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How to solve Europe’s three biggest problems

David Folkerts-Landau (ed.), (2016), “How to solve Europe’s three biggest problems”, Konzept – Deutsche Bank Research, June

In this issue we tackle three of the most intractable problems facing Europe today: moribund economic growth, the refugee crisis and a banking sector that struggles to satisfy anyone even eight years after the financial crisis. Our three feature articles show that credible solutions exist provided that governments, policymakers, investors as well as the public can jettison dearly-held beliefs, economic orthodoxy and dogma. First up we call for the European Central Bank to end its ever-looser monetary policy. Even if it was the right path once, today the balance of trade-offs weighs more heavily to the downside. There are distortions galore, savers punished, speculators rewarded and all the while governments across Europe have been let off the painful reform hook. Likewise with the refugee crisis in Germany we lay out the three key areas where nativists and liberals should be able to find common ground in order to move the immigration debate forward. Most importantly the issue of cost and iniquity can only be resolved via reforms to the welfare system whereby benefits are phased in for new arrivals. As we explain, a tiered approach to social security is hardly the odious rarity claimed by some. It is a widespread practice around the world. Our final feature article looks at Europe’s banks and argues that it is time to allow the sector to do its job properly. While there is no doubt that finance lost its way pre-crisis and many reforms are overdue, it is fair to ask whether utility-like regulation is proving counterproductive. Banks are too nervous to lend, too burdened to provide liquidity to markets and too hobbled to finance entrepreneurial bets on the future. The effect on economic growth is becoming apparent to everyone. Likewise we question whether the system overall is safer, even if banks certainly are.

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