August Lösch. As there are no counterparts to them in the Anglo-Saxon tradition of economic theorising, ini- tially spatial economics was completely absent from neoclassical economics. Even today it is much less central to mainstream economics than it should be, because the introduction of space and land use into economic analysis brings about important ramifications. Space cannot be incorporated into the competitive general equilibrium model in a frictionless way as changing location incurs costs, especially transport costs. This fact lies at the heart of the phenomenon of agglomeration.
Chapter 9 convincingly argues that agglomeration drives economic growth and the social cohesion of a society in a fundamental way. This insight holds important lessons for policy makers in the European Union: the single most important insight perhaps is that wealth is increasingly created in cities and metropolitan areas.
What are the economic driving forces behind this development? For consumers as well as firms, agglomeration produces increasing returns due to improved learn- ing, sharing and matching opportunities in productive and social processes. Given consumers’ preferences for affordable housing and dislike of commuting, cities emerge as the outcome of a trade-off between the gains and costs of agglomeration. The simultaneous spatial treatment of land use for housing and business and transport in spatial theory is not easy. There are many externalities at work, e.g. any person’s decision to use a car or occupy a certain flat yields consequences for others who are deprived from using this particular space. Taking account of these externalities theoretically and estimating them empirically leads to another remark- able result: cities, in particular European cities, are likely to be too small rather than too large to reap the full benefits of agglomeration. The success of cities – much more so than that of regions – is instrumental for future growth in the European Union.
Improvements to the organisation of metropolitan areas and big cities should hence focus on a reduction of agglomeration costs. Traffic and the transport of people as a main source of congestion in urban areas are prime targets in this regard. For example, the single most important external cost of car use in urban areas is congestion, rather than climate damage. However, much more public and political attention is paid to climate change than to congestions. The economic answer to the problem of congestion is the politically unpopular device of road pricing. Nevertheless, efficient pricing of congestion will bring about time and productivity gains, as well as generate valuable revenues. The need for congestion pricing is reinforced by the finding that in the absence of road pricing the public provision of expensive new infrastructure and transport links will not alleviate the congestion problem. The authors present impressive evidence of the scope and implementation of smart pricing schemes that have consequences not only for the cost-benefit analysis of large transportation projects but also for public finance in general; e.g. they suggest spending the revenues from congestion pricing on a reduction in labour taxes.
The bottom line is simple: the European Union needs the design of urban policies (on behalf of the European Commission and its Member States) similar in standing, importance and funding to its present design of regional policies.
Chapter 10 focuses on ‘Fiscal and Monetary Policies in the Aftermath of the Crises’. Historically, macroeconomic policy and research have always been inter- twined, main policy and institutional designs have been rooted in economic analysis (price stability, Central Bank Independence, etc.) and, likewise, economic re- search has always been stimulated by macroeconomic events; especially negative ones. The financial and euro crises (2008–2013) – the Great Recession for many countries – have been no exception.
These have also been crises of confidence: for advanced societies, who viewed themselves in a sustainable growth path supported by the ‘great macroeconomic moderation’; for policy makers, who entertained similar self-views to those of Jean-Claude Trichet, president of the ECB, who wrote on the occasion of that Institution’s 10th anniversary: “The achievements of the past decade are due to the vision and determination of the Governing Council members, past and present, and due to the energy and efforts of all staff of the Eurosystem”,5 and also to the macroeconomic academic profession who, in the words of Nobel Laureate Robert
E. Lucas Jr. at the dawn of this Century, thought that “macroeconomics in this original sense has succeeded: its central problem of depression prevention has been solved”.6
The chapter provides an overview of the growth of research in macroeconomics, in response to these severe shocks of the early 21st century. The debate about which instruments to use to stimulate economies in recession and which stabilisation policies should be pursued when traditional interest rate policies proved to be ineffective, became the centre of attention in both academia and policy making. The chapter shows how new research has contributed to clarifying issues, assessing new and old policies, and raising new questions.
The authors present the landscape that policymakers and researchers faced after the recession by highlighting the trends observed in three economic aggregates: output, unemployment and inflation. Their attention then turns to analysing policy design in economies with low or negative output growth, low inflation, high un- employment and a binding zero lower-bound (ZLB) for interest rates. Part of the economics literature indicates that the driver leading an economy to hit the ZLB is a fall in the natural rate of interest. Taking this literature as a starting point, the chapter discusses both monetary and fiscal policy alternatives. In particular, three alternative monetary policies are covered: forward guidance, quantitative easing, and credit easing. On the fiscal side, the discussion focuses on research that has investigated the effectiveness of fiscal stimulus when the economy is near the ZLB, as well as on the most effective instruments to be used: labour taxes, consumption taxes, and government expenditures, among others.
The scientific method has prevailed over the ‘crisis of confidence’. That is, new theories and methods have been developed which build on existing ones (not throw- ing them away as ‘culprits of the crises’, as it was often put in the media). For example, the authors show how different new contributions can be mapped into a key ingredient of dynamic macroeconomic models; how policies and frictions dis- tort the intertemporal choices that households and societies make. The questions of how the fall in the natural rate is modelled, and how the different proposed policies provide incentives to escape from a recession at the ZLB, are better understood through the lens of the Euler equation. The results of this analysis indicate that most of the suggested policies work through ‘the expectations channel’. More precisely, policies are effective if they increase expectations of future inflation, and consequently lower the real interest rates. As the authors note, it remains a theoretical and empirical challenge to effectively assess the size and validity of ‘the expectations channel’ as the pivotal policy transmission mechanism at the ZLB.
In economic models, a fall in the natural interest rate is commonly modelled as an exogenous increase in the discount factor: consumers become more patient and want to save more. This is just a convenient modelling strategy rather than a fundamental explanation for the fall in the natural interest rate. One of the main concerns raised by the analysis is that most theories based on standard business cycle shocks only account for a short permanence of the economy at the ZLB. Contrary to this prediction, Europe has been experiencing this situation for over six years, and Japan for over twenty years. This has motivated the search for theories that can sustain the ZLB as a ‘persistent’ situation. The chapter discusses two such theories: secular stagnation and self-fulfilling recessions. As an alternative, it also illustrates how the seemingly temporary effects of business cycle shocks could be highly persistent due to labour market frictions.
Some features of the financial crisis and recession are common to most of the advanced economies that have experienced them, but the euro crisis and its ‘South recession’ has some specific elements. For the European Monetary Union (EMU) the ‘crisis of confidence’ was the collapse of ‘the convergence view’ – namely, that the expectation that due to the common currency and the established fiscal and monetary policies, convergence among EMU countries would be relatively fast. The debt and banking crises and the divergence among Euro Area countries has added new challenges to EMU fiscal and monetary policies. The chapter also discusses these issues, and some of the research that they have stimulated (most of it undertaken by researchers based in Europe). For instance, the chapter concludes with a section on risk-sharing and fiscal policy within a monetary union. The aim is to analyse how a system of conditional transfers can strengthen EMU, beyond what can be achieved through private insurance and ECB interventions, without needing a large ‘federal budget’ or becoming a ‘transfer union’.
Chapter 11 deals with financial regulation in Europe. It has often been said that the recent economic crisis was mainly caused by the worldwide interdependence, and the excessively risky and apparently out-of-control behaviour of financial markets. This not entirely correct statement has once again brought to the forefront the debate on the need for coordinated intervention policies among European countries, and on the optimal degree of regulation in this vital and already highly regulated sector of the economy.
We know that it is extremely difficult to keep a balance between free market forces and regulation in order to preserve the stability of the overall financial sys- tem and of the banking sector in particular, and enhance financial innovation, hence the efficiency of financial intermediation, and ultimately the smooth working of real economic activity. Moreover, there exists a seemingly endless cycle between regulators reacting to the last crisis by imposing more and more sophisticated rules and financial intermediaries always finding new loopholes and side paths to avoid the regulating constraints.
The debate has been particularly intense in Europe, where economies are strongly bank-based and where some segments of financial markets, the private equity market for example, are not as developed as in other advanced economies. This implies that the efforts of both policy makers and regulators have mainly been directed to- wards ensuring the stability of the banking sector using both micro and macro prudential regulation and enforcing the European Banking Union, a successful endeavour that still needs some finishing touches. The more recent focus of the financial community, which includes operators in the field as well as the European Commission, the European Central Bank, National Central Banks and Regulating Authorities, has also been the design and implementation of the Capital Markets Union.
This chapter is a comprehensive, clear and detailed review of what happened and what was done during and after the crisis in Europe and what still needs to be done. It may well be considered a reference text to be kept very close and used by policy makers, practitioners and students interested in understanding regulation and how it has been applied to European financial markets, in particular to the European Banking System.
The authors trace the struggle of ‘complexity against simplicity’ in regulation, they discuss the risks attached to financial crises, describe the rules that have been implemented and review the opinions of economists, both European and non- European, on the pros and cons of alternative policies. They show that further economic research is strongly needed. While the risks of a fragile financial system are well known and have been thoroughly studied by economists, there is very little recent theoretical work on how to map basic failures into regulatory reforms. Most of the published contributions in the last decade are indeed applied ex post analyses of the effects of the enacted regulatory reforms, often with ambiguous results, maybe because of the restricted access to data that central banks and regulators in fact collect but have not yet published.
This state of affairs may partially be the consequence of the particularly strong and productive interaction between economists, regulators and practitioners: most regulators are themselves economists, while economists that work in academia are often consultants to policy makers and regulators. This implies that there is no over- whelming ‘language problem’, but also that regulators and policy makers may re- quest relatively quick operative answers to their questions, not leaving enough time for in-depth theoretical assessments by researchers. Nevertheless, the involvement of academics in policy making, specific to this branch of economics, is extremely welcome and has been the main driver of the research on financial markets in the last few decades.
Chapter 12 deals with inequality and welfare and asks whether Europe is special. Historically economists and politicians alike have been concerned with inequality and welfare. Recently the topic has regained focus, most notably due to Thomas Piketty’s ‘Capital in the Twenty-First Century’, where he shows that inequality, if anything, has increased in the last decades. It is not presumptuous to say that the question how inequality affects major topics such as education, health, migration, growth, technical progress, innovation and social security, to name a few, is at the very essence of how the European welfare state will develop.
Why is this regained focus important but also so difficult? First, the concepts of inequality and welfare have proven difficult to define and measure in a coherent and agreeable manner. Second, when considering the present empirics on inequality, most measures show a stark increase in inequality since the 1970–80s. Third, research has uncovered strong hysteresis effects in inequality development in the sense that the next generation will inherit much of the present pattern, suggesting that the situation will take many years to mend.
The situation in Europe seems to be less critical, at least at the average level. Whereas the US has experienced a 20%-point increase in the top 10% income share since 1970 (from an already high 30%+ level), Europe started on its own inequality-trip ten years later in the 1980s, increasing their top 10% income share from 30 to 35% from 1980 to 2010. However, when treating Europe as a unified country, inequality in Europe is as high as the inequality in the US.
Focusing on the country level, several patterns are visible. First, the Northern countries have much lower inequality levels than other countries. The UK is the other side of the coin, with the highest inequality levels in Europe. Second, this heterogeneity is, however, decreasing over time. There is a clear pattern of convergence in inequality since 1985. Whereas the Northern countries, starting from a significantly lower inequality level, increase inequality over time, and more than all others (e.g. more than 25% in Sweden), other countries have considerably flatter developments. Even in the UK, we find a flattening of the upward trend in inequality since 2000. Seen in the light of a common labour market with open borders and new migration streams, this suggests several potential explanations. One is a revealed preferences argument that points towards a more integrated Europe when it comes to the redistributive preferences across Europe.
A major challenge addressed also in other parts of this volume is migration. Partly migration seems to change political fundamental views, and partly it challenges the foundations of traditional welfare states. An example of how this challenge remains unresolved is Belgium. Two thirds of the increase in poverty in Belgium in recent years is attributed to migrants, and at the same time Belgium is struggling with minority groups that are willing to engage in terror acts. This picture is not very different in several other EU countries. Some have even argued that this new development changes fundamental political preferences, from earlier being one-dimensional (more or less welfare state) to a bi-dimensional political agenda where the second political axis is how open the society should be to people originating from other ethnicities. The choice along the second dimension interferes with the choice over the redistributive dimension and changes the equilibrium of the entire political game. Obviously, such changes bear consequences when it comes to future inequality acceptance and the welfare states’ political and economic fundaments.
At present, we do not know enough about peoples’ attitude towards inequality, though surveys show a large heterogeneity in views across Europe. For instance, on questions on why people are ‘living in need’, only around 20% in countries such as Belgium, Netherlands and Sweden attribute this to ‘laziness or lack of willpower’, in contrast to more than 50% of Finnish and Austrian citizens. People from Fin- land and Austria, however, share views with many outside Europe and are quite representative of people living in countries such as the US, Canada and Japan. This heterogeneity partly implies that people seem to have very different acceptance to- wards ex ante and ex post inequality. Ex post inequality, that is a direct result of peoples’ own choices is generally much more accepted than ex ante inequality resulting from inherited economic situation and birth. New and comparable data on peoples’ perceived welfare and happiness, as well as a new focus on research on fairness and preferences through experimental studies provide, and will continue to provide, new insight on these issues.
The European welfare state has other challenges related to these questions. Tax rules in several countries seem to change towards more favourable tax rates for firms, resembling a race to the bottom across countries and resulting in large corporations and firms moving to the most attractive locations. This in turn has con- sequences for where the smartest people move to work, and obviously also for inequality and the financing of the welfare state in the future.
Most of the above, and several other questions are raised and discussed in this comprehensive chapter. It concludes with several areas where it is of vital importance for Europe to gain new knowledge. In particular, it has five clear research policy recommendations for Europe. It should: 1. Build a network of researchers in economics and social sciences to understand the fabric of equality of opportunity: Ex ante inequality is a major challenge for the foundations of the future welfare state. 2. Build a large panel of data specific to studying the dynamics of poverty, and how people get in, how people get out. 3. Undertake research to prepare the ground for a standing-up policy to fight poverty and promote equal opportunities. 4. Look at the sustainability of national welfare states in an environment where capital and labour are mobile. 5. Further strengthen the research on the issues that lead to the convergence of Southern societies to the social model of the Northern societies.
The Relevance of Data and Methods
The last two chapters of this volume deal with developments in data and methods that cut across policy areas and fields. The past 20–30 years have witnessed a steady rise in empirical research in economics. In fact, the majority of articles published by leading journals these days are empirical. This evolution is made possible by improved computing power but, more importantly, thanks to an increase in the quantity, quality and variety of data used in economics.
This data revolution has led to significant intellectual breakthroughs in economics. Several chapters in this volume allude to the role that better data have played in recent advances of our understanding in important economic issues, such as innovation and growth (Chapter 1), human capital and education (Chapter 4) or inequality and welfare (Chapter 12), among others. More and better data are sometimes even credited for changing the research paradigm in some fields, where data are no longer used as a means for testing theory but as a central input to theory development, as in trade and globalisation (Chapter 6 and Eaton and Kortum (2010)).
Equally important, most chapters conclude that our ability to satisfactorily ad- dress remaining open questions in key policy areas will hinge upon the availability of better, more comparable (i.e. across countries), or more accessible data.
Data do not, however, come for free: they need to be collected, checked, harmonised, and organised for easy retrieval and analysis. When they contain confidential information, access needs to be organised in a way that preserves the legitimate privacy concerns of data subjects. More fundamentally, data for economic research come from many different sources and involve many different producers: not only statistical agencies, but also public administrations and agencies, central banks, private firms, data vendors and, last but not least, researchers.
Chapter 13 brings together several actors and stakeholders of recent developments in data for economic research to discuss their drivers, their implications and the remaining challenges. The chapter starts with microdata, i.e. data at the individual, household, firm or establishment level, produced from surveys or collected for administrative reasons. Such data have been at the forefront of important new research insights. Administrative data in particular is now the new Eldorado for empirical work. The big issue here is access to these data for research purposes. Northern countries are world leaders on this front. They combine some of the best and most comprehensive statistical systems in the world with some of the highest levels of access. Access is often more difficult in other European countries. However, things are improving. The chapter outlines recent developments towards greater and easier access in the UK and Catalonia as illustrative of the ways stake- holders can foster greater access despite less favourable contexts than those of the Northern countries.
Another big issue for administrative data, especially when it comes to business data, is cross-country data harmonisation and data linking (i.e. the ability to link data from different sources but corresponding to the same firm or statistical unit). Harmonised cross-country data are essential, as several chapters have outlined, to draw sound comparisons between countries and assess the scope for replicability across borders (e.g. whether the experience of one country is relevant for another). Moreover, we are living in a globalised world where firms operate across borders and we need statistical systems that reflect this reality. Until recently this was not the case. The 2008 economic crisis cast a crude light on the mismatch between existing data structures in official statistics (mostly organised along national lines) and the reality of global financial and economic markets. Two developments are taking place in reaction. At the international level, the G20 Data Gaps Initiative is bringing together Eurostat and other international organisations such as the Bank for International Settlements, the World Bank and the OECD to coordinate statistical issues and strengthen data collection to improve its alignment with economic realities. At the same time, a number of initiatives are under way among national statistical offices to improve data harmonisation and data linking across national borders. Eventually, this is likely to contribute to improving access to harmonised cross-country datasets for researchers, even if the impetus for the current changes is mostly political and access to researchers is not a priority.
Naturally, statistical offices are not the only producers of data. Private data firms have long been involved in harmonising and linking firm data across borders. Their data are often used by researchers as a complement or a substitute to administrative data. A number of researchers are also involved in large-scale data collection or production efforts. The chapter describes three such researcher-led data initiatives that illustrate their advantages. First, the data are typically immediately and easily made accessible to researchers. Second, not being subject to the same operational constraints as statistical offices, the databases produced by these researchers often use innovative designs (such as internet surveys or automated reporting from handheld devices) that reduce costs and improve reliability. Third, unlike official data that are collected because there is a policy or administrative need, data collection can be more forward-looking and focus on issues and topics that might not yet be recognised as policy issues. The Survey of Health, Ageing and Retirement in Europe is a perfect example. Funding, however, is a critical challenge that all such initiatives face.
Another type of data produced by researchers is data generated from economic experiments, either in the lab or in the context of randomised controlled trials. Both types of data have led to major advances in our understanding of human behaviour and the robustness of economic institutions, for the first one, and in our understanding of the impact of policies and the mechanisms underlying them, for the second. Both approaches are now well-established and registries have been set up to archive the data produced and to ensure that they are accessible for researchers interested in replicating the results. The chapter describes recent developments, remaining challenges and outlook for each type of approach.
An emerging trend in economic research is the development of new forms of collaborations between researchers and private and public sector organisations. One form that such collaborations have taken is closer relationships with private firms for access to their proprietary data. A complementary form has been collaborations between researchers and policy-makers where the focus is not only on data, but also on helping design and recalibrating policy interventions. In both cases, these collaborations are providing researchers with unmatched data access and data quality, as well as opportunities to investigate novel research questions and existing research questions in new ways. The chapter illustrates the potential of these collaborations but also discusses their risks and their implications for how research is organised, evaluated and funded.
The chapter concludes that there is no single type of data that is superior to all others. Each type of data is unique and has advantages over the others for a given research question. It is important for economic research to acknowledge the benefits of variety and the potential complementarity among data producers, and for stakeholders to support – politically, legally, technically, and financially – this diversity.
A benefit of the data revolution in economics is that researchers now have access to unprecedented amounts of data, a phenomenon that has been popularized under the name of ‘Big Data’. The term itself is used to cover a variety of data-driven phenomena that have very different implications for empirical methods. Chapter 14 deals with some of these methods-related issues.
In the simplest case, ‘Big Data’ simply means a large dataset that otherwise has a standard structure. Administrative data, which cover entire populations rather than population samples, belong to this category. The large size of these datasets allows for better controls and more precise estimates and is a bonus for researchers. It may raise challenges for data storage and handling, but it does not raise any particularly heavy methodological issues.
But ‘Big Data’ often means more than just standard datasets of large sizes. First, large numbers of units of observation often come with large numbers of variables. To continue with the same example, the possibility of linking different administrative datasets increases the number of variables attached to each statistical unit. Likewise, business records typically contain all interactions of the customers with the business. This ‘curse of dimensionality’ challenges traditional econometric ap- proaches because coefficients on explanatory variables may no longer be identified or only poorly so. Second, the term also covers new datasets that have a very different structure from the structures we are used to in economics. This includes web search queries, real-time geo-locational data or social media, to name a few. This type of data raises questions about how to structure and possibly re-aggregate them. If economists want to be able to take advantage of the data revolution, they will need to be equipped with appropriate methods to deal with these new datasets and data structures.
Chapter 14 starts by describing standard approaches in statistics and computer science to overcome the curse of dimensionality. Such approaches usually take an agnostic stance on the data generation process when seeking to balance the goal of ‘letting the data speak’ with the need to generate stable estimators.
Economic problems and economic data have specificities, however, to which it is worthwhile to tailor solutions. One specificity of economic problems is that we are often interested in measuring a (causal) relationship between some variable of interest (for example, a policy) and its effects. In other words, there might be many variables, but one of them (the policy) is of special interest to the researcher. Recent research efforts seek to combine the power of ‘standard approaches’ in statistics and computer science with the ability to give, within the algorithms, a special status to one variable – the policy variable – which we are interested in identifying precisely.
Economic data also have their own specificities, which vary by context. For ex- ample, macroeconomic indicators tend to be serially correlated, are released non- synchronously and with different frequencies. Recent research has shown that estimators that take these specificities into account outperform standard approaches in statistics and computer science for dealing with the curse of dimensionality. We are only at the beginning of these efforts, however, and much still needs to be done. Another methodological challenge raised by ‘Big Data’ is the development of estimators that are computationally tractable for very large datasets (e.g. high frequency trading data, browsing data, etc.). Indeed, despite recent progress in computing power and storage, these can be a constraint for such datasets. Estimation methods that take advantage of parallel computing offer a promising route.
In short, ‘Big Data’ is exciting for economics because of all the things we can learn from them, but it is also essential to make sure economists are equipped to take advantage of these opportunities. On this front, economists can learn a lot from recent and current research in statistics and computer science. It is, nevertheless, essential that methods be developed that account for the specificities of economic problems and data.
Overall, it can be clearly seen from all chapters that a large number of new results are based on new datasets across all fields of economics. An immense body of new knowledge has emerged from the analyses of newly collected/assembled datasets; and from new methods of using existing data. New questions have surfaced, and new answers have been given to long standing questions. Europe could become the leader in the collection and linkage of new types of big data and related methods. There also seems to be a genuine need for the economics and policy interface to be strengthened. Unfortunately, few economic policy decisions are based on known and established economics results, and vice versa, not enough economics research is motivated by direct policy questions. Finally, it is also easy to spot that many new useful insights have been provided by the generalisation of local (country-related and/or regional) knowledge into a more general EU-wise understanding, and vice versa, by the analysis of how general knowledge is interpreted or translated at the local level. It is fair to say that the critical mass of talented European-based re- searchers is available, and it clearly transpires through the chapters of this volume that they tend to work on problems, challenges and data covering Europe.
The objective of Work Package 2 (WP2) of the COEURE project is to assess the efficiency of economic research funding sources and systems across European countries. The task was undertaken by collecting primary data on three elements of the elements of the research production process: the global standing of research in economics undertaken in Europe, the mechanisms employed to fund this research, and the experience of researchers with utilizing these mechanisms in support of their research.
Preliminary results were presented at a workshop in June 2016 attended by the EU Commission DG Research & Innovation, the European Research Council, representatives of national funding agencies, the European Science Foundation, and economics researchers. Insights and feedback from participants at the workshop have been incorporated into the final report (submitted in SESAM as deliverable D2.12).
A review of research in economics in Europe is presented in chapter 2 of the final report where we employ citation analysis to identify the extent to which frontier research is undertaken at European institutions. This is supplemented in Appendix 1 of the final report with details of all economics departments and institutions in Europe that are placed in the top 10% of global research performers. Viewed from the perspective of the 1970s the standing of European research in economics is encouraging with 40% of the top quartile of economics departments in the world located in Europe. Innovations, involving the establishment of a variety of clusters, have created centres of critical mass in graduate education and research capable of retaining talent in Europe. These developments have been driven by visionary leadership facilitated by the emergence of greater opportunities to fund research.
We examine developments in funding in chapters 3 and 4 of the final report. First we look at trends in spending on research and development where we note concerted action across Europe to increase spending to match competitors in Japan and the USA. The objective of creating a European Research Area has codified a strategy where research is seen as a driver of prosperity. Framework programmes have been used to implement this strategy and a European Research Council (ERC) has been created to support frontier research.
A database of research funding sources across European countries was created as part of the project and is contained in Appendix 2 of the final report. This drawn from information available in published sources and supplemented by visits and interviews with those involved in administration at 6 funding agencies. In chapter 4 of the final report we highlight a number of key trends that emerge from our analysis of this database. We note evidence of best practice being transferred across countries in the design of agencies and funding instruments. However, trends are also observed that give cause for concern. Most prominent among these is the growing expectation of shorter term impact from research funding. This is a concern also highlighted by the OECD (2015) in its study on The Future of Productivity. Where it calls for a renewed focus on the funding of basic research. The concern with impact has an effect across and within disciplinary areas. It brings a greater bias towards supporting research in the life and physical sciences. In a period of austerity this presents a danger that research in the humanities and social sciences (HSS) may be squeezed out and, where maintained, be directed too narrowly at top down priority themes.
We also raise concerns at: trends in core funding that undermine the universities that host research, and competitive funding instruments that can result in a beggar=thy-neighbour approach from national governments to winning EU funding.
Chapter 5 of the final report uses the results from a survey of researchers to analyse the experience of economists with available funding instruments. Formal analysis using this survey data is presented in Appendix 4 of the final report where it is used to examine the production process of research.
Lessons, both for funders and the economics profession are drawn in chapter 6 of the final report. These messages will input into the formulation of an Agenda for Economic Research in Europe which is the topic of the final work package of the COEURE project.
Potential Impact:
The potential impact of the COEURE project has been described in detail in the COEURE manifesto. Below, a summary:
Strategic Objectives in Economic Research after the COEURE project
Objective 1: Foster Long-term Research Capacity
Why: Ensuring long-term research capacity for economic research in Europe requires that we continuously enhance, improve and expand the production line or chain of economic research to: Catch up with the US in terms of productivity and impact; Address the long list of policy challenges and open research questions; Develop technical tools and build databases to push the frontiers of economic research; Address the growing demand for economic analysis and knowledge in society; Strengthen the research career in economics: PhD and post-doctoral programmes and mobile and competitive tenure track careers.
Actions: All actions that could impact the production process of economic research as provided below will contribute to shifting the production function of economic research upward, making it more productive (e.g. producing more articles in economic journals) and more efficient (e.g. increasing the conversion of resources into research outputs) but also, and importantly, increasing its quality (e.g. delivering articles in the best scientific journals).
The actions detailed below concern: The design, development and availability of data; The outreach of economic results and policy recommendations drawn from the most up-to-date economic research; Features of available funding devices and their capacity to support innovative funding schemes; Preservation and support of basic research in economics, not only research that deals with applied analysis or current issues; Support for the development of high quality PhD programmes in economics in European universities. This includes increasing funding opportunities for qualified PhD students and expanding their training in terms of research dissemination. An evaluation of the Bologna process for the 3rd cycle should be carried out; Support for the career development of junior researchers in economics, through e.g. the development of an efficient European-wide academic job market for economists, the provision of mentoring and networking opportunities, a better understanding of the career paths of junior economists in Europe (e.g. alongside the lines of the European Science Foundation’s pilot study on the Career Tracking of Doctorate Holders); Fostering the development of a research dialogue with other social sciences, while at the same time respecting the constraints and incentives of individual disciplines; Coordination of European research policy with Member States’ research policies.
Objective 2: Establish Europe as a Data Power-house for Research and Policy Analysis
The past 20-30 years have witnessed a steady rise in empirical research in economics. This evolution has been enabled by the increase in the quantity, quality and variety of data used in economics, and also thanks to the development of computing capacities, computer technologies and statistical/econometric methods. This revolution has led to significant intellectual breakthroughs and is key support for the development of evidence-based policy. Equally importantly, the availability of better, more comparable (e.g. across countries), or more accessible data is central to our ability to satisfactorily address the remaining open questions in key policy areas, and to European-based researchers’ ability to carry out cutting edge research.
Recommendation 1: Facilitate data access for researchers
Why: Data collected and administered by public institutions and governments, covering entire populations rather than samples could generate new robust scientific insights, with significant social value. Ensuring researchers have access to these data will provide European-based researchers with a significant competitive edge in the creation of new knowledge.
Actions: Introduce mandates for statistical agencies, including Eurostat and data intermediaries, to service researchers; Build capacity of research institutions to support researchers’ efforts to access data (research training, legal advice on NDAs, IT infrastructure that meets the required security standards, etc.); Work to secure legal access to personal data for scientific purposes at national levels; Introduce provisions in all European and national legislations to secure researcher access to the data produced in the course of the implementation of those legislations, as done in Nordic countries; Clarify the legal framework for access to confidential data across borders; Promote Open Data for non-confidential administrative data and other public data; Work on removing non-legal barriers that make access to data costly and time-consuming for researchers.
Recommendation 2: Improve data design and data harmonisation
Why: In spite of the progress made through European agencies (Eurostat) and other institutions (ECB), data collection is still predominantly organised at the national level, whereas, e.g. firms largely operate across boundaries. Likewise, some firms operate through a number of subsidiaries and other legal entities, but existing statistical systems do not account for these interdependencies. Last but not least, firms do not always have the same identifiers across datasets covering different dimensions of their activities. This issue also concerns household data when, for instance, dealing with the fairness of labour markets at the European level. Ensuring that data structures reflect the complexity of economic systems is critical to a sound understanding of the economy.
Actions: Promote cross-country data harmonisation; Mandate common metadata and linking of existing business data across Member States; Modernise national data collection and production systems; Involve researchers in data design.
Recommendation 3: Support economic data infrastructure in Europe
Why: A number of researchers are involved in the collection of large-scale data, which they turn into publicly available databases. Because their design is not driven by compliance or administrative motives, they have often analysed new issues and data providing huge benefits for the research community and policy, as in the case of the Survey of Health, Ageing and Retirement in Europe (SHARE). Moreover, the scientific value of large-scale data often grows with their time coverage, a striking difference with datasets in the hard sciences where the underlying reality is not changing or is not the object of interest.
Actions: Design funding instruments that meet the needs of the diversity and specificity of data in economics, in particular that ensure stable funding for key longitudinal datasets; Ensure that publicly funded large-scale data collection projects include plans for data maintenance; Secure stable European-level funding for cross-national data collection efforts; Establish best practice guidelines for data collection and recording that all economic agents can use. This would facilitate the dissemination and the use of multiple databases collected by institutions, firms, etc.
Objective 3: Reinforce outreach of economic knowledge
There is a distance between European economic research and both policy makers and the general public in terms of sharing economic knowledge and information. Action must be taken to reduce this gap, which is probably wider than in the U.S. This would enhance the efficacy of economics in its advisory role and in inducing sounder economic decisions at any level of political and economic activities.
Recommendation 1: Establish a continuing dialogue between the research community and the policy community
Why: Policy makers’ and researchers’ time horizons and objectives are different. Economists may have strong beliefs about the desirable policy and advocate for a particular policy agenda. As the academic process ensures the discussion and evaluation of diverse views, ideology usually does not endanger scientific discovery. In policy analysis, however, it is important to provide an impartial and credible summary for policymakers, who have limited time to review all the competing views. Policy makers, in turn, need immediate answers to contingent problems that economists may not immediately have. This does not mean that the dialogue between these two actors is undesirable. On the contrary, a stronger dialogue between the two communities is the best guarantee to ensure rapid dissemination of research results into policy-making and to foster the creation of new knowledge in policy-relevant issues. For example, this dialogue already exists and has proved very useful in some areas, notably in macroeconomics and finance, where the ECB and other Central Banks’ research centres have been a bridge between academic research and economic policy.
Actions: Organise regular high-level policy-research workshop series, as outlined in COEURE and similar experiences, with leading academics and policy people on specific topics; Finance the production of policy reports or insights to facilitate communication between academics and policy makers; Institutional funders of research could also be involved and act as mediators between the two parties.
Recommendation 2: Establish a format for communication for the general public
Why: Citizens will support research if they understand its value for society. Moreover, economic expertise also has a role to play in informing the public on key policy issues, as we have witnessed in the context of the Brexit campaign, where experts had little voice.
Actions: Initiate a public lecture series alongside policy-research workshops; Promote activities for wider dissemination through the media (e.g. VoxEu), social media, economics fairs (e.g. the Trento festival of economics); Promote the teaching of economics and statistics in higher education.
Objective 4: Enhance research funding
Why: In Europe, the volume of funding for economic research is small relative to the funding of other sciences, even other social sciences. To increase the productivity and foster a larger economic and social impact of economic research, we need to attract more and more successful applications by economists to funding agencies. Moreover, time is one of the most important factors in producing relevant research. Given that time is costly, multi-year funding becomes a vital element in ensuring that European economists bridge the gap with U.S. economists. It is crucial to have efficient mechanisms for research funding. To support research, funding in economics should be comprehensive and inclusive, which does not exclude funding research on specific challenges.
Recommendation 1: Evaluate quality/productivity of research on a regular basis
Why: Evaluation is a key tool for identifying the inefficiencies of the production process of research and for stimulating innovative actions.
Actions: Keep track and evaluate funded research by doing a (low cost) yearly survey/study on economists’ productivity. Monitor the impact of open access; Monitor the citation count of European research Follow PhD Graduates’ careers.
Recommendation 2: Increase efficiency of funding processes
Why: It is necessary to lower the barriers to entry and the “discouragement effect” that the “top-down”, thematic funding approach currently used by both EU and Member States funding agencies may have created, especially among economists and other social science researchers. In addition, an effort must be made to increase the percentage of articles published in top journals by researchers supported by public funding agencies.
Actions: Create a funders forum with the European Economic Association (EEA) as an outside advisor; Allocate a greater share of EU research funding via the mechanism of the ERC; Create suitable funding streams to support structured PhD programmes without imposing specific themes of research; Sustain the funding database developed in the COEURE project as an information source for cooperation in the analysis of funding research; Reduce the ex-ante administrative burden for grant management but increase ex-post accountability for the scientific quality of the output.
Recommendation 3: Improve the incentives to access funding
Why: Economists’ demand for funds must increase so that all the potential resources available should be efficiently exploited.
Actions: Promote activities that inform about and encourage applications to the ERC and other national and international research funding bodies; Promote activities that support researchers receiving outside research funding from the ERC (and other bodies), specifically regarding ethics approval; Provide an industry standard for ethics approval that the ERC agree to; Increase the flexibility of funding instruments to allow for research innovations and re-optimisation, depending on interim results and scientific risk-taking; Use common funding principles across agencies to facilitate institutions and reduce the administrative burden associated with administering research funding; Include teaching “buy out” among alternative funding options. An excessive amount of teaching may hinder research; Create a focused lobby for a place for economics in future framework programmes; Collaborate across social science disciplines as a means of establishing the value of research for the future of European economies and society.
Research Frontiers
These frontiers concern eleven topics, which have been defined under the COEURE project. Even if these topics – described in more detail in the book, “Economics without borders, Economic Research for European Policy Challenges” edited by the COEURE Executive Committee, - provide a wide perspective of current ‘frontier’ research in economics in Europe, relevant for economic policy and design, they are far from being exhaustive both in scope, since we do not cover all the topics in economics, and in detail, since we do not cover all the ongoing research within any specific topic. Nevertheless, they are representative of the value of current research in economics in Europe.
R&D, innovation and growth
Why: Innovation is a key driver of long-term growth. Recent research has highlighted the central role that firms and entrepreneurs play in this process, and new data have revealed how their incentives and capabilities affect macro outcome variables, such as the rate of innovation, industry and job turnover, welfare and inequality. These findings are, in turn, shedding new light on the role of competition and industrial policy, the welfare state and macroeconomic policy. However, we are only at the beginning of this intellectual revolution.
Actions: Improve our theoretical and empirical understanding of the dynamics of innovation and growth; Further develop the current dialogue between theory and data, e.g. by fostering methodological innovation combining macro models with micro data, improving researcher access to microdata (on individual income, on firms, and on patenting), and increasing data harmonisation and linking; Support the convergence between the literatures on development, trade and the internal organisation of firms, on the one hand, and the literature on growth, on the other.
Labour markets
Why: The “European Unemployment Problem” was perceived as a problem of the past before the euro crisis and, consequently, many funding agencies in Europe did not perceive funding for research on the topic as a priority, including support for new sources of employment/unemployment data. The euro crisis showed this perception to be a mirage, with a divide among European countries, in terms of their employment performance during and in the aftermath of the crisis. This divide shows the pervasive effect of ‘dual-labour markets,’ where jobs created in the recovery – and destroyed in the crisis – are mostly temporary jobs with low productivity, human capital accumulation, and a distortionary effect on investment into technologies in sectors such as construction that are based on these types of jobs.
Actions: Foster research – theoretical, quantitative and empirical – on the persistence and possible socio-economic effects of different forms of labour regulations and contracts; Further develop EU panel-data on employment (short and long-term), unemployment and inactivity transitions, as well as data suitable to link labour contracts, regulations, taxes and other labour institutions to productivity and human capital (formation and allocation), as well as to technological choice and innovation. Make these databases easily accessible to researchers; Support research on other policies and institutions affecting labour – such as unemployment insurance – leading to an assessment of best practices and their possible adoption across Europe.
Population, migration, ageing and health
Why: Migration as an important and critical issue for Europe in the current period needs to be studied in a dynamic setting, by following migrants’ decisions over time. In particular, it is important for Europe to understand the determinants by skill type of migrants’ permanent, rather than temporary, migration.
Actions: Foster research on the links between migrants’ decisions and alternative types of labour market regulation; Create long-term panel data on migration, possibly using new technology like, for example, GPS tracking mobile applications; Link national registries to create a homogeneous European database on migration flows and migrant characteristics.
Human capital and education
Why: The formation or ‘production’ of human capital through educational systems is of prime importance for any society. Not only does human capital codetermine prosperity and growth, but it also exerts a decisive influence on the degree of social inequality present in a society. Globalisation and technological progress have given further weight to these roles of education, which is already acknowledged and reflected in the so-called Lisbon Agenda of the European Union.
Actions: Foster research into the process of human capital formation, in particular seek better explanations for the observed heterogeneity of returns to education with a view to alleviating them through the provision of targeted additional resources; Support additional research into the determinants of teacher effectiveness through better teacher training, stricter teacher selection, appropriate hiring, retention and contract policies; Support research on governance issues in a school system that allows the determination of the impact of school autonomy, school accountability and centralised tests of student achievement; Support the creation, maintenance and accessibility of datasets throughout the EU that go beyond standard survey data; e.g. birth cohort sets, administrative or register data and standardise them in an internationally comparative way.
Competition and regulation in digital markets
Why: When it comes to speed and dynamics, digital markets are different from more traditional ‘brick and mortar’ markets. In terms of theory, in digital markets one is more likely to see competition for the market rather than competition in the market. We therefore need to explore more the dynamics of our traditional competition models, and their relations to the dynamics of innovation. Data on digital markets are now available in an order of magnitude that requires rethinking our empirical methods. Finally, digital markets challenge the single market objective and several traditional views on competition policy instruments.
Actions: To launch research programmes: On our empirical strategies to maximise the value of the new data that digital markets offer; On the limits to what the single market should mean, and its potential regulatory needs; On incorporating dynamic effects, which are clearly important in digital markets, without losing analytical tractability; On the link between competition economics and innovation policy.
Trade and Development
Why: It is particularly clear in this domain of trade and development in a globalised world that politics drive policies, which in turn drive research. Therefore, there is a tension between policy makers and researchers, with the mercantilist view being the main conflict. Value addition helps to bridge the discrepancy between macro and micro economics. Value addition turns attention to the distributional effect of trade, which is the new achievement of the Geneva Consensus.
Actions: Launch research programmes on the role of precaution versus protection; Promote research on the losers and winners of trade and globalisation. More generally, there is an urgent need to assess and quantify the redistributional effects of globalisation; Encourage the building of general models where the tax-equivalent of regulatory and information frictions can be calculated. Economic analysis studies prices and quantities, and measures welfare losses by deadweight loss triangles. This is of limited use in a world where frictions and barriers to transactions are neither taxes, nor quantity regulations; Stimulate a better understanding of how multinational firms operate, as this is a necessary first step to estimating their contribution to the costs and benefits of globalisation. While there are many quantifiable models to evaluate the gains from trade, the welfare gains from global production sharing either via arm’s length global value chains or via multinational production, are less clearly quantifiable.
Energy, environment and sustainability
Why: Energy and environmental policy issues are at the core of the EU policy debate. It is important to realise that in the area of energy there is a shift from a supply driven to a demand driven approach. In addition, although energy transition to a low carbon economy is widely accepted, the questions about its speed and exact methods are less obvious. Moreover, at this stage it is unclear how the rapid progress of IT may impact energy and environmental policies.
Actions: Promote research on the compatibility of environmental sustainability with maintained economic growth. Answer three basic questions: What will happen to the environment if economic growth continues? What will happen to the economy if environmental degradation (including climate change) continues? What will happen to economic growth if societies take strong action to protect the environment, including the mitigation of climate change?
Promote the inclusion of environmental systems in the macroeconomics models used for policy analysis, especially the costs of environmental mitigation; Foster research at the micro level to generate more detailed insights into individual and institutional attitudes and responses to the environment and environmental change, and the costs and benefits that people experience in their interactions with the environment; Perform more research on what will happen to European societies if they try to function outside the safe operating environmental space, and what kind of economic trajectory they may expect if they try to go back inside this space.
Regional Disparities and Efficient Transport Systems
Why: It is deeply ingrained in the EU’s DNA that “the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas” (Article 158 of the Treaty on European Union). European integration is supposed to lead, through more intense trade links and better transport infrastructure, to the convergence of income levels across countries. Belief in EU regional policy efforts to this end have been reinforced by recent decreases in transport and communication costs. However, this convergence process is slow and may result in widening interregional income gaps.
Actions: Foster research on the impact of falling transportation costs and new infrastructure projects on the locational choices of workers and firms and their impact on agglomeration forces; Foster research aimed at a reassessment of the use of the existing transport infrastructure for people and goods, in particular road and rail traffic networks; Promote research into the efficient use of more sophisticated road pricing systems for trucks as well as cars.
Skilled Cities and Efficient Urban Transport
Why: Spatial economics, both in theory and empiricism, is not central to present mainstream economics. This must change since the phenomenon of agglomeration has been shown to be an important driver of a society’s economic growth and social cohesion. Increasingly, wealth is created in cities and metropolitan areas. European cities are rather too small than too large to reap the full benefits of agglomeration; hence the need for efficient urban transport means.
Actions:
Foster theoretical as well as empirical research on the cost and benefits of agglomeration; in particular the development of models that incorporate transportation into the urban land market; Support research into the reduction of agglomeration costs in large cities through congestion pricing. In particular, foster research on the impact of congestion pricing on the planning and cost-benefit analysis of large infrastructure projects; Develop a European database for a US-like categorisation of European agglomerations into more unified “statistical metropolitan areas”. This requires comparable local data about employment, transport, GDP, human capital, physical attributes (buildings and roads), environmental quality (air quality and soil), and cultural amenities in European cities.
Fiscal and monetary policy
Why: The financial and euro crises have opened old and new questions on the role and design of fiscal and monetary policies, their interplay, and their effectiveness in stabilising the economy and stimulating growth and wellbeing. At the same time, these crises have stimulated new research and policies (e.g. unconventional monetary policies), but many problems are still open (e.g. how to deal with the Eurozone debt overhang, what fiscal policy should be adopted in times of crisis and social unrest) and the new policies need to be reassessed theoretically and empirically. Furthermore, the euro crisis has been a major test for the euro project and, as Brexit has shown, for the European Union itself. How the EU and the Euro Area will develop and the role it/they will play in the global economy in the years to come is possibly the main challenge that Europe is facing. Politics and political leadership are vital, but so are sound economic thinking, credible and effective policy and institutional design.
Actions: Foster rigorous macroeconomic research, which can help Europe in facing its main challenge. In particular, but not only, research linking monetary, fiscal and financial policies and institutions – possibly in the framework of a monetary union, reassessing the current and proposed EU and Euro Area frameworks; Further develop databases for studying how households and firms react to fiscal and monetary policies in good and bad times and how economic agents’ expectations respond to policy announcements and different economic institutional designs; Support research that addresses the long-term impact of fiscal and monetary policies (pensions, debt policy, etc.), as well as their possible impact on inequality and social unrest. Additionally support research that improves the toolbox of macroeconomists and policy makers (e.g. helping them to design and implement robust and credible policies and institutions).
Financial markets
Why: The recent economic crisis and the role financial markets played in it has once again brought to the forefront the debate on the need for coordinated intervention policies among European countries, and on the optimal degree of regulation in this vital and already highly regulated sector of the economy. Much has been done to ensure the stability of the banking sector and to fully enforce the European Banking Union and, in the near (not too distant) future, the Capital Markets Union. However, there is still much work left to do on policy coordination and regulation design, and the literature on capital markets needs to catch up with the literature on financial stability in banking, which is “light years ahead”.
Actions: Foster theoretical work by economists on how to map basic failures into regulatory reforms, which is at the moment severely lagging behind applied ex post analyses of the effects of the enacted regulatory reforms; Develop metrics and indicators that evaluate risks and conduct, in order to help regulators design ex-ante prudential policy and early crisis prevention mechanisms; Promote “Financial Literacy” among consumers, the ultimate users of capital markets; Open access to data that Central Banks and regulators collect but are not published in a timely fashion.
Inequality and Welfare
Why: While Europe has relatively low inequality as compared to e.g. the US, there is much heterogeneity in terms of mobility and migration. This partly increases heterogeneity in fundamental political views, in perceptions like beliefs about why people are in need, and in terms of self-reported happiness. Deeper European integration will be a failure if we do not cope with this heterogeneity. Understanding the social processes that lead to more equality is probably more important than resource transfers from North to South.
Actions: Create a network of researchers in economics and social sciences to understand the fabric of equality of opportunity; Build up dedicated panel data to study the dynamics of poverty, how people get into and out of poverty; Launch research programmes to analyse: The sustainability of nation welfare states in an environment where capital and labour are mobile; The issue of the convergence of southern societies to the social model of northern societies; Prepare the ground for a standing-up policy to fight poverty and promote equal opportunities.
LIST OF DISSEMINATION ACTIVITIES:
Regarding dissemination, a series of workshops took place to present and discuss each survey of WP1: Fiscal and Monetary Policies after the Crises; European Financial Markets: Policy Challenges and Research Agenda; EU Dual Labour Markets: Consequences and Potential Reforms; Energy, Environment and Sustainability in the European Context: Policy Issues and Research Agenda; Efficient Transport, Skilled Cities and Regional Disparities: the State of the Art and a Research Agenda; Towards a Smart Europe: a Research Agenda for Innovation and Growth; Trade and Development in a Globalized World: The Roadmap for a Research Agenda; Data and methods; Competition and regulation in markets for goods and services; Inequality and Welfare; Population, migration, aging and health; Human capital and education.
The workshop for WP2 “Funding the Economic Research that Europe needs” took place, co-organized by TSE and CEPR to assess the efficiency of economic research funding sources and systems across the different European countries.
A session on Economic Research and Economic Policy Challenges in Europe – The COEURE Project took place on August 22 in Geneva, during the EEA-ESEM 2016.
In addition, the COEURE Final Book “Economics without Borders - Economic Research for European Policy Challenges” will be published by Cambridge University Press in January 2017. This book, written by Europe’s leading scholars in economics and European policy, bridges the gap between economic research and policy-making by presenting overviews of twelve key areas for future economic policy and research in Europe. Written for the economists and policy-makers working within European institutions, it uses comprehensive surveys to demonstrate how economic research can contribute to good policy decisions, and vice versa, demonstrating how economics research can be motivated and made relevant by hot policy questions.
List of Websites:
http://www.coeure.eu/
TSE coordinated the COEURE (COoperation on EUropean Research in Economics), a three-year project financed by the European Commission under the FP7 with a 1.6 million euros budget and intended to bring together the key stakeholders in the European economic research space – scientists, users of research in the policy community and the private sector, and funders of research- in a process of stocktaking, consultation and stakeholder engagement. The purpose of the COEURE project has been to evaluate the strengths and weaknesses of European research in economics.
The executed committee was formed by: Marc Ivaldi, Committee Chair and Project Coordinator (Fondation Jean-Jacques Laffont / Toulouse School of Economics); Richard Blundell (European Economic Association); Barbara Chizzolini (Bocconi University, Milano); Estelle Cantillon (Université Libre de Bruxelles); Wolfgang Leininger (Dortmund University); Ramon Marimon (European University Institute); László Mátyás (Central European University); Frode Steen (Norwegian School of Economics and Business Administration); Tessa Ogden (Center for Economic Policy Research).
The COEURE process is based on three work packages (WP)
WP1: Advances in Economic Research: Foundations for European Policies. It evaluates the strengths and weaknesses of economic research with respect to key economic issues.
WP2: Evaluating Mechanisms for Funding Economic Research in Europe. It assesses the efficiency of economic research funding sources and systems across the different European countries.
WP3: Setting an Agenda for Research Funding for Economics in Europe (the COEURE Manifesto). Based on the outcomes of this project, this Manifesto outlines the present state of European research in economics, identifies promising research avenues and proposes objectives and recommendations for fostering its efficiency and increasing its impact. The final document from the project members details 9 recommendations to improve economic research in Europe under 4 objectives:
I. Foster long-term research capacity
II. Establish Europe as a data power-house for research and analysis: Facilitate data access to researchers; Improve data design & harmonization; support economic data infrastructures in Europe
III - Reinforce outreach of economic knowledge: Establish a continued dialogue between the research and policy communities; establish a format for communication to the general public
IV - Enhance research funding: Evaluate quality/productivity of research on a regular basis; increase efficiency of funding processes; improve the incentives to access funding
The document also details what the COEURE members consider to be the future research frontiers in economics.
Project Context and Objectives:
The European Union is the world's largest economic entity, yet its ability to design and implement effective economic policies is not commensurate with its size. It is lagging, for example, in terms of policies promoting productivity, growth, scientific research and technological innovation. The Eurozone debt crisis has provided a sharp and painful reminder that the European Union must adopt a new approach to designing its economic policies and coordinating them with the policies of its Member States.
At the same time, while the field of economics in Europe has seen impressive growth in terms of global impact, the number of researchers and funding, Europe still lags behind the U.S. in terms of research productivity (as measured by the numbers of articles published in the top field journals), and European research remains fragmented across its Member States. According to recent research the share of articles in economics published by European researchers represents 34% of the total production of articles in this field in the world, while the US amounts to 53.5%. The contrast is sharper when the citation impact of these publications is taken into account. In terms of share of citations, the US represents 70.8% while the EU share is 28.4%, which illustrates the higher impact of the US research in economics.
Developing a competitive and open European research area (ERA) is essential for growth and to the process of European integration. However, different languages, a diversity of academic traditions and a variety of informal barriers often inhibit the free flow of research funding, the mobility of academic talent and, as a result, the efficient allocation of R&D funding. In times of financial restraint the latter becomes particularly important. In this context, research grants, in particular if they are allocated across national borders (e.g. by the European Research Council; ERC), can provide a viable tool to circumvent limits to integration and consequently to enhance the exchange of ideas. In fact, the relationship between openness and successful research funding is reciprocal and internationalization can benefit national and regional funding, e.g. by permitting the inflow of foreign resources. However, if not designed correctly, research funding can also aggravate the initial problem, for example by conditioning grants on nationalities and/ or local use or by failing to retain and attract the most able researchers.
A group of academic institutions with the support of the European Economic Association (EAA) created the COEURE (COoperation for EUropean Research in Economics) network, which brought together the key stakeholders in the European economic research space – scientists from the different strands of economic research in Europe, users of research in the policy community and the private sector, and funders of research. COEURE will launch a process of stocktaking, consultation and stakeholder engagement that will lead to the formulation of an “Agenda for Research Funding for Economics in Europe” (ARFEE).
The COEURE network results from an initiative of the European Economic Association (EEA) whose role, given its aims as set out by its statutes, are:
• to contribute to the development and application of economics as a science in Europe;
• to improve communication and exchange between teachers, researchers and students in economics in the different European countries;
• to develop and sponsor co-operation between teaching institutions of university level and research institutions in Europe.
In practice, Fondation Jean-Jacques Laffont / Toulouse School of Economics will effectively lead the network assembling a group of academic institutions, with the support of EEA.
The process had three work packages. The first work package (“Advances in Economic Research: Foundations for European Policies”) involved taking stock of the current state of research in key sub-fields in economics. The subfields covered the entire spectrum of mainstream economic research while addressing the thematic issues identified in the call. The stock-taking exercise was centred on a survey of each subfield by a team of scholars. Each survey mapped out the policy issues that Europe is now dealing with, the research frontier in the sub-field and the activities of European researchers working at the frontier. It went on to identify the key open research questions in the sub-field, and suggest ways in which research on these issues should evolve over the medium term, notably to better address the policy challenges that Europe will be facing in the future.
The second work package of the project (“Evaluating Mechanisms for Funding Economic Research in Europe”) involved assessing the efficiency of economic research funding sources and systems across European countries and the extent to which mechanisms for funding economic research in Europe have supported research at the frontier in the past, and suggest ways in which they might evolve in the future to support it more effectively, in terms of the scope, productivity and the dissemination of this research. It will require both surveys and the construction of databases. The task was undertaken by collecting primary data on three elements of the elements of the research production process: the global standing of research in economics undertaken in Europe, the mechanisms employed to fund this research, and the experience of researchers with utilizing these mechanisms in support of their research.
The third work package of the work (“Setting an Agenda for Research Funding for Economics in Europe”) was to formulate the Agenda for Research Funding for Economics in Europe and to propose measures to ensure that Europe has the appropriate funding mechanisms, and the coordination among them, needed to deliver this research agenda. The Agenda was renamed “The Manifesto for Economic Research in Europe”.
The fourth work package deals with the Management issues involved in the project, including budget and partner relations and the organization of the Opening and the Final conferences.
The fifth Work Package comprises the Dissemination of COEURE’s results through the workshops organized in the framework of WP1 and WP2, the projects’ website, online debates, publications, as well as the coeure manifesto (final report).
Project Results:
The most important scientific and technological results can be found in detail in the COEURE Book « Economics without Borders » and in the final report of Work Package 2. Below a summary:
The first chapter of Economics withour Borders deals with innovation and growth, which have been central to European policy-making since at least the Lisbon Agenda. The chapter argues that the Schumpeterian paradigm provides a unifying framework to organise existing empirical evidence and think about R&D, innovation and growth policies. The authors show how the Schumpeterian framework sheds new light on ongoing policy debates such as the role of competition for innovation or the consequence of innovation on inequality. They also discuss the policy implications of recent advances in our understanding of these phenomena.
The Schumpeterian growth paradigm relies on three fundamental ideas. First, in- novation (rather than simply the growth of capital or labour as in the classic growth models) drives long-term growth. Innovations may be process innovations, which increase the productivity of existing assets or labour, product innovations, or organ- isational innovations. Second, innovations result from investments by firms and entrepreneurs. This raises the question of the incentives for innovation, including the ability of firms and entrepreneurs to reap the benefits of their innovations. Third, new innovations tend to make old innovations, old technologies, or old skills obsolete (creative destruction). Thus, growth intrinsically involves a conflict between ‘the old’ and ‘the new’: the innovators of yesterday will tend to resist new innovations that render their activities obsolete. Creative destruction also explains why, in the data, higher productivity growth is associated with higher rates of firm and labour turnover.
Because firms and entrepreneurs are at its core, the Schumpeterian paradigm provides a natural link between micro phenomena, such as firm entry and exit, firm heterogeneity, firm organisation, or job turnover, and macro phenomena, such as growth and inequality. In fact, the authors show how the Schumpeterian framework is able to explain a number of existing stylised facts about firm and job turnover, the size distribution of firms, and the correlation between firm size and firm age, to name a few. They also show how the framework has been used to develop new predictions that have then been tested using new micro datasets. The scope of ap- plications is very large and this is an active field of research. For example, recent research has shown how the level of competition impacts differently the incentives for innovation of firms that are close to the technology frontier of the economy and those that are furthest away. Other research has looked at the impact of market pro- tection on innovation as a function of a country’s distance to the world technology frontier.
A central message of the chapter is that institutions and policies that foster growth depend on where a country is situated with respect to the world technology frontier. There is no one-size-fits-all. In advanced economies, competitive product markets, flexible labour markets, quality graduate education and developed equity- based financial markets form the four pillars of innovation-led growth: competition in product markets encourages innovation by firms seeking to escape the low mar- gins of neck-to-neck competition; flexible labour markets ease the process of creative destruction; quality graduate education produces the research skills necessary for innovation; and equity-based financing is more receptive to the risk intrinsic to innovation. The chapter revisits the rationale and design of competition policy, the welfare state, macroeconomic policy, and R&D policy in this light. It ends with a call for a new Growth Pact in Europe, one that relies on structural reforms aimed at liberalising product and labour markets, a renewed industrial policy and more flexible macroeconomic policies.
Chapter 2 focuses on the prevalence of ‘dual labour markets’ in the European Union. In the 1960s unemployment in Europe was no higher than in the United States, but by the end of the 20th century the ‘European unemployment problem’ was the code name for a widespread problem of inefficient allocation of human re- sources in Europe, and in Continental Europe in particular. At the beginning of the 21st century, the problem seemed to recede, with some countries undertaking critical labour reforms (e.g. Germany) and some of the ‘high unemployment’ countries showing very high rates of net job creation (e.g. Spain). Although still lower than in the United States, European employment rates were not only higher on average but also less dispersed than earlier. However, with the financial and euro crises the problem took on a different dimension, that of a divided Europe (and Euro Area), with some countries exhibiting once again very high unemployment rates (mostly Southern EU), as a reflection of their deeply entrenched structural problems.
Chapter 2 provides an overview of the research – most of it by European labour economists – that focuses on this new version of the ‘European unemployment problem’. The theoretical and empirical research provides a consensus view on who the culprit is: the ‘duality’ induced in labour markets by the existence of labour contracts with large differences in their implied employment protection legislation.
In particular, this chapter describes the highly asymmetric employment protection that distinguishes permanent from temporary contracts, tracing their historical origins and institutional arrangements. In line with the most advanced literature, the chapter takes a general equilibrium perspective. The historical perspective explains why different European countries have followed different paths, and why ‘changing paths’ has proven difficult. The theoretical, general equilibrium perspective reveals the side effects of such ‘dualism’ and why it cannot simply be identified with the coexistence of temporary and permanent contracts, which are used in all countries.
After World War I and up to the mid 70s, many European countries experienced a significant increase in employment protection legislation. Spain, Italy, France and Portugal regulated their labour markets by imposing severance payments and restrictions on dismissals, among other measures. These laws made it costly for firms to adjust in response to a changing environment, and once the oil crisis hit in the 70s, the need for higher flexibility became a more pressing priority on political agendas.
Nevertheless, dismantling the benefits that workers were entitled to was not politically feasible due to the strong political influence of highly-protected workers. Thus, reforms were made at the margin, affecting new employees only. Specifically, the emergence of temporary contracts with a lower regulatory burden was the policy response to the quest for flexibility in labour markets. These reforms thus created a dual labour market by allowing for two types of contract: temporary and permanent (open-ended). The former was designed to facilitate turnover and fast adjustments, while the latter represented the remains of stringent policies targeted at guaranteeing job and income stability.
The chapter describes how economic research – in particular, ‘insider-outsider’ theories – has helped to explain why dual labour markets have been a longstanding feature of many European economies. Insider-outsider models have set the frame- work for the analysis of the tensions between workers with permanent contracts (insiders) and the rest of the labour force (outsiders) when it comes to deciding on a reform. Beyond rationalising the pattern observed in the creation of a dual labour market and its political sustainability, these models have extended our understanding of the interplay between the political decision-making process and real business-cycle (RBC) effects – e.g. why employment is so volatile in economies with ‘dual markets’ and how these RBC effects reinforce the lack of effective political support for labour market reforms.
Nevertheless, as the chapter emphasises, the coexistence of temporary and per- manent contracts is desirable, as firms might have temporary or seasonal needs. Furthermore, a temporary contractual relationship can help workers gain experience or acquire human capital. In fact, in countries like Austria, Denmark or Sweden, temporary jobs are the first step into the labour market, and are followed by a permanent contract. On the other hand, in southern European countries, tempo- rary jobs have become ‘dead-end’ jobs. Workers tend to experience a sequence of fixed term contracts and the dream of a transition to a permanent contract rarely comes true. The chapter documents this difference and reviews relevant research, showing that market dualism is due to the large gaps in redundancy costs between permanent and temporary workers, combined with wage rigidity.
The general equilibrium formulations have helped explain the pervasive effects of ‘labour market duality’ beyond its direct effects on the level and volatility of employment: First, its composition effect, in particular the high levels of youth unemployment and NEET (‘not in education, employment, or training’), second, the lower human capital accumulation, and third, how these labour supply effects have also shaped firms’ demand for low productivity jobs, low levels of innovation and, in particular, investment in sectors of low growth potential (e.g. construction) in times of low interest rates.
The chapter closes with a review and evaluation of the reforms that have been undertaken or proposed in different countries to overcome ‘the duality disease’, demonstrating how both empirical and theoretical research reveal the need for overall reforms of labour market regulations. In particular, the chapter discusses the possibility of a single/unified contract, both from a theoretical and a practical perspective. Finally, the survey identifies three main directions in which economic research can enrich the policy debate: (i) empirical work on the differential incentives and responses induced by the two types of contracts; (ii) analysis of the political feasibility of reforms within the current scheme; and (iii) the role of labour market dualism in firms’ technology adoption.
Chapter 3 deals with the problems of population, migration, ageing and health. World migration and in particular net migration in the European Union, has been an extremely hot topic in the last few years, debated in the media as much as in the political arenas of each EU Member State and in the European Commission. A large part of the debate has, however, focused on how to deal with the current emergency inflow of undocumented migrants fleeing war zones and natural disasters.
Little is known and discussed about medium and long term causes and effects of migration. For instance, one of the recognised structural motivations of migration is the contrast between the ageing population in most destination countries and the young, more fertile population of the countries of origin. Migrants are typically younger than the host country population when they arrive, and as a result, they contribute to rejuvenating the host country’s labour supply in the short run. However, migrants age as well as natives, and it has also been shown that their fertility behaviour, and that of their descendants, tends to adapt in time to the host country’s pattern of behaviour. Is then migration a long term solution to the ageing population problem of most Western European countries? Similarly, what are the long term economic costs and benefits of migrant workers in the destination countries? Do the tax revenues and benefits of the economic activity due to changes in the composition of the working population exceed the welfare costs over the entire lifecycle of a cohort of immigrants? What exactly determines these costs and benefits? What migration policies are more effective in fostering welfare enhancing migration patterns?
Looking instead at the countries of origin, can the ‘brain drain’ phenomenon be a problem? Is their growth potential impaired by the out-migration they experience? The chapter addresses these questions from an economics standpoint, with the explicit aim of suggesting clear migration policies and indications for future research.
The main message the authors put forward is the need for a dynamic approach to simultaneously describing migration plans, human capital acquisition and labour supply. They evolve in time and both affect and are affected by the social, economic and demographic structure of the host countries. The key issue in this context is the analysis of the choice between temporary and permanent migration. Data shows that the percentage of temporary migrants is much higher in Europe than in Anglo- America, Australia and New Zealand. Why is that? What are the determinants of return migration to the countries of origin? The literature is as yet only able to provide partial answers. It is, however, quite clear that the demographic, social and economic impacts of immigration vary depending on how long migrants stay in the destination countries.
As for the fiscal effects of migration, there is consensus on the finding that host countries experience a net gain from highly skilled, young, possibly temporary, workers; but effects are less clear cut in the case of low skilled workers. In particular, the evidence collected in Norway by Bernt Bratsberg clearly outlines the tendency of low skilled migrants to exit the labour force early, and become social security dependents. In addition, migrant workers are more likely to suffer from macroeconomic downturns than natives. Nevertheless, there exists significant heterogeneity across destination countries, and migrants’ behaviour responds to incentives provided by the local welfare state, as well as to the local implementation of migration policies. Expanding on the latter issue, the effect of any migration policy strongly depends on the institutional setting: the evidence on the relative efficacy of immigrant driven versus employer driven policies in attracting the ‘best’ migrants is ambiguous. In both cases what makes the difference is the credibility of the state and the efficiency of local labour markets.
To conclude, the authors also emphasise the lack of data for certain types of studies. Analysis of the long term causes and effects of migration requires as yet unavailable long panels of information on migrants and their descendants. Even more relevant is the need to standardise and guarantee access to data across the EU, and to link EU Member States’ Immigration Registries.
Moving to the next chapter, it is well understood that the process of globalisation has reinforced the basic tenet of human capital theory, namely that the economic well-being of a society is determined not only by its stocks of financial capital, labour and natural resources but also – and increasingly so – the knowledge and skills of its individual members. Accordingly, already the 2000 Lisbon Agenda of the European Union set out the aim to turn Europe into “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”.
Indeed, research results in the economics of education show that education has a considerable impact on economic growth. Simple qualitative measures for education such as indicators based on students’ cognitive achievement turn out to be extremely good predictors for the long-run economic growth of nations. Plainly, enhancing the EU’s average student performance using a test like PISA would yield substantial returns in the EU Member States’ long-term economic growth.
From this economic perspective it appears that education systems ‘produce’ the human capital embodied in the workforce of a society. They are hence prime subjects for economic investigation. At the same time, educational attainment is an important determinant of equity and social cohesion in a society. This makes the search for educational policies and forms of political governance that influence the formation of human capital in a most favourable way, a particularly important one. Chapter 4 surveys and organises a huge body of mainly empirical work that ad- dresses the question of how education policies can advance student attainment. To understand which policies work, education economists employ advanced micro- econometric methods to perform carefully designed quasi-experimental evaluations. The main emphasis is on the identification of causal effects from the data; these methods and set-ups may require new types of datasets which are not yet uniformly available across Europe. Consequently, the survey also draws heavily on studies and evaluations of the US educational system.
The chapter is organised around the economic paradigm of a more or less competitive ‘market for education’. More precisely, it takes the special form of a matching or assignment market as students and pupils on the demand side have to be ‘matched’ with schools and other institutions of the educational system on the sup- ply side. How can such matching be accomplished as efficiently as possible if efficiency is measured by educational attainment? And what assignment methods are beneficial to what groups? The answers to these questions may be surprising, if one also takes into account the reactions of the actors in this market, parents, pupils, schools, teachers, etc. to the assignment mechanism chosen by society. The identification and assessment of such incentive effects is a hallmark of economic inquiry. The chapter performs this task for the most common assignment mechanisms: neighbourhood schooling (each pupil goes to the local school), tracking or elite schooling (schools are allocated on the basis of a test score), choice-based schooling (parental choice of school subject to a rationing mechanism) and income- based schooling (admission to private schools).
Another central concern is how the political governance of education systems affects educational success and equity. What makes an effective education system with good schools given an assignment mechanism? School accountability, i.e. the provision of rewards or sanctions for ‘good’ and ‘bad’ schools, is the key is- sue here, which – economically speaking – determines the degree of competition between schools. It can only be effective if schools also have some autonomy, and hence decision-making in the governance structure becomes decentralised. As a consequence, individual school leadership and management become more important. Indeed, evidence shows that all three components – accountability, autonomy and management, each of which can take many forms – exert an influence on school and pupil achievements.
Knowledge of the patterns of causal dependencies between student attainment and these market design features of an educational system should be extremely use- ful for progressing along the strategic framework ‘Education and Training 2020’ adopted by the European Commission. It provides some common ground to improve cooperation between the European Commission and its Members on educational matters while fully respecting Member States’ competencies in the field of education and training.
Chapter 5 deals with the issues of competition and regulation in markets for goods and services. Competition policy has become an important tool in Europe’s common work towards a more efficient and innovative economy. The major topics in competition policy and regulation are organised around four areas: collusion and cartels, abuse of dominance, merger controls and state aid. Policy and regulation have been guided by a growing research in Industrial Organization (IO), both theoretically and empirically. The EU has built national and European structures to manage competition issues both through law and regulation, and by strengthening regulative institutions’ scope and capacity for governing competition and efficiency within and across national markets.
A major new concern within both research and policy implementation is how markets work in the ‘digitalised’ economy and electronic trade. The efficient functioning of digital and online markets is crucial to welfare and is expected to become even more important in the near future. Already by 2020, more than half of total European retail sales are anticipated to be web-impacted.4 The digitalisation of the economy challenges traditional competition and regulation tools as well as theory. Several issues distinguish digitalised markets: such markets are often two-sided; search and transaction costs are different and significantly lower compared to traditional offline markets; the cost structure is tilted heavily towards the fixed cost component rather than the marginal ones; there are challenges on how to protect intellectual property rights; and new privacy issues are in focus due to the increased availability of private information on market participants. For instance, a significant part of traditional competition regulation, and partly theory, relates to firm size, dominance and market definition. In the online economy, market borders are fluid, at best and competition is geared towards competition for the market rather than competition in the market. The latter implies in its most liberal consequence that even monopolised online markets are not necessarily a problem as long as they are contestable and exposed to continuous competitive pressure. The regulation and competition problem transfers to entry barrier questions rather than dominance as such.
The challenges we are facing can be seen through the policy questions and decisions relevant in recent and ongoing competition cases. From these cases several questions emerge: the existence and the challenges with most favoured national (MFN) clauses (e.g. Amazon e-books, Online Travel Agents), selective distribution (Adidas, ASICS and Casio), the use of selective non-neutral price comparison algorithms (Google), cross border rules on fees (MasterCard) and resale price maintenance (RPM) rules (Swedish sport nutrition products), to name a few.
This chapter shows that policy makers and courts take different stances due to different views on how to solve these issues, motivating a discussion on the difficult choices policy makers now face between ex ante regulation (per se prohibition) and ex post regulation (rule of reason). It discusses the EU’s digital single market imitative and some of the economic challenges we are facing on vertical relations and pricing. The IO literature offers ‘old’ and new wisdom as regards how we can deal with these issues, still the chapter shows that there are coexisting theories suggesting different outcomes with regards to efficiency and welfare, and several open questions that need answers. For instance, the way in which we are to deal with RPM rules is not obvious, neither in the offline nor in the digitalised economy. Although RPM rules offer vertical related firms to facilitate pricing and in- crease competition, they also sometimes facilitate collusion. Likewise, it is unclear whether not allowing any restrictions on cross-border online sales is enhancing welfare in all cases.
The chapter surveys the new literature on competition and digitalised markets, and clearly advocates more work. In particular, it shows that despite the increased data availability from the online economy, there are very few empirical studies. This is surprising since the theory typically generates ambiguous predictions that depend on the size of the effects at play when it comes showing how pricing arrangements affect equilibrium prices, profits and welfare.
Many of the issues that surface as important in ‘digitalised’ markets are also evident in more traditional markets. However, the systematic presence of some key new features like two-sidedness, cost structure and vertical pricing structures, significantly modifies the nature of the models that should be used. Overall, new research on this topic needs to balance the important central results in the existing IO literature, even if re-organised and re-interpreted, against new approaches required by the new features of the digitalised economy.
Chapter 6 deals with the problems of trade, globalisation and development. It is well understood that the fortune of workers, consumers, firms, regions and countries increasingly depends on other regions and countries. This global interdependence is driven by the flow of goods, capital, information, ideas and people across them. An almost tautological conclusion of theory is that if countries choose to interact with one another, they have to be better off than being in isolation. While there are many quantifiable models to evaluate the gains from trade, the welfare gains from global production sharing, either via arm’s length global value chains or via multinational production, are less clearly quantifiable. Better understanding how multinational firms operate is central to comprehend and estimate their contribution to the costs and benefits of globalisation.
An overarching theme is that globalisation benefits some more than others. In fact, some may even become worse off as their country becomes more open to the flow of goods, ideas and people. For example, workers in import-competing industries stand to lose when countries open up to trade. There is a need for better understanding the redistributional effects of globalisation and to develop policies to mitigate the negative effects. Economists find it difficult to give definite answers to trade policy challenges, partly because the remaining policy barriers to cross- border transactions are difficult to quantify. There is broad-based evidence that these frictions are strong, but many of them cannot be captured by taxes and quotas, which are the standard tools to model them for policy analysis. We need to better understand not only protectionist, but also precautionary motives for trade policy.
There are also important challenges in measurement. Recent initiatives to match data from various national sources are promising, but the national fragmentation of data collection remains the primary data challenge facing analysts of globalisation. To be more specific, the most relevant tasks in this area are to: 1.Harmonise firm-level trade and balance sheet data across countries. 2. Develop statistical methods and computational tools to work with multidimensional data. 3. Develop new datasets on workers within firms, while ensuring privacy and consistency across studies. 4. Build harmonised firm-level data on services trade 5. Collect data on buyer-supplier links within the EU. 6. Link national administrative data, harmonise data collection and reporting. 7. Synthesise research based on ad-hoc proprietary data. 8. Construct international input-output accounts from the ground up. There are some important challenges for theory as well. We need to: 1. Reconcile model-based and reduced-form estimates of gains from trade. 2. Identify losers from globalisation and quantify their losses. 3. Understand and quantify non-tax, non-quota frictions in trade. 4. Develop a toolbox for quantitative analysis of redistribution. 5. Understand and quantify the effects of standards and harmonisation on trade and welfare. 6. Develop a quantitative theory of supply-chain trade, and of multinationals.
Chapter 7 deals with economic approaches to energy, the environment and sustainability. Different schools of economic theory hold differing views on the basic characteristics of the relationship between the economy and the environment. The two principal schools are ‘environmental and resource economics’, which con- siders environmental concerns as an aspect of broader economic issues to which the approaches of rationality, marginalism and efficiency may be suitably applied, and ‘ecological economics’, which considers the economy as a component of the global ecosystem, and employs ‘methodological pluralism’ to assess different aspects of what proponents view as a highly complex, multifaceted human-economy- environment interaction. These two opposing viewpoints produce different concepts of ‘sustainability’ and ‘sustainable development’, and different ways of measuring whether progress towards such states is being achieved. Environmental and resource economics takes the position of ‘weak’ sustainability, which advocates that as long as the total economic value of all capital stock (natural, human and man-made) can be maintained in real terms, regardless of the distribution, sustainability is achieved. The monetary valuation of natural capital and ecosystem services is a central tool in such analysis.
On the other hand, ecological economics takes the position of ‘strong’ sustain- ability, which considers some natural capital to be ‘critical’ in that it makes a unique contribution to welfare or have intrinsic value, and cannot be substituted by manufactured or other forms of capital. The insights of institutional/evolutionary economics and behavioural economics are also important to our conception of the economy/environment relationship, and challenge the core tenets of neoclassical economics (upon which environmental and resource economics is based), including assumptions of rational, maximising behaviour by all economic agents (individuals and firms) according to exogenous preferences, the absence of chronic information problems, the complexity and limits to cognitive capacity, and a theoretical focus on movements towards or attained equilibrium states of rest.
Although sometimes contradictory, these schools of thought are complementary in many respects and bring different insights to bear on both the issues of sustainability (such as the ‘wicked problem’ of the ‘Energy Trilemma’; decarbonising the energy system whilst maintaining both energy security and energy access and affordability), and policy approaches to tackle issues that threaten it. Whilst the application of economic thought and methodological approaches has advanced our understanding of interactions within and between the human and natural world, many important areas of further theoretical, empirical and methodological research remain open. These areas may be broadly delineated into four inter-related themes. Basic characteristics of the economy-environment relationship. This concerns the notions of weak and strong sustainability, central to which is valuation of natural capital and ecosystem services. Particular areas of research should show how to include or mitigate the impact of behavioural and cognitive complexities on values elucidated, how non-monetary valuation approaches may be integrated or made complementary to monetary valuation, whether monetary valuation, by framing the good or service in such terms, crowds out other forms of valuation, and the ex- tent to and nature in which monetary valuation can and does impact decision- and policy-making (including the drivers and barriers involved). Another ongoing area for research should be the refinement of robust approaches to identifying ‘critical’ natural capital, in order to further define our ‘safe operating space’ within ‘planetary boundaries’ that are not open to meaningful monetary valuation.
‘Natural’ (non-policy) drivers of changes to this relationship. This contains two principal longstanding questions. The first concerns the validity of the Environ- mental Kuznets Curve hypothesis, which suggests that the relationship between resource depletion and pollution levels and income follows an inverted ‘U’ shaped parabola; resource depletion and pollution levels increase with income until a given level of income is reached, after which environmental pressures decrease (driven by, rather than simply inversely correlated to, increasing income). Further research using structural equation models, along with an increased focus on the influence of economic and demographic structures and the political economy, is required. The second question surrounds approaches to the robust calculation of marginal social costs of pollution, and of CO2 in particular. Alongside valuation of natural capital and ecosystem services (in addition to valuation of human health and comfort, etc.), debates about appropriate social discount rates are central in this field.
The design and impact of policy interventions. Four principal, interrelated topics for further research are dominant. The first concerns the cost for firms of environ- mental policy of different designs (both individually and in a policy ‘mix’), and the effect this has on competitiveness (and in particular ‘carbon leakage’). The second surrounds the process, drivers and barriers to innovation and diffusion of innovations, and the development of innovation ‘indicators’. The third topic concerns the role, nature and impact of institutions and behaviour in policy choice, design and impact. In terms of the ‘energy trilemma’, continued research into the availability of ‘win-win’ options, and options for reducing the risks surrounding inherent un- certainty of future developments, would also be of substantial benefit. The fourth topic concerns issues of environmental justice and distributional impacts. Uncertainty surrounds whether instruments utilising monetary valuation of natural capital and ecosystem services reduces or exacerbates pre-existing economic and social inequalities, particularly at the local level. Further research is required to determine the distributional impacts of policy instruments, instrument mixes and their specific design.
Modelling approaches and techniques. Most models employed to assess the impact of environmental policy tend to focus on a particular component of the environmental-economic system. Although numerous Integrated Assessment Models (IAMs) attempt to link different components of the environment and the economy, such dynamic links are usually relatively basic. Further research should be directed at improving such links. However, improvements to the individual components of such models are also required. For example, integration of the insights provided by behavioural and institutional economics in macroeconomic models is often poor, meaning that such models mischaracterise critical, ‘real-life’ dynamics. The improved incorporation of such insights into economic-environmental models should hold a high priority on the research agenda.
Chapter 8 provides a detailed account of the general economic principles governing regional growth. It starts from the very basics of spatial economics to progress to advanced econometric testing of predictions following from models based on New Economic Geography and New Trade Theory, both of which attach prominent roles to increasing returns and network effects occurring through complex ‘linkages’. Mostly publicly provided infrastructure and transport networks are key drivers of these linkages.
The chapter provides sobering insights for advocates of such clear, politically well-intentioned goals as regional cohesion and (income) equalisation in Europe. As shown, the authors hold in particular against the background of decreasing transport and communication costs, which has recently given rise to popular catch-words like ‘the death of distance’ or ‘the flat world’. The insinuated quasi-irrelevance of distance and location in space and markets and the intuition that this should foster more equal development across different regions have no economic foundation.
It appears that regional disparities are inevitable due to the economic forces of agglomeration and dispersion at work, and the complex ways they are reinforced or dampened by transport costs. Moreover, decreasing transport costs as well as the new transport infrastructure, which better links lagging regions to thriving markets in urban agglomerations, may work against the aim of convergence of income and living standards if agglomeration forces become relatively stronger. There is ample evidence that this occurs at a European level. The crucial point to assess is economic agents’ reaction to these changes, i.e. how firm and labour mobility are affected. Results indicate that differences between regions matter less than differences between people living there. As a consequence, helping poor regions need not help poor people in that region. Thus, investments into training and human capital may be a better development strategy than additional transport infrastructure.
What are the consequences of these findings for the transport and infrastructure policy of the European Union? Firstly, the selection and assessment of large transport infrastructure projects must be improved. Standard piecemeal cost-benefit analysis does not suffice as system-wide consequences have to be accounted for. Secondly, the present use of the existing transport infrastructure in Europe has to be put to much better use. The EU does not do well in comparison to the US in using its rail and air transport systems. Both suffer from national fragmentation of regulations and operation standards as well as the ‘protectionist’ interests of large domestic firms. In particular, the proportion of rail transport of goods in the EU is very low compared to the US, as most goods are transported by trucks across Europe. Simple fuel taxes have given way to new distance-based ‘truck taxes’ imposed by countries with a high share in transit traffic, such as Germany or Austria. This instrument for more efficient pricing is very promising. The present implementation of distance charges, however, is suboptimal as distance-based charges for trucks have considerably lowered diesel taxes due to tax competition initiated by neighbouring countries. Moreover, distance is not necessarily a good proxy for the external costs of a road trip, which also depend on local conditions such as congestion, air pollution and accidents. Taking account of these factors in more sophisticated formulas for road pricing of trucks cannot ignore the impact of traffic by passenger cars. Already today the diesel tax is likely to be too low for passenger cars and too high (combined with distance charges) for trucks. The political shift in road pricing for trucks must also pave the way to a new system of road pricing for cars.
The treatment of urban development and spatial planning within the social sciences underplays the importance of economics in a serious way. This is mostly self-inflicted by the field, as Urban Economics has never formed a central part of mainstream economics. Originally, the development of spatial economic theory was almost exclusively driven by German contributors: Heinrich von Thünen, Wil- helm Launhardt, Alfred Weber, Walter Christaller and August Lösch. As there are no counterparts to them in the Anglo-Saxon tradition of economic theorising, ini- tially spatial economics was completely absent from neoclassical economics. Even today it is much less central to mainstream economics than it should be, because the introduction of space and land use into economic analysis brings about important ramifications. Space cannot be incorporated into the competitive general equilibrium model in a frictionless way as changing location incurs costs, especially transport costs. This fact lies at the heart of the phenomenon of agglomeration.
Chapter 9 convincingly argues that agglomeration drives economic growth and the social cohesion of a society in a fundamental way. This insight holds important lessons for policy makers in the European Union: the single most important insight perhaps is that wealth is increasingly created in cities and metropolitan areas.
What are the economic driving forces behind this development? For consumers as well as firms, agglomeration produces increasing returns due to improved learn- ing, sharing and matching opportunities in productive and social processes. Given consumers’ preferences for affordable housing and dislike of commuting, cities emerge as the outcome of a trade-off between the gains and costs of agglomeration. The simultaneous spatial treatment of land use for housing and business and transport in spatial theory is not easy. There are many externalities at work, e.g. any person’s decision to use a car or occupy a certain flat yields consequences for others who are deprived from using this particular space. Taking account of these externalities theoretically and estimating them empirically leads to another remark- able result: cities, in particular European cities, are likely to be too small rather than too large to reap the full benefits of agglomeration. The success of cities – much more so than that of regions – is instrumental for future growth in the European Union.
Improvements to the organisation of metropolitan areas and big cities should hence focus on a reduction of agglomeration costs. Traffic and the transport of people as a main source of congestion in urban areas are prime targets in this regard. For example, the single most important external cost of car use in urban areas is congestion, rather than climate damage. However, much more public and political attention is paid to climate change than to congestions. The economic answer to the problem of congestion is the politically unpopular device of road pricing. Nevertheless, efficient pricing of congestion will bring about time and productivity gains, as well as generate valuable revenues. The need for congestion pricing is reinforced by the finding that in the absence of road pricing the public provision of expensive new infrastructure and transport links will not alleviate the congestion problem. The authors present impressive evidence of the scope and implementation of smart pricing schemes that have consequences not only for the cost-benefit analysis of large transportation projects but also for public finance in general; e.g. they suggest spending the revenues from congestion pricing on a reduction in labour taxes.
The bottom line is simple: the European Union needs the design of urban policies (on behalf of the European Commission and its Member States) similar in standing, importance and funding to its present design of regional policies.
Chapter 10 focuses on ‘Fiscal and Monetary Policies in the Aftermath of the Crises’. Historically, macroeconomic policy and research have always been inter- twined, main policy and institutional designs have been rooted in economic analysis (price stability, Central Bank Independence, etc.) and, likewise, economic re- search has always been stimulated by macroeconomic events; especially negative ones. The financial and euro crises (2008–2013) – the Great Recession for many countries – have been no exception.
These have also been crises of confidence: for advanced societies, who viewed themselves in a sustainable growth path supported by the ‘great macroeconomic moderation’; for policy makers, who entertained similar self-views to those of Jean-Claude Trichet, president of the ECB, who wrote on the occasion of that Institution’s 10th anniversary: “The achievements of the past decade are due to the vision and determination of the Governing Council members, past and present, and due to the energy and efforts of all staff of the Eurosystem”,5 and also to the macroeconomic academic profession who, in the words of Nobel Laureate Robert
E. Lucas Jr. at the dawn of this Century, thought that “macroeconomics in this original sense has succeeded: its central problem of depression prevention has been solved”.6
The chapter provides an overview of the growth of research in macroeconomics, in response to these severe shocks of the early 21st century. The debate about which instruments to use to stimulate economies in recession and which stabilisation policies should be pursued when traditional interest rate policies proved to be ineffective, became the centre of attention in both academia and policy making. The chapter shows how new research has contributed to clarifying issues, assessing new and old policies, and raising new questions.
The authors present the landscape that policymakers and researchers faced after the recession by highlighting the trends observed in three economic aggregates: output, unemployment and inflation. Their attention then turns to analysing policy design in economies with low or negative output growth, low inflation, high un- employment and a binding zero lower-bound (ZLB) for interest rates. Part of the economics literature indicates that the driver leading an economy to hit the ZLB is a fall in the natural rate of interest. Taking this literature as a starting point, the chapter discusses both monetary and fiscal policy alternatives. In particular, three alternative monetary policies are covered: forward guidance, quantitative easing, and credit easing. On the fiscal side, the discussion focuses on research that has investigated the effectiveness of fiscal stimulus when the economy is near the ZLB, as well as on the most effective instruments to be used: labour taxes, consumption taxes, and government expenditures, among others.
The scientific method has prevailed over the ‘crisis of confidence’. That is, new theories and methods have been developed which build on existing ones (not throw- ing them away as ‘culprits of the crises’, as it was often put in the media). For example, the authors show how different new contributions can be mapped into a key ingredient of dynamic macroeconomic models; how policies and frictions dis- tort the intertemporal choices that households and societies make. The questions of how the fall in the natural rate is modelled, and how the different proposed policies provide incentives to escape from a recession at the ZLB, are better understood through the lens of the Euler equation. The results of this analysis indicate that most of the suggested policies work through ‘the expectations channel’. More precisely, policies are effective if they increase expectations of future inflation, and consequently lower the real interest rates. As the authors note, it remains a theoretical and empirical challenge to effectively assess the size and validity of ‘the expectations channel’ as the pivotal policy transmission mechanism at the ZLB.
In economic models, a fall in the natural interest rate is commonly modelled as an exogenous increase in the discount factor: consumers become more patient and want to save more. This is just a convenient modelling strategy rather than a fundamental explanation for the fall in the natural interest rate. One of the main concerns raised by the analysis is that most theories based on standard business cycle shocks only account for a short permanence of the economy at the ZLB. Contrary to this prediction, Europe has been experiencing this situation for over six years, and Japan for over twenty years. This has motivated the search for theories that can sustain the ZLB as a ‘persistent’ situation. The chapter discusses two such theories: secular stagnation and self-fulfilling recessions. As an alternative, it also illustrates how the seemingly temporary effects of business cycle shocks could be highly persistent due to labour market frictions.
Some features of the financial crisis and recession are common to most of the advanced economies that have experienced them, but the euro crisis and its ‘South recession’ has some specific elements. For the European Monetary Union (EMU) the ‘crisis of confidence’ was the collapse of ‘the convergence view’ – namely, that the expectation that due to the common currency and the established fiscal and monetary policies, convergence among EMU countries would be relatively fast. The debt and banking crises and the divergence among Euro Area countries has added new challenges to EMU fiscal and monetary policies. The chapter also discusses these issues, and some of the research that they have stimulated (most of it undertaken by researchers based in Europe). For instance, the chapter concludes with a section on risk-sharing and fiscal policy within a monetary union. The aim is to analyse how a system of conditional transfers can strengthen EMU, beyond what can be achieved through private insurance and ECB interventions, without needing a large ‘federal budget’ or becoming a ‘transfer union’.
Chapter 11 deals with financial regulation in Europe. It has often been said that the recent economic crisis was mainly caused by the worldwide interdependence, and the excessively risky and apparently out-of-control behaviour of financial markets. This not entirely correct statement has once again brought to the forefront the debate on the need for coordinated intervention policies among European countries, and on the optimal degree of regulation in this vital and already highly regulated sector of the economy.
We know that it is extremely difficult to keep a balance between free market forces and regulation in order to preserve the stability of the overall financial sys- tem and of the banking sector in particular, and enhance financial innovation, hence the efficiency of financial intermediation, and ultimately the smooth working of real economic activity. Moreover, there exists a seemingly endless cycle between regulators reacting to the last crisis by imposing more and more sophisticated rules and financial intermediaries always finding new loopholes and side paths to avoid the regulating constraints.
The debate has been particularly intense in Europe, where economies are strongly bank-based and where some segments of financial markets, the private equity market for example, are not as developed as in other advanced economies. This implies that the efforts of both policy makers and regulators have mainly been directed to- wards ensuring the stability of the banking sector using both micro and macro prudential regulation and enforcing the European Banking Union, a successful endeavour that still needs some finishing touches. The more recent focus of the financial community, which includes operators in the field as well as the European Commission, the European Central Bank, National Central Banks and Regulating Authorities, has also been the design and implementation of the Capital Markets Union.
This chapter is a comprehensive, clear and detailed review of what happened and what was done during and after the crisis in Europe and what still needs to be done. It may well be considered a reference text to be kept very close and used by policy makers, practitioners and students interested in understanding regulation and how it has been applied to European financial markets, in particular to the European Banking System.
The authors trace the struggle of ‘complexity against simplicity’ in regulation, they discuss the risks attached to financial crises, describe the rules that have been implemented and review the opinions of economists, both European and non- European, on the pros and cons of alternative policies. They show that further economic research is strongly needed. While the risks of a fragile financial system are well known and have been thoroughly studied by economists, there is very little recent theoretical work on how to map basic failures into regulatory reforms. Most of the published contributions in the last decade are indeed applied ex post analyses of the effects of the enacted regulatory reforms, often with ambiguous results, maybe because of the restricted access to data that central banks and regulators in fact collect but have not yet published.
This state of affairs may partially be the consequence of the particularly strong and productive interaction between economists, regulators and practitioners: most regulators are themselves economists, while economists that work in academia are often consultants to policy makers and regulators. This implies that there is no over- whelming ‘language problem’, but also that regulators and policy makers may re- quest relatively quick operative answers to their questions, not leaving enough time for in-depth theoretical assessments by researchers. Nevertheless, the involvement of academics in policy making, specific to this branch of economics, is extremely welcome and has been the main driver of the research on financial markets in the last few decades.
Chapter 12 deals with inequality and welfare and asks whether Europe is special. Historically economists and politicians alike have been concerned with inequality and welfare. Recently the topic has regained focus, most notably due to Thomas Piketty’s ‘Capital in the Twenty-First Century’, where he shows that inequality, if anything, has increased in the last decades. It is not presumptuous to say that the question how inequality affects major topics such as education, health, migration, growth, technical progress, innovation and social security, to name a few, is at the very essence of how the European welfare state will develop.
Why is this regained focus important but also so difficult? First, the concepts of inequality and welfare have proven difficult to define and measure in a coherent and agreeable manner. Second, when considering the present empirics on inequality, most measures show a stark increase in inequality since the 1970–80s. Third, research has uncovered strong hysteresis effects in inequality development in the sense that the next generation will inherit much of the present pattern, suggesting that the situation will take many years to mend.
The situation in Europe seems to be less critical, at least at the average level. Whereas the US has experienced a 20%-point increase in the top 10% income share since 1970 (from an already high 30%+ level), Europe started on its own inequality-trip ten years later in the 1980s, increasing their top 10% income share from 30 to 35% from 1980 to 2010. However, when treating Europe as a unified country, inequality in Europe is as high as the inequality in the US.
Focusing on the country level, several patterns are visible. First, the Northern countries have much lower inequality levels than other countries. The UK is the other side of the coin, with the highest inequality levels in Europe. Second, this heterogeneity is, however, decreasing over time. There is a clear pattern of convergence in inequality since 1985. Whereas the Northern countries, starting from a significantly lower inequality level, increase inequality over time, and more than all others (e.g. more than 25% in Sweden), other countries have considerably flatter developments. Even in the UK, we find a flattening of the upward trend in inequality since 2000. Seen in the light of a common labour market with open borders and new migration streams, this suggests several potential explanations. One is a revealed preferences argument that points towards a more integrated Europe when it comes to the redistributive preferences across Europe.
A major challenge addressed also in other parts of this volume is migration. Partly migration seems to change political fundamental views, and partly it challenges the foundations of traditional welfare states. An example of how this challenge remains unresolved is Belgium. Two thirds of the increase in poverty in Belgium in recent years is attributed to migrants, and at the same time Belgium is struggling with minority groups that are willing to engage in terror acts. This picture is not very different in several other EU countries. Some have even argued that this new development changes fundamental political preferences, from earlier being one-dimensional (more or less welfare state) to a bi-dimensional political agenda where the second political axis is how open the society should be to people originating from other ethnicities. The choice along the second dimension interferes with the choice over the redistributive dimension and changes the equilibrium of the entire political game. Obviously, such changes bear consequences when it comes to future inequality acceptance and the welfare states’ political and economic fundaments.
At present, we do not know enough about peoples’ attitude towards inequality, though surveys show a large heterogeneity in views across Europe. For instance, on questions on why people are ‘living in need’, only around 20% in countries such as Belgium, Netherlands and Sweden attribute this to ‘laziness or lack of willpower’, in contrast to more than 50% of Finnish and Austrian citizens. People from Fin- land and Austria, however, share views with many outside Europe and are quite representative of people living in countries such as the US, Canada and Japan. This heterogeneity partly implies that people seem to have very different acceptance to- wards ex ante and ex post inequality. Ex post inequality, that is a direct result of peoples’ own choices is generally much more accepted than ex ante inequality resulting from inherited economic situation and birth. New and comparable data on peoples’ perceived welfare and happiness, as well as a new focus on research on fairness and preferences through experimental studies provide, and will continue to provide, new insight on these issues.
The European welfare state has other challenges related to these questions. Tax rules in several countries seem to change towards more favourable tax rates for firms, resembling a race to the bottom across countries and resulting in large corporations and firms moving to the most attractive locations. This in turn has con- sequences for where the smartest people move to work, and obviously also for inequality and the financing of the welfare state in the future.
Most of the above, and several other questions are raised and discussed in this comprehensive chapter. It concludes with several areas where it is of vital importance for Europe to gain new knowledge. In particular, it has five clear research policy recommendations for Europe. It should: 1. Build a network of researchers in economics and social sciences to understand the fabric of equality of opportunity: Ex ante inequality is a major challenge for the foundations of the future welfare state. 2. Build a large panel of data specific to studying the dynamics of poverty, and how people get in, how people get out. 3. Undertake research to prepare the ground for a standing-up policy to fight poverty and promote equal opportunities. 4. Look at the sustainability of national welfare states in an environment where capital and labour are mobile. 5. Further strengthen the research on the issues that lead to the convergence of Southern societies to the social model of the Northern societies.
The Relevance of Data and Methods
The last two chapters of this volume deal with developments in data and methods that cut across policy areas and fields. The past 20–30 years have witnessed a steady rise in empirical research in economics. In fact, the majority of articles published by leading journals these days are empirical. This evolution is made possible by improved computing power but, more importantly, thanks to an increase in the quantity, quality and variety of data used in economics.
This data revolution has led to significant intellectual breakthroughs in economics. Several chapters in this volume allude to the role that better data have played in recent advances of our understanding in important economic issues, such as innovation and growth (Chapter 1), human capital and education (Chapter 4) or inequality and welfare (Chapter 12), among others. More and better data are sometimes even credited for changing the research paradigm in some fields, where data are no longer used as a means for testing theory but as a central input to theory development, as in trade and globalisation (Chapter 6 and Eaton and Kortum (2010)).
Equally important, most chapters conclude that our ability to satisfactorily ad- dress remaining open questions in key policy areas will hinge upon the availability of better, more comparable (i.e. across countries), or more accessible data.
Data do not, however, come for free: they need to be collected, checked, harmonised, and organised for easy retrieval and analysis. When they contain confidential information, access needs to be organised in a way that preserves the legitimate privacy concerns of data subjects. More fundamentally, data for economic research come from many different sources and involve many different producers: not only statistical agencies, but also public administrations and agencies, central banks, private firms, data vendors and, last but not least, researchers.
Chapter 13 brings together several actors and stakeholders of recent developments in data for economic research to discuss their drivers, their implications and the remaining challenges. The chapter starts with microdata, i.e. data at the individual, household, firm or establishment level, produced from surveys or collected for administrative reasons. Such data have been at the forefront of important new research insights. Administrative data in particular is now the new Eldorado for empirical work. The big issue here is access to these data for research purposes. Northern countries are world leaders on this front. They combine some of the best and most comprehensive statistical systems in the world with some of the highest levels of access. Access is often more difficult in other European countries. However, things are improving. The chapter outlines recent developments towards greater and easier access in the UK and Catalonia as illustrative of the ways stake- holders can foster greater access despite less favourable contexts than those of the Northern countries.
Another big issue for administrative data, especially when it comes to business data, is cross-country data harmonisation and data linking (i.e. the ability to link data from different sources but corresponding to the same firm or statistical unit). Harmonised cross-country data are essential, as several chapters have outlined, to draw sound comparisons between countries and assess the scope for replicability across borders (e.g. whether the experience of one country is relevant for another). Moreover, we are living in a globalised world where firms operate across borders and we need statistical systems that reflect this reality. Until recently this was not the case. The 2008 economic crisis cast a crude light on the mismatch between existing data structures in official statistics (mostly organised along national lines) and the reality of global financial and economic markets. Two developments are taking place in reaction. At the international level, the G20 Data Gaps Initiative is bringing together Eurostat and other international organisations such as the Bank for International Settlements, the World Bank and the OECD to coordinate statistical issues and strengthen data collection to improve its alignment with economic realities. At the same time, a number of initiatives are under way among national statistical offices to improve data harmonisation and data linking across national borders. Eventually, this is likely to contribute to improving access to harmonised cross-country datasets for researchers, even if the impetus for the current changes is mostly political and access to researchers is not a priority.
Naturally, statistical offices are not the only producers of data. Private data firms have long been involved in harmonising and linking firm data across borders. Their data are often used by researchers as a complement or a substitute to administrative data. A number of researchers are also involved in large-scale data collection or production efforts. The chapter describes three such researcher-led data initiatives that illustrate their advantages. First, the data are typically immediately and easily made accessible to researchers. Second, not being subject to the same operational constraints as statistical offices, the databases produced by these researchers often use innovative designs (such as internet surveys or automated reporting from handheld devices) that reduce costs and improve reliability. Third, unlike official data that are collected because there is a policy or administrative need, data collection can be more forward-looking and focus on issues and topics that might not yet be recognised as policy issues. The Survey of Health, Ageing and Retirement in Europe is a perfect example. Funding, however, is a critical challenge that all such initiatives face.
Another type of data produced by researchers is data generated from economic experiments, either in the lab or in the context of randomised controlled trials. Both types of data have led to major advances in our understanding of human behaviour and the robustness of economic institutions, for the first one, and in our understanding of the impact of policies and the mechanisms underlying them, for the second. Both approaches are now well-established and registries have been set up to archive the data produced and to ensure that they are accessible for researchers interested in replicating the results. The chapter describes recent developments, remaining challenges and outlook for each type of approach.
An emerging trend in economic research is the development of new forms of collaborations between researchers and private and public sector organisations. One form that such collaborations have taken is closer relationships with private firms for access to their proprietary data. A complementary form has been collaborations between researchers and policy-makers where the focus is not only on data, but also on helping design and recalibrating policy interventions. In both cases, these collaborations are providing researchers with unmatched data access and data quality, as well as opportunities to investigate novel research questions and existing research questions in new ways. The chapter illustrates the potential of these collaborations but also discusses their risks and their implications for how research is organised, evaluated and funded.
The chapter concludes that there is no single type of data that is superior to all others. Each type of data is unique and has advantages over the others for a given research question. It is important for economic research to acknowledge the benefits of variety and the potential complementarity among data producers, and for stakeholders to support – politically, legally, technically, and financially – this diversity.
A benefit of the data revolution in economics is that researchers now have access to unprecedented amounts of data, a phenomenon that has been popularized under the name of ‘Big Data’. The term itself is used to cover a variety of data-driven phenomena that have very different implications for empirical methods. Chapter 14 deals with some of these methods-related issues.
In the simplest case, ‘Big Data’ simply means a large dataset that otherwise has a standard structure. Administrative data, which cover entire populations rather than population samples, belong to this category. The large size of these datasets allows for better controls and more precise estimates and is a bonus for researchers. It may raise challenges for data storage and handling, but it does not raise any particularly heavy methodological issues.
But ‘Big Data’ often means more than just standard datasets of large sizes. First, large numbers of units of observation often come with large numbers of variables. To continue with the same example, the possibility of linking different administrative datasets increases the number of variables attached to each statistical unit. Likewise, business records typically contain all interactions of the customers with the business. This ‘curse of dimensionality’ challenges traditional econometric ap- proaches because coefficients on explanatory variables may no longer be identified or only poorly so. Second, the term also covers new datasets that have a very different structure from the structures we are used to in economics. This includes web search queries, real-time geo-locational data or social media, to name a few. This type of data raises questions about how to structure and possibly re-aggregate them. If economists want to be able to take advantage of the data revolution, they will need to be equipped with appropriate methods to deal with these new datasets and data structures.
Chapter 14 starts by describing standard approaches in statistics and computer science to overcome the curse of dimensionality. Such approaches usually take an agnostic stance on the data generation process when seeking to balance the goal of ‘letting the data speak’ with the need to generate stable estimators.
Economic problems and economic data have specificities, however, to which it is worthwhile to tailor solutions. One specificity of economic problems is that we are often interested in measuring a (causal) relationship between some variable of interest (for example, a policy) and its effects. In other words, there might be many variables, but one of them (the policy) is of special interest to the researcher. Recent research efforts seek to combine the power of ‘standard approaches’ in statistics and computer science with the ability to give, within the algorithms, a special status to one variable – the policy variable – which we are interested in identifying precisely.
Economic data also have their own specificities, which vary by context. For ex- ample, macroeconomic indicators tend to be serially correlated, are released non- synchronously and with different frequencies. Recent research has shown that estimators that take these specificities into account outperform standard approaches in statistics and computer science for dealing with the curse of dimensionality. We are only at the beginning of these efforts, however, and much still needs to be done. Another methodological challenge raised by ‘Big Data’ is the development of estimators that are computationally tractable for very large datasets (e.g. high frequency trading data, browsing data, etc.). Indeed, despite recent progress in computing power and storage, these can be a constraint for such datasets. Estimation methods that take advantage of parallel computing offer a promising route.
In short, ‘Big Data’ is exciting for economics because of all the things we can learn from them, but it is also essential to make sure economists are equipped to take advantage of these opportunities. On this front, economists can learn a lot from recent and current research in statistics and computer science. It is, nevertheless, essential that methods be developed that account for the specificities of economic problems and data.
Overall, it can be clearly seen from all chapters that a large number of new results are based on new datasets across all fields of economics. An immense body of new knowledge has emerged from the analyses of newly collected/assembled datasets; and from new methods of using existing data. New questions have surfaced, and new answers have been given to long standing questions. Europe could become the leader in the collection and linkage of new types of big data and related methods. There also seems to be a genuine need for the economics and policy interface to be strengthened. Unfortunately, few economic policy decisions are based on known and established economics results, and vice versa, not enough economics research is motivated by direct policy questions. Finally, it is also easy to spot that many new useful insights have been provided by the generalisation of local (country-related and/or regional) knowledge into a more general EU-wise understanding, and vice versa, by the analysis of how general knowledge is interpreted or translated at the local level. It is fair to say that the critical mass of talented European-based re- searchers is available, and it clearly transpires through the chapters of this volume that they tend to work on problems, challenges and data covering Europe.
The objective of Work Package 2 (WP2) of the COEURE project is to assess the efficiency of economic research funding sources and systems across European countries. The task was undertaken by collecting primary data on three elements of the elements of the research production process: the global standing of research in economics undertaken in Europe, the mechanisms employed to fund this research, and the experience of researchers with utilizing these mechanisms in support of their research.
Preliminary results were presented at a workshop in June 2016 attended by the EU Commission DG Research & Innovation, the European Research Council, representatives of national funding agencies, the European Science Foundation, and economics researchers. Insights and feedback from participants at the workshop have been incorporated into the final report (submitted in SESAM as deliverable D2.12).
A review of research in economics in Europe is presented in chapter 2 of the final report where we employ citation analysis to identify the extent to which frontier research is undertaken at European institutions. This is supplemented in Appendix 1 of the final report with details of all economics departments and institutions in Europe that are placed in the top 10% of global research performers. Viewed from the perspective of the 1970s the standing of European research in economics is encouraging with 40% of the top quartile of economics departments in the world located in Europe. Innovations, involving the establishment of a variety of clusters, have created centres of critical mass in graduate education and research capable of retaining talent in Europe. These developments have been driven by visionary leadership facilitated by the emergence of greater opportunities to fund research.
We examine developments in funding in chapters 3 and 4 of the final report. First we look at trends in spending on research and development where we note concerted action across Europe to increase spending to match competitors in Japan and the USA. The objective of creating a European Research Area has codified a strategy where research is seen as a driver of prosperity. Framework programmes have been used to implement this strategy and a European Research Council (ERC) has been created to support frontier research.
A database of research funding sources across European countries was created as part of the project and is contained in Appendix 2 of the final report. This drawn from information available in published sources and supplemented by visits and interviews with those involved in administration at 6 funding agencies. In chapter 4 of the final report we highlight a number of key trends that emerge from our analysis of this database. We note evidence of best practice being transferred across countries in the design of agencies and funding instruments. However, trends are also observed that give cause for concern. Most prominent among these is the growing expectation of shorter term impact from research funding. This is a concern also highlighted by the OECD (2015) in its study on The Future of Productivity. Where it calls for a renewed focus on the funding of basic research. The concern with impact has an effect across and within disciplinary areas. It brings a greater bias towards supporting research in the life and physical sciences. In a period of austerity this presents a danger that research in the humanities and social sciences (HSS) may be squeezed out and, where maintained, be directed too narrowly at top down priority themes.
We also raise concerns at: trends in core funding that undermine the universities that host research, and competitive funding instruments that can result in a beggar=thy-neighbour approach from national governments to winning EU funding.
Chapter 5 of the final report uses the results from a survey of researchers to analyse the experience of economists with available funding instruments. Formal analysis using this survey data is presented in Appendix 4 of the final report where it is used to examine the production process of research.
Lessons, both for funders and the economics profession are drawn in chapter 6 of the final report. These messages will input into the formulation of an Agenda for Economic Research in Europe which is the topic of the final work package of the COEURE project.
Potential Impact:
The potential impact of the COEURE project has been described in detail in the COEURE manifesto. Below, a summary:
Strategic Objectives in Economic Research after the COEURE project
Objective 1: Foster Long-term Research Capacity
Why: Ensuring long-term research capacity for economic research in Europe requires that we continuously enhance, improve and expand the production line or chain of economic research to: Catch up with the US in terms of productivity and impact; Address the long list of policy challenges and open research questions; Develop technical tools and build databases to push the frontiers of economic research; Address the growing demand for economic analysis and knowledge in society; Strengthen the research career in economics: PhD and post-doctoral programmes and mobile and competitive tenure track careers.
Actions: All actions that could impact the production process of economic research as provided below will contribute to shifting the production function of economic research upward, making it more productive (e.g. producing more articles in economic journals) and more efficient (e.g. increasing the conversion of resources into research outputs) but also, and importantly, increasing its quality (e.g. delivering articles in the best scientific journals).
The actions detailed below concern: The design, development and availability of data; The outreach of economic results and policy recommendations drawn from the most up-to-date economic research; Features of available funding devices and their capacity to support innovative funding schemes; Preservation and support of basic research in economics, not only research that deals with applied analysis or current issues; Support for the development of high quality PhD programmes in economics in European universities. This includes increasing funding opportunities for qualified PhD students and expanding their training in terms of research dissemination. An evaluation of the Bologna process for the 3rd cycle should be carried out; Support for the career development of junior researchers in economics, through e.g. the development of an efficient European-wide academic job market for economists, the provision of mentoring and networking opportunities, a better understanding of the career paths of junior economists in Europe (e.g. alongside the lines of the European Science Foundation’s pilot study on the Career Tracking of Doctorate Holders); Fostering the development of a research dialogue with other social sciences, while at the same time respecting the constraints and incentives of individual disciplines; Coordination of European research policy with Member States’ research policies.
Objective 2: Establish Europe as a Data Power-house for Research and Policy Analysis
The past 20-30 years have witnessed a steady rise in empirical research in economics. This evolution has been enabled by the increase in the quantity, quality and variety of data used in economics, and also thanks to the development of computing capacities, computer technologies and statistical/econometric methods. This revolution has led to significant intellectual breakthroughs and is key support for the development of evidence-based policy. Equally importantly, the availability of better, more comparable (e.g. across countries), or more accessible data is central to our ability to satisfactorily address the remaining open questions in key policy areas, and to European-based researchers’ ability to carry out cutting edge research.
Recommendation 1: Facilitate data access for researchers
Why: Data collected and administered by public institutions and governments, covering entire populations rather than samples could generate new robust scientific insights, with significant social value. Ensuring researchers have access to these data will provide European-based researchers with a significant competitive edge in the creation of new knowledge.
Actions: Introduce mandates for statistical agencies, including Eurostat and data intermediaries, to service researchers; Build capacity of research institutions to support researchers’ efforts to access data (research training, legal advice on NDAs, IT infrastructure that meets the required security standards, etc.); Work to secure legal access to personal data for scientific purposes at national levels; Introduce provisions in all European and national legislations to secure researcher access to the data produced in the course of the implementation of those legislations, as done in Nordic countries; Clarify the legal framework for access to confidential data across borders; Promote Open Data for non-confidential administrative data and other public data; Work on removing non-legal barriers that make access to data costly and time-consuming for researchers.
Recommendation 2: Improve data design and data harmonisation
Why: In spite of the progress made through European agencies (Eurostat) and other institutions (ECB), data collection is still predominantly organised at the national level, whereas, e.g. firms largely operate across boundaries. Likewise, some firms operate through a number of subsidiaries and other legal entities, but existing statistical systems do not account for these interdependencies. Last but not least, firms do not always have the same identifiers across datasets covering different dimensions of their activities. This issue also concerns household data when, for instance, dealing with the fairness of labour markets at the European level. Ensuring that data structures reflect the complexity of economic systems is critical to a sound understanding of the economy.
Actions: Promote cross-country data harmonisation; Mandate common metadata and linking of existing business data across Member States; Modernise national data collection and production systems; Involve researchers in data design.
Recommendation 3: Support economic data infrastructure in Europe
Why: A number of researchers are involved in the collection of large-scale data, which they turn into publicly available databases. Because their design is not driven by compliance or administrative motives, they have often analysed new issues and data providing huge benefits for the research community and policy, as in the case of the Survey of Health, Ageing and Retirement in Europe (SHARE). Moreover, the scientific value of large-scale data often grows with their time coverage, a striking difference with datasets in the hard sciences where the underlying reality is not changing or is not the object of interest.
Actions: Design funding instruments that meet the needs of the diversity and specificity of data in economics, in particular that ensure stable funding for key longitudinal datasets; Ensure that publicly funded large-scale data collection projects include plans for data maintenance; Secure stable European-level funding for cross-national data collection efforts; Establish best practice guidelines for data collection and recording that all economic agents can use. This would facilitate the dissemination and the use of multiple databases collected by institutions, firms, etc.
Objective 3: Reinforce outreach of economic knowledge
There is a distance between European economic research and both policy makers and the general public in terms of sharing economic knowledge and information. Action must be taken to reduce this gap, which is probably wider than in the U.S. This would enhance the efficacy of economics in its advisory role and in inducing sounder economic decisions at any level of political and economic activities.
Recommendation 1: Establish a continuing dialogue between the research community and the policy community
Why: Policy makers’ and researchers’ time horizons and objectives are different. Economists may have strong beliefs about the desirable policy and advocate for a particular policy agenda. As the academic process ensures the discussion and evaluation of diverse views, ideology usually does not endanger scientific discovery. In policy analysis, however, it is important to provide an impartial and credible summary for policymakers, who have limited time to review all the competing views. Policy makers, in turn, need immediate answers to contingent problems that economists may not immediately have. This does not mean that the dialogue between these two actors is undesirable. On the contrary, a stronger dialogue between the two communities is the best guarantee to ensure rapid dissemination of research results into policy-making and to foster the creation of new knowledge in policy-relevant issues. For example, this dialogue already exists and has proved very useful in some areas, notably in macroeconomics and finance, where the ECB and other Central Banks’ research centres have been a bridge between academic research and economic policy.
Actions: Organise regular high-level policy-research workshop series, as outlined in COEURE and similar experiences, with leading academics and policy people on specific topics; Finance the production of policy reports or insights to facilitate communication between academics and policy makers; Institutional funders of research could also be involved and act as mediators between the two parties.
Recommendation 2: Establish a format for communication for the general public
Why: Citizens will support research if they understand its value for society. Moreover, economic expertise also has a role to play in informing the public on key policy issues, as we have witnessed in the context of the Brexit campaign, where experts had little voice.
Actions: Initiate a public lecture series alongside policy-research workshops; Promote activities for wider dissemination through the media (e.g. VoxEu), social media, economics fairs (e.g. the Trento festival of economics); Promote the teaching of economics and statistics in higher education.
Objective 4: Enhance research funding
Why: In Europe, the volume of funding for economic research is small relative to the funding of other sciences, even other social sciences. To increase the productivity and foster a larger economic and social impact of economic research, we need to attract more and more successful applications by economists to funding agencies. Moreover, time is one of the most important factors in producing relevant research. Given that time is costly, multi-year funding becomes a vital element in ensuring that European economists bridge the gap with U.S. economists. It is crucial to have efficient mechanisms for research funding. To support research, funding in economics should be comprehensive and inclusive, which does not exclude funding research on specific challenges.
Recommendation 1: Evaluate quality/productivity of research on a regular basis
Why: Evaluation is a key tool for identifying the inefficiencies of the production process of research and for stimulating innovative actions.
Actions: Keep track and evaluate funded research by doing a (low cost) yearly survey/study on economists’ productivity. Monitor the impact of open access; Monitor the citation count of European research Follow PhD Graduates’ careers.
Recommendation 2: Increase efficiency of funding processes
Why: It is necessary to lower the barriers to entry and the “discouragement effect” that the “top-down”, thematic funding approach currently used by both EU and Member States funding agencies may have created, especially among economists and other social science researchers. In addition, an effort must be made to increase the percentage of articles published in top journals by researchers supported by public funding agencies.
Actions: Create a funders forum with the European Economic Association (EEA) as an outside advisor; Allocate a greater share of EU research funding via the mechanism of the ERC; Create suitable funding streams to support structured PhD programmes without imposing specific themes of research; Sustain the funding database developed in the COEURE project as an information source for cooperation in the analysis of funding research; Reduce the ex-ante administrative burden for grant management but increase ex-post accountability for the scientific quality of the output.
Recommendation 3: Improve the incentives to access funding
Why: Economists’ demand for funds must increase so that all the potential resources available should be efficiently exploited.
Actions: Promote activities that inform about and encourage applications to the ERC and other national and international research funding bodies; Promote activities that support researchers receiving outside research funding from the ERC (and other bodies), specifically regarding ethics approval; Provide an industry standard for ethics approval that the ERC agree to; Increase the flexibility of funding instruments to allow for research innovations and re-optimisation, depending on interim results and scientific risk-taking; Use common funding principles across agencies to facilitate institutions and reduce the administrative burden associated with administering research funding; Include teaching “buy out” among alternative funding options. An excessive amount of teaching may hinder research; Create a focused lobby for a place for economics in future framework programmes; Collaborate across social science disciplines as a means of establishing the value of research for the future of European economies and society.
Research Frontiers
These frontiers concern eleven topics, which have been defined under the COEURE project. Even if these topics – described in more detail in the book, “Economics without borders, Economic Research for European Policy Challenges” edited by the COEURE Executive Committee, - provide a wide perspective of current ‘frontier’ research in economics in Europe, relevant for economic policy and design, they are far from being exhaustive both in scope, since we do not cover all the topics in economics, and in detail, since we do not cover all the ongoing research within any specific topic. Nevertheless, they are representative of the value of current research in economics in Europe.
R&D, innovation and growth
Why: Innovation is a key driver of long-term growth. Recent research has highlighted the central role that firms and entrepreneurs play in this process, and new data have revealed how their incentives and capabilities affect macro outcome variables, such as the rate of innovation, industry and job turnover, welfare and inequality. These findings are, in turn, shedding new light on the role of competition and industrial policy, the welfare state and macroeconomic policy. However, we are only at the beginning of this intellectual revolution.
Actions: Improve our theoretical and empirical understanding of the dynamics of innovation and growth; Further develop the current dialogue between theory and data, e.g. by fostering methodological innovation combining macro models with micro data, improving researcher access to microdata (on individual income, on firms, and on patenting), and increasing data harmonisation and linking; Support the convergence between the literatures on development, trade and the internal organisation of firms, on the one hand, and the literature on growth, on the other.
Labour markets
Why: The “European Unemployment Problem” was perceived as a problem of the past before the euro crisis and, consequently, many funding agencies in Europe did not perceive funding for research on the topic as a priority, including support for new sources of employment/unemployment data. The euro crisis showed this perception to be a mirage, with a divide among European countries, in terms of their employment performance during and in the aftermath of the crisis. This divide shows the pervasive effect of ‘dual-labour markets,’ where jobs created in the recovery – and destroyed in the crisis – are mostly temporary jobs with low productivity, human capital accumulation, and a distortionary effect on investment into technologies in sectors such as construction that are based on these types of jobs.
Actions: Foster research – theoretical, quantitative and empirical – on the persistence and possible socio-economic effects of different forms of labour regulations and contracts; Further develop EU panel-data on employment (short and long-term), unemployment and inactivity transitions, as well as data suitable to link labour contracts, regulations, taxes and other labour institutions to productivity and human capital (formation and allocation), as well as to technological choice and innovation. Make these databases easily accessible to researchers; Support research on other policies and institutions affecting labour – such as unemployment insurance – leading to an assessment of best practices and their possible adoption across Europe.
Population, migration, ageing and health
Why: Migration as an important and critical issue for Europe in the current period needs to be studied in a dynamic setting, by following migrants’ decisions over time. In particular, it is important for Europe to understand the determinants by skill type of migrants’ permanent, rather than temporary, migration.
Actions: Foster research on the links between migrants’ decisions and alternative types of labour market regulation; Create long-term panel data on migration, possibly using new technology like, for example, GPS tracking mobile applications; Link national registries to create a homogeneous European database on migration flows and migrant characteristics.
Human capital and education
Why: The formation or ‘production’ of human capital through educational systems is of prime importance for any society. Not only does human capital codetermine prosperity and growth, but it also exerts a decisive influence on the degree of social inequality present in a society. Globalisation and technological progress have given further weight to these roles of education, which is already acknowledged and reflected in the so-called Lisbon Agenda of the European Union.
Actions: Foster research into the process of human capital formation, in particular seek better explanations for the observed heterogeneity of returns to education with a view to alleviating them through the provision of targeted additional resources; Support additional research into the determinants of teacher effectiveness through better teacher training, stricter teacher selection, appropriate hiring, retention and contract policies; Support research on governance issues in a school system that allows the determination of the impact of school autonomy, school accountability and centralised tests of student achievement; Support the creation, maintenance and accessibility of datasets throughout the EU that go beyond standard survey data; e.g. birth cohort sets, administrative or register data and standardise them in an internationally comparative way.
Competition and regulation in digital markets
Why: When it comes to speed and dynamics, digital markets are different from more traditional ‘brick and mortar’ markets. In terms of theory, in digital markets one is more likely to see competition for the market rather than competition in the market. We therefore need to explore more the dynamics of our traditional competition models, and their relations to the dynamics of innovation. Data on digital markets are now available in an order of magnitude that requires rethinking our empirical methods. Finally, digital markets challenge the single market objective and several traditional views on competition policy instruments.
Actions: To launch research programmes: On our empirical strategies to maximise the value of the new data that digital markets offer; On the limits to what the single market should mean, and its potential regulatory needs; On incorporating dynamic effects, which are clearly important in digital markets, without losing analytical tractability; On the link between competition economics and innovation policy.
Trade and Development
Why: It is particularly clear in this domain of trade and development in a globalised world that politics drive policies, which in turn drive research. Therefore, there is a tension between policy makers and researchers, with the mercantilist view being the main conflict. Value addition helps to bridge the discrepancy between macro and micro economics. Value addition turns attention to the distributional effect of trade, which is the new achievement of the Geneva Consensus.
Actions: Launch research programmes on the role of precaution versus protection; Promote research on the losers and winners of trade and globalisation. More generally, there is an urgent need to assess and quantify the redistributional effects of globalisation; Encourage the building of general models where the tax-equivalent of regulatory and information frictions can be calculated. Economic analysis studies prices and quantities, and measures welfare losses by deadweight loss triangles. This is of limited use in a world where frictions and barriers to transactions are neither taxes, nor quantity regulations; Stimulate a better understanding of how multinational firms operate, as this is a necessary first step to estimating their contribution to the costs and benefits of globalisation. While there are many quantifiable models to evaluate the gains from trade, the welfare gains from global production sharing either via arm’s length global value chains or via multinational production, are less clearly quantifiable.
Energy, environment and sustainability
Why: Energy and environmental policy issues are at the core of the EU policy debate. It is important to realise that in the area of energy there is a shift from a supply driven to a demand driven approach. In addition, although energy transition to a low carbon economy is widely accepted, the questions about its speed and exact methods are less obvious. Moreover, at this stage it is unclear how the rapid progress of IT may impact energy and environmental policies.
Actions: Promote research on the compatibility of environmental sustainability with maintained economic growth. Answer three basic questions: What will happen to the environment if economic growth continues? What will happen to the economy if environmental degradation (including climate change) continues? What will happen to economic growth if societies take strong action to protect the environment, including the mitigation of climate change?
Promote the inclusion of environmental systems in the macroeconomics models used for policy analysis, especially the costs of environmental mitigation; Foster research at the micro level to generate more detailed insights into individual and institutional attitudes and responses to the environment and environmental change, and the costs and benefits that people experience in their interactions with the environment; Perform more research on what will happen to European societies if they try to function outside the safe operating environmental space, and what kind of economic trajectory they may expect if they try to go back inside this space.
Regional Disparities and Efficient Transport Systems
Why: It is deeply ingrained in the EU’s DNA that “the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas” (Article 158 of the Treaty on European Union). European integration is supposed to lead, through more intense trade links and better transport infrastructure, to the convergence of income levels across countries. Belief in EU regional policy efforts to this end have been reinforced by recent decreases in transport and communication costs. However, this convergence process is slow and may result in widening interregional income gaps.
Actions: Foster research on the impact of falling transportation costs and new infrastructure projects on the locational choices of workers and firms and their impact on agglomeration forces; Foster research aimed at a reassessment of the use of the existing transport infrastructure for people and goods, in particular road and rail traffic networks; Promote research into the efficient use of more sophisticated road pricing systems for trucks as well as cars.
Skilled Cities and Efficient Urban Transport
Why: Spatial economics, both in theory and empiricism, is not central to present mainstream economics. This must change since the phenomenon of agglomeration has been shown to be an important driver of a society’s economic growth and social cohesion. Increasingly, wealth is created in cities and metropolitan areas. European cities are rather too small than too large to reap the full benefits of agglomeration; hence the need for efficient urban transport means.
Actions:
Foster theoretical as well as empirical research on the cost and benefits of agglomeration; in particular the development of models that incorporate transportation into the urban land market; Support research into the reduction of agglomeration costs in large cities through congestion pricing. In particular, foster research on the impact of congestion pricing on the planning and cost-benefit analysis of large infrastructure projects; Develop a European database for a US-like categorisation of European agglomerations into more unified “statistical metropolitan areas”. This requires comparable local data about employment, transport, GDP, human capital, physical attributes (buildings and roads), environmental quality (air quality and soil), and cultural amenities in European cities.
Fiscal and monetary policy
Why: The financial and euro crises have opened old and new questions on the role and design of fiscal and monetary policies, their interplay, and their effectiveness in stabilising the economy and stimulating growth and wellbeing. At the same time, these crises have stimulated new research and policies (e.g. unconventional monetary policies), but many problems are still open (e.g. how to deal with the Eurozone debt overhang, what fiscal policy should be adopted in times of crisis and social unrest) and the new policies need to be reassessed theoretically and empirically. Furthermore, the euro crisis has been a major test for the euro project and, as Brexit has shown, for the European Union itself. How the EU and the Euro Area will develop and the role it/they will play in the global economy in the years to come is possibly the main challenge that Europe is facing. Politics and political leadership are vital, but so are sound economic thinking, credible and effective policy and institutional design.
Actions: Foster rigorous macroeconomic research, which can help Europe in facing its main challenge. In particular, but not only, research linking monetary, fiscal and financial policies and institutions – possibly in the framework of a monetary union, reassessing the current and proposed EU and Euro Area frameworks; Further develop databases for studying how households and firms react to fiscal and monetary policies in good and bad times and how economic agents’ expectations respond to policy announcements and different economic institutional designs; Support research that addresses the long-term impact of fiscal and monetary policies (pensions, debt policy, etc.), as well as their possible impact on inequality and social unrest. Additionally support research that improves the toolbox of macroeconomists and policy makers (e.g. helping them to design and implement robust and credible policies and institutions).
Financial markets
Why: The recent economic crisis and the role financial markets played in it has once again brought to the forefront the debate on the need for coordinated intervention policies among European countries, and on the optimal degree of regulation in this vital and already highly regulated sector of the economy. Much has been done to ensure the stability of the banking sector and to fully enforce the European Banking Union and, in the near (not too distant) future, the Capital Markets Union. However, there is still much work left to do on policy coordination and regulation design, and the literature on capital markets needs to catch up with the literature on financial stability in banking, which is “light years ahead”.
Actions: Foster theoretical work by economists on how to map basic failures into regulatory reforms, which is at the moment severely lagging behind applied ex post analyses of the effects of the enacted regulatory reforms; Develop metrics and indicators that evaluate risks and conduct, in order to help regulators design ex-ante prudential policy and early crisis prevention mechanisms; Promote “Financial Literacy” among consumers, the ultimate users of capital markets; Open access to data that Central Banks and regulators collect but are not published in a timely fashion.
Inequality and Welfare
Why: While Europe has relatively low inequality as compared to e.g. the US, there is much heterogeneity in terms of mobility and migration. This partly increases heterogeneity in fundamental political views, in perceptions like beliefs about why people are in need, and in terms of self-reported happiness. Deeper European integration will be a failure if we do not cope with this heterogeneity. Understanding the social processes that lead to more equality is probably more important than resource transfers from North to South.
Actions: Create a network of researchers in economics and social sciences to understand the fabric of equality of opportunity; Build up dedicated panel data to study the dynamics of poverty, how people get into and out of poverty; Launch research programmes to analyse: The sustainability of nation welfare states in an environment where capital and labour are mobile; The issue of the convergence of southern societies to the social model of northern societies; Prepare the ground for a standing-up policy to fight poverty and promote equal opportunities.
LIST OF DISSEMINATION ACTIVITIES:
Regarding dissemination, a series of workshops took place to present and discuss each survey of WP1: Fiscal and Monetary Policies after the Crises; European Financial Markets: Policy Challenges and Research Agenda; EU Dual Labour Markets: Consequences and Potential Reforms; Energy, Environment and Sustainability in the European Context: Policy Issues and Research Agenda; Efficient Transport, Skilled Cities and Regional Disparities: the State of the Art and a Research Agenda; Towards a Smart Europe: a Research Agenda for Innovation and Growth; Trade and Development in a Globalized World: The Roadmap for a Research Agenda; Data and methods; Competition and regulation in markets for goods and services; Inequality and Welfare; Population, migration, aging and health; Human capital and education.
The workshop for WP2 “Funding the Economic Research that Europe needs” took place, co-organized by TSE and CEPR to assess the efficiency of economic research funding sources and systems across the different European countries.
A session on Economic Research and Economic Policy Challenges in Europe – The COEURE Project took place on August 22 in Geneva, during the EEA-ESEM 2016.
In addition, the COEURE Final Book “Economics without Borders - Economic Research for European Policy Challenges” will be published by Cambridge University Press in January 2017. This book, written by Europe’s leading scholars in economics and European policy, bridges the gap between economic research and policy-making by presenting overviews of twelve key areas for future economic policy and research in Europe. Written for the economists and policy-makers working within European institutions, it uses comprehensive surveys to demonstrate how economic research can contribute to good policy decisions, and vice versa, demonstrating how economics research can be motivated and made relevant by hot policy questions.
List of Websites:
http://www.coeure.eu/
