Volume 20, Issue 1

We review the state of the current industrial champions debate and make the case for nimble, innovative ‘Davids’, rather than resource-hungry ‘Goliaths’. These export-based firms have shown robust performance in recent years and may help economies increase their resilience in times of significant uncertainty. They are more autonomous than traditional champions and they are already in our midst. The challenge for policymakers is how to foster an environment that supports Davids while keeping an eye on national strategic interests.

Corporate wokeism may be sustainable in an imperfectly competitive market when the higher costs driven by the inefficiency in employing labor inputs are offset by the increase in positive-margin sales generated from being “woke.” This is the mechanism by which woke corporations are potentially rewarded rather than punished by the competitive process in the new market economy.

This paper looks at twenty first-century dollarization in Latin America. We emphasize that dollarization is a complex reform that can be implemented in many different ways. We draw three important lessons from these experiences: (1) keeping the central bank after dollarizing is an unnecessary institutional vulnerability that facilitates compulsive de-dollarization, (2) public opinion offers the most important defense of dollarization against populist attempts at reversal, and (3) even if dollarization is not supported with structural reforms (or such reforms are reversed), it remains superior to the counterfactual of no reforms with persistent, high and volatile inflation.

We use text-mining techniques to measure the accessibility and quality of information within the texts of interest rate announcements published by the Bank of Israel over the past decade. We find that comprehension of interest rate announcements published by the Bank of Israel requires fewer years of education than interest rate announcements published by the Federal Reserve and the European Central Bank. In addition, we show that the sentiment within these announcements is aligned with economic fluctuations. We also find that textual uncertainty is correlated with the volatility of the domestic financial market.

This article reviews the broad political economy literature on transatlantic security, while noting applications to the current challenges ranging from burden-sharing to enlargement to NATO/EU relations, all in the context of renewed state-centric threats to allies emanating from Russia in particular. Thinking about the policy practicalities of transatlantic security has interested scholars and practitioners since the early days of the post-WWII international order. The “O” in NATO emerged as an international “organization” in many ways to address the economic challenges posed by a defense investment imbalance, wherein the US assumed the largest share. This collective action problem and the concomitant burden-sharing challenges merit yet another consideration given a deteriorating security environment in Europe and globally. We discuss a variety of influences that shape the ability of the transatlantic community to invest in defense, while also highlighting the role of recent empirical developments, notably, NATO’s prospective enlargement and the EU’s policy initiatives in the defense field. The discussion lays groundwork for a broader approach to transatlantic security, that is, beyond the canonical understanding of the collective action problem, and stresses a policy perspective that encourages thinking about levers by which burden-sharing arrangements can be adjusted to deal with unfavourable dynamics of defense investment.

Monetary history is a history of inflation. The Statute of the ECB, as a copy of the Bundesbank Act, can be viewed as an attempt to establish the euro as apolitical money. Experience with the short history of the euro shows the limits of this attempt. Fundamentally, the state remains the final authority in monetary matters. The article begins with a very brief outline of monetary history and the efforts undertaken to achieve a stable currency. The second chapter analyses the Statute of the ECB as an attempt to shield monetary policy from political influence. This is followed by a review of the experience gained in the short history of the euro. The last chapter draws conclusions about the possibilities of apolitical money.

The ECB’s Transmission Protection Instrument (TPI) supports the effective transmission of the monetary policy stance throughout the euro area, which is a precondition for the ECB to deliver on its price stability mandate. If activated, the Eurosystem would purchase securities issued in jurisdictions that experience a deterioration in financing conditions not warranted by country-specific fundamentals. The TPI thereby complements other tools to counter risks to the transmission mechanism such as the Pandemic Emergency Purchase Programme (PEPP) reinvestment flexibility and the Outright Monetary Transactions (OMT) programme.

If agreed, the new European Commission legislative proposals on the reform of the fiscal framework will represent a major change. First and foremost debt replaces budget deficit as central variable, and debt sustainability assessment becomes a pivotal concept. It allows to introduce a multiannual approach and more flexible framework disconnected from numerical rules, which, in principle, gives member states greater ownership but also greater responsibility for their choices. It can only work if member states recognise that debt sustainability assessment is a risk-management tool that has to be taken seriously.

In the euro area, the sovereign debts of all Member States aspire to be equally safe but investors persistently discriminate between country debts. Empirically, the evidence suggests a clear role of ‘fundamentals’ in explaining government bond spreads between euro area countries. In particular, the level of indebtedness is found to weigh strongly on spreads in a non-linear fashion. Fiscal factors may however be tempered, or conversely exacerbated, by other factors including the external position, potential growth, and institutional quality. Notwithstanding other pressing policy priorities such as the energy transition and climate change, policy reforms aimed at credibly ensuring sustainable national debts therefore remain central to the governance equilibrium of the euro area.

The European Central Bank (ECB) is currently facing major challenges. Fragmentation of government bond yields across Member States of the European Economic and Monetary Union, based on different economic and fiscal policies, hampers a uniform transmission of monetary policy. At the same time, climate-related financial risks need to be addressed. In recent years, the ECB is meeting these challenges by making selective bond purchases and deviating from the principle of market neutrality. This study discusses whether such selective interventions by the ECB are justified from economic and legal perspectives. We conclude that choosing winners and losers, discriminating on the grounds of social, economic, environmental, or other grounds is beyond the ECB’s competence and outside of the ECB’s democratic foundation.

The autumn 2022 economic upheavals that brought down British Prime Minister Liz Truss’s government represented an ultimate extension of a high-risk exercise in British exceptionalism: the June 2016 referendum decision to leave the European Union. The ill-fated 23 September 2022 ‘mini budget’ introduced by Truss and Kwasi Kwarteng, her chancellor of the exchequer – like the referendum outcome six years earlier – was a landmark gesture of national independence. ‘The most ambitious and disastrous budget in modern British history’ illustrated how the intertwining forces of politics and economics set limits on ‘go it alone’ policies. The lessons reverberate beyond the UK’s borders.

Amid rising global inflation, Japan, which has long struggled with deflation, is now witnessing increasing prices. Inflation and the appointment of a new Bank of Japan governor in April 2023 bring the future of its monetary policy into question. Changes in monetary policy could significantly impact the economy, particularly public finances, given Japan’s high debt. The Bank of Japan must carefully observe market reactions to changes in monetary policy, while the government should aim to improve its fiscal situation. In the meantime, Japan must carefully consider the effectiveness and potential drawbacks of monetary and fiscal policies.

Public debt can be reduced in three ways: (1) repayment; (2) default; and (3) indirect default through monetary financing accompanied by debasement or followed by currency reform. In the course of history, repayment was more the exception than the rule, default often the only available way when a government had no control over the currency in which it borrowed, and indirect default more the rule than the exception. In this paper we review the three ways of debt reduction with exemplary references to historical events. We conclude that financial repression supplemented with debt repayment is likely to be the preferred way for public debt reduction today. The alternative would be currency reform.