Superstar Firms, Aging and Euro Success in Vogue at ECB Retreat

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Superstar companies that dominate their competition, aging populations, and the euro area’s progress toward a fully fledged economic union are themes on the table at the European Central Bank’s forum in Sintra this year.

The annual gathering in a swanky Portuguese resort will this week take stock of the first two decades of the euro and look at what lays ahead. Over the course of three days, the conference will hear from scores of academics and central bankers including ECB President Mario Draghi and Bank of England Governor Mark Carney.

While current issues like the economic slowdown and global trade tensions are bound to overshadow the academic debate, these three papers are likely to stoke a discussion about the longer-term challenges facing the 19-nation region:

Superstar Firms

Laura Alfaro, Maggie X. Chen and Harald Fadinger give a European twist to research into “superstar firms.” The growing market power of companies like Amazon or Alphabet Inc.’s Google featured in discussion at last year’s Federal Reserve symposium in Jackson Hole.

Superstar firms have often been blamed for stifling competition in the U.S., although Europe has remained largely immune to their impact because of stronger antitrust laws.

The three researchers focused on the emergence of industrial clusters around very large companies across Europe. They found the agglomeration is more pronounced in the euro zone than elsewhere in Europe, or even in the U.S. Larger and more productive factories tend to congregate more.

What does it mean for Europe, where the talk is increasingly about building national champions? Regions like Bavaria that are more specialized and agglomerated in manufacturing have benefited from faster growth, but finding a one-size-fit all recipe to replicate their success is tricky.

Trade Convergence

Despite constant hand-wringing over euro being an unfinished project with its disparate 19 economies growing at different speeds, the opposite might actually be the case, according to Jean Imbs and Laurent Pauwels.

They looked under the hood of euro-area trade data at so-called export intensity, which shows how much of value chains in 50 industries get exported. Their conclusion is that trade linkages between euro-zone states are intensifying, and are helping consumption patterns to converge.

The researchers found that services -- long a trouble spot in building the single market -- are increasingly correlated. In financial markets, deregulation has led to risk-sharing reaching levels that “appear to be more complete than between U.S. states.”

Demographic deficit

Things look less rosy when it comes to aging. A paper by Axel Boersch-Supan, Duarte Nuno Leite and Johannes Rausch doesn’t sugarcoat the problem: the extent of demographic changes in the euro zone is dramatic and finding a solution won’t be easy.

For one, their analysis shows that go-to fixes like pension reforms and increases in the retirement age have often led to a backlash. In France, Italy and Germany, for example, people actually started to retire early, which reduced labor supply especially among skilled workers.

The problem is that demographic developments differ significantly among euro zone members, leading to a divergence in growth rates. Increased digitalization and investment help, but public policy will need to get involved. The ECB also has a stake in that.

“Understanding and minimizing the opposition to the free flow of capital, addressing the sources of instability in global financial markets, and fostering policies that reduce frictions and instability are important goals also for central banks in order to exploit the chances of population aging,” the researchers say.

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint

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