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TOWARDS A RESUMPTION OF BANKING CONSOLIDATION IN SOUTHERN EUROPE? Published on 16 Sep 2020 by Thomas HUMBLOT
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CaixaBank and Bankia, respectively the third and fourth largest Spanish banking groups in terms of CET1, formalized on September 3, 2020, the opening of negotiations for a potential merger. If it materialized, this operation would consolidate the Spanish banking system. The level of concentration of the latter is comparable to that observed on average in the euro area, following two successive waves of consolidation between 2008-2009 and 2012-2013 from which CaixaBank and Bankia themselves emerged. The question is whether or not this could be the prelude to a broader movement of concentration that the ECB has been in favour of since several years. Indeed, the banking supervisor sees consolidation as a way to improve the financial profitability and resilience of banks1. It is in this perspective that, in July 2020, it published a consultative document aimed at encouraging bank mergers2.

[1] See for example the interview of Edouard Fernandez-Bollo, ECB representative to the Supervisory Board, « Consolidation can secure safe and sound banks » in ECB’s Supervision Newsletter, August 2020.

[2] ECB, Guide on the supervisory approach to consolidation in the banking sector – Draft, July 2020.

NORDICS NOT PARTICULARLY OPTIMISTIC DESPITE SMALLER RECESSION Published on 9 Sep 2020 by Hubert De Barochez
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While Europe has been hit hard by the Covid-19 pandemic, Nordic countries have been relatively less affected – with the exception of Sweden, where restriction measures have been particularly soft. As a result, Nordic economies have been among the most resilient in Europe. In the second quarter, GDP fell by “only” 8.3% in Sweden, 6.9% in Denmark, 5.1% in Norway, and 4.5% in Finland. That compares with drops of 9.8% in Germany, 13.8% in France, and nearly 12% in the euro area as a whole.

That said, businesses and consumers in Nordic countries are not especially optimistic about the economic outlook, which certainly reflects the region’s reliance on global trade. Since the start of the Covid-19 crisis, the Economic Sentiment Indicators (ESI) for Sweden and Finland have moved in line with that for the euro area. Meanwhile, the indicator for Denmark has markedly underperformed. Although these countries look fairly well positioned to weather the crisis – notably thanks to their economic model – lack of confidence could be a clear drag on economic recovery there.

CHINA: INVESTMENT RECOVERY CONTINUES Published on 2 Sep 2020 by Christine PELTIER
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Activity indicators for July reflected the continued recovery of the Chinese economy. Real GDP growth already rebounded to 3.2% year-on-year in Q2 2020, up from a 6.8% contraction in Q1. The acceleration in investment growth since March has been driven mainly by public infrastructure projects, the construction and the real estate sectors, which have been supported by the government’s stimulus measures. Manufacturing investment has recovered more slowly, held back by the financial difficulties of corporates, particularly amongst SMEs.

In the second half of 2020, investment in public infrastructure is set to remain strong, helped by continued expansionary fiscal policy. Monetary policy, by contrast, might become slightly more cautious, contributing to a slowdown in the recovery in the real estate sector. Lastly, investment in the manufacturing sector could strengthen slightly given the rebound in profits of industrial enterprises since May. Exports of manufactured goods have strengthened over the past two months, but their outlook remains clouded by the weakness of global demand and tensions between China and the US.

On the Same Theme

Nordics not particularly optimistic despite smaller recession 9/9/2020
While Europe has been hit hard by the Covid-19 pandemic, Nordic countries have been relatively less affected – with the exception of Sweden, where restriction measures have been particularly soft. As a result, Nordic economies have been among the most resilient in Europe. In the second quarter, GDP fell by “only” 8.3% in Sweden, 6.9% in Denmark, 5.1% in Norway, and 4.5% in Finland. That compares with drops of 9.8% in Germany, 13.8% in France, and nearly 12% in the euro area as a whole. That said, businesses and consumers in Nordic countries are not especially optimistic about the economic outlook, which certainly reflects the region’s reliance on global trade. Since the start of the Covid-19 crisis, the Economic Sentiment Indicators (ESI) for Sweden and Finland have moved in line with that for the euro area. Meanwhile, the indicator for Denmark has markedly underperformed. Although these countries look fairly well positioned to weather the crisis – notably thanks to their economic model – lack of confidence could be a clear drag on economic recovery there.
Recovery fund: will the EU kill two birds with one stone? 7/29/2020
Through the Recovery and Resilience Facility, an essential part of its Next Generation EU plan, the European Union (EU) will disburse grants and loans to member states according to precise criteria. Allocations for 2021 and 2022 will depend on each country’s population, GDP per capita, and unemployment rate. The same criteria will be used for 2023, except for the unemployment rate, which will be replaced by the loss in real GDP observed this year and the cumulative loss observed over the period 2020-2021. With that in mind, the think tank Bruegel has estimated the allocations by country[1]. When excluding the most developed countries (in red), it appears that grants will particularly benefit those that profit the least from their membership to the EU’s single market – according to the results of three studies that seek to quantify these benefits. That is partly a coincidence, as the Covid-19 pandemic has particularly affected countries that benefit relatively less from the single market, such as Italy and Spain. Nevertheless, this also expresses the EU’s two-pronged strategy: improving the resilience of the most fragile countries in addition to facilitating the recovery in the whole region. The aim is to avoid further economic divergence between member states. Overall, all countries should profit. Those benefiting the least from grants count, to support their exports, on demand from the other countries, for which economic disaster has been made less likely by the recovery plan. [1] Bruegel, Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?, 23 July 2020
Classification of European banks according to their business model: an objective approach 7/28/2020
The analysis of banks' business model responds to strategic as well as regulatory needs. It can also contribute to studying the effects of monetary policy, amongst other things. However, no harmonized definition exists in the literature. The authors therefore regularly use hierarchical cluster analysis to objectively classify banks according to their business model. These empirical, algorithm-based approaches rely heavily on balance sheet variables. Still, the distribution of bank sources of income and assets under management are also relevant variables. We therefore perform our own classification of European banks according to their business model using all these variables. In addition, we apply a divisive (top-down) hierarchical classification that appears to perform better than its agglomerative (bottom-up) version, which is more common in the literature. Finally, the retention of a supplementary principal component, in addition to the two that are traditionally retained, improves the quality of our classification.
Europe: fiscal policy in action 6/30/2020
The Covid-19 shock has triggered a significant fiscal policy response by European Union member states. Even though it is likely to be short-lived, the 2020 recession will be historic. The fiscal response has therefore been essential in avoiding much more serious and longer-lasting economic consequences. Member states have not all been affected in the same way by the current crisis, and the scale of their fiscal responses varies. The European response has been one of the few positive aspects of the crisis. However, the challenges are not yet over. Levels of risk and uncertainty on both the public health and economic fronts will remain particularly high over the next few months. An agreement on a European recovery programme is therefore needed and there is little likelihood of any letting up in national efforts.
Boomerang economics 6/26/2020
Corporate sentiment has jumped following the easing of Covid-19 related restrictions. There is a risk of excessive enthusiasm because better business expectations do not tell us where we are in terms of the level of activity and demand. The current phase of the rebound is mechanical. It shows that the supply side starts to function again. The real question however is what happens to the demand side in the coming quarters. Companies and households are confronted with limited visibility, so caution will prevail.
The long shadow of unemployment 6/19/2020
Recent economic data have improved on the back of the easing of lockdowns. This may create a feeling of false comfort. The effects of the severity of the crisis will make themselves felt well into the future. A key factor is the rise in unemployment and in unemployment expectations. Both weigh on household spending, due to related income losses and increased precautionary savings. The major national central banks of the Eurosystem expect unemployment to increase in 2021, despite the economic recovery. When visibility remains limited and the pressure on profits high, many companies have no other option than to reduce their labour force
DESI index, a roadmap for the European Union 6/17/2020
The European Commission has recently published the 2020 Digital Economy and Society Index (DESI). DESI is a weighted average of five indicators: connectivity, citizens’ digital skills, use of internet, integration of digital technology in businesses, and digital public services. Scandinavian countries perform the best, with Finland, Sweden and Denmark at the top of the ranking. Italy is only 25th, while France (16th), Germany (12th) and Spain (11th) are close to the EU average. The Covid-19 crisis and the lockdown have led to a greater use of digital technology. As technological transformations accelerate in many areas (artificial intelligence, 5G, e-commerce), EU economies will need to pursue their efforts towards greater digitalisation in order to develop new sources of growth and employment.    
Corporate leverage as a headwind during the recovery 6/12/2020
One of the longer-lasting consequences of this crisis is a forced increase in corporate gearing A high level of corporate leverage can act as a drag on growth. Research shows that firms with higher leverage invest less than others. This reduces the effectiveness of monetary accommodation. Highly indebted companies may also suffer a lasting loss in competitiveness vis-à-vis their better capitalised competitors. It implies that policies aimed at recapitalising companies should have lasting favourable effects on growth.
After an ambitious proposal, preparing for difficult negotiations 5/29/2020
The European Commission is proposing a comprehensive plan to support growth and achieve the EU ambitions in terms of climate policy and digital strategy. Such an effort is necessary in order to avoid that the current crisis would increase the economic divergence between member states. Such a development would weaken the functioning of the Single Market and weigh on long-term growth. The Commission proposes a combination of grants and loans at favourable terms, funded by debt issued directly by the EU. Given the resistance of certain countries to grants, negotiations on the proposal will be tough.
Central European economies should not avoid a recession in 2020 5/20/2020
Central Europe has registered a better growth performance in Q1 (-1% q/q), compared to -3.3% in the European Union. In Hungary, Romania and Bulgaria economic growth had even remained positive during this period. However, this Q1 growth performance is rather the consequence of a late impact of the Covid-19 than a byproduct of a lower impact. Manufacturing production figures show that the economic downturn has gathered pace in Central Europe in March. This downturn is now stronger in Hungary, Romania and Slovakia than in European Union’s average. Exports should be one of the main drivers of the contagion towards Central Europe. Openness to trade is high in these countries and the export loss is already stronger in several of them compared to EU average export loss, particularly regarding the car sector. As a consequence, Central Europe’s GDP should decrease by -3.8% in 2020 (-5.8% in Slovakia, -5.3% in Hungary, -4.8% in Romania, -4% in Czech Republic, -3.5% in Bulgaria and -2.9% in Poland).

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