1,721,045 research outputs found
Why so much wage restraint in EMU? The role of country size: Integrating trade theory with monetary policy regime accounts
Full text linkWage growth has remained under control after the formation of the European Monetary Union (EMU). The literature has advanced numerous explanations to account for this phenomenon. But, arguments about the need to preserve competitiveness in an enlarged market remain too generic. At the same time, analyses that focus on the alleged deterioration of labour market institutions (e.g. de-unionization, decentralization, etc.) find little empirical support. More promising are the results obtained by Posen and Gould (2006) indicating that behind the generalised shift towards wage restraint is enhanced monetary credibility in EMU. This paper builds on the school in comparative political economy that models the interaction between wage bargaining systems and the monetary policy regime but integrates it with more traditional trade theories. The argument developed here is that the degree in wage restraint varies according to country size. The relationship between wage growth and economy size is hump-shaped. Wage compression is especially present in large countries (e.g. Germany) that entertain intense trade relations with the rest of the eurozone. This is because wage-setters in large countries fear that they might affect average price conditions in the euroarea forcing a reaction by the ECB, which is highly undesirable as it would dampen not only domestic demand but also demand conditions in the rest of EMU with employment costs spread across the board from more protected to export-oriented sectors. Downwards pressures on wages are less pronounced in small countries. In spite of the fact that small open economies perceive cost competitiveness as a key driver of their economic growth, wage-setters in small countries can nonetheless act as free-riders in the new EMU monetary regime. Finally, countries of intermediate size display slightly faster wage growth than in the rest of EMU because neither do they believe capable of affecting eurozone inflation, nor do they look at the improvement in cost competitiveness as the one and only chance for their economic survival
Trade shocks and relative consumption : why the European middle class is turning (far) right
Full text linkThis paper relates far-right political preferences to changes in relative consumption stemming from trade exposure to low-quality producers such as China. The availability of more affordable varieties benefits the poor, while low-to-middle income groups stand to lose from such import shocks. Relative consumption deprivation awakens their perception of losing out relative to other once marginalised groups in the same society. Resentment for status loss explains the recent rightward drift in politics that is then channelled into support for the far-right especially during the main part of the China shock from 2000 to 2006. I empirically explore this hypothesis by relating measures of relative consumption deprivation to survey-based data from the European Social Survey (ESS) on a sample of 18 European countries over 2002- 2014
The long-term EU budget: Size or flexibility?
Full text linkThe EU is in the process of negotiating its 2014-20 financial framework. Failure to reach an agreement would imply a delay in the preparation of the strategic plans each member state puts together to explain how it will use Structural and Cohesion Funds. Even if solutions are found - for example annual renewals of the budget based on the previous year's figures - there will be political and institutional costs. EU leaders have too often and too forcefully advocated the use of the EU budget for growth to be able to drop the idea without consequences. · The overwhelming attention paid to the size of the budget is misplaced. EU leaders should instead aim to make the EU budget more flexible, safeguard it from future political power struggles, and reinforce assessment of the impact of EU funded growth policies. · To improve flexibility a commitment device should be created that places the EU budget above continuous political disagreement. We suggest the creation of a European Growth Fund, on the basis of which the European Commission should be allowed to borrow on capital markets to anticipate pre-allocated EU expenditure, such as Structural and Cohesion Funds. Markets would thus be a factor in EU budget policymaking, with a potentially disciplining effect. Attaching conditionality to this type of disbursement appears legitimate, as capital delivered in this way is a form of assistance
A European fund for economic revival in crisis countries
Full text linkSignificant volumes of Structural and Cohesion Funds have been pre-allocated but remain undisbursed or uncommitted. In Portugal, unused funds amount to 9.3 percent of GDP, in Greece close to 7 percent, and in central and eastern European countries about 15 percent. These funds should be part of a temporary European Fund for Economic Revival (EFER) for 2011-13, which would promote economic growth in crisis-hit countries and facilitate structural reforms. For countries under financial assistance in particular, the European Commission has a role to play in identifying the right objectives for which the funds should be used. The Commission could decide to manage the funds directly with the support of an executive agency. Greater efforts should be made to exploit synergies between EU grants and European Investment Bank loans, allowing EIB loans to finance the total costs of a project or programme in small countries, and leveraging the whole EU budget to attract private investment
Euro area macroeconomic imbalances and their asymmetric reversal: the link between financial integration and income inequality
Full text linkThis paper explores the impact of the Economic and Monetary Union (EMU) and the ensuing financial integration on Euro Area (EA) macroeconomic imbalances. It is found that EMU caused an exceptional deterioration of current account positions in relatively unequal EA countries more than in the others. The explanation provided is that the large increase in money supply following the abolition of capital controls in 1990, of exchange rate risks in 1999 and the parallel softening of domestic credit market regulation throughout the 1990s that lead to downwards interest rate convergence had the effect of relaxing collateral constraints specifically for lower-income households, whose share is found to rise with levels of income inequality. Optimistic expectations about future income led to over-borrowing by these groups. Consequently, current account reversal was asymmetric because the crisis forced indebted lower-income (unskilled) households to abruptly reduce consumption, as they were the first to be pulled out of the labour market and hardly had financial buffers. The hypothesis is tested using a difference-in-difference approach to panel data
Current Account Imbalances: The Role of Competitiveness and of Financial Sector Dynamics
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Euro Area Current Account Imbalances: A Tale of Two Financial Liberalizations
No full textThis paper explores the extent to financial liberalization in the euro area had a differential impact on members’ current account positions. Theoretically, it builds on an inter-temporal consumption model augmented with household heterogeneity. Low/middle income groups are impatient and constrained, whilst high-income groups are patient and under no constraint. Increased access to international credit in previously financially repressed countries implies a relaxation of collateral constraints specifically for the (low-skilled) low/middle-income group, who differently from high-income agents borrows to finance current consumption. It follows that financial liberalization is associated with deteriorating external positions there where initial levels of financial openness are lowest and the share of the (low-skilled) low/middle-income group with potentially binding collateral constraints largest. The same approach is useful to understand asymmetric current account reversals, which relates to suddenly biting collateral constraints in indebted peripheral countries, where the Great Recession hit disproportionally the low-skilled
On the effectiveness and legitimacy of EU economic policies
Full text linkFor markets, European economic governance faces a crisis of policy effectiveness, while for citizens the European Union faces a democratic legitimacy crisis. The introduction of the European Semester economic policy surveillance system has not resolved these problems. Policy guidance deriving from the Semester is not focused enough on areas of significant spillovers and on problem countries, and national compliance is often procedural rather than actual. This brings into question both the Semester’s effectiveness and the democratic legitimacy of the EU’s new intervention rights, which allow intrusion into national policy-making
Are Inflation Differentials in the Euroarea a Challenge to EMU Governance? Some preliminary evidence on the political sustainability of divergences in EMU
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