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Regional Papers on Europe

The Economic Impact of Italian Market Reforms
Giovanna Maria Dora Dore, World Economics, December 2017
Italy’s labour market is highly segmented by gender and age with high labour costs, high rates of self-employment and undeclared work, high minimum wages, strong dismissal constraints and uneven job opportunities between Northern and Southern regions. Italy has experienced three decades of reforms aimed at liberalising its labour market, boosting competitiveness and introducing flexibility to address low productivity and weak employment dynamics. The 2014 Jobs Act is Italy’s latest market labour reforms aimed at rationalising employment protection legislation, improving the effectiveness of social protection and boosting female and youth participation in the labour force. Labour market data for the first 18 months of the implementation of the Jobs Act point to positive upward trends for both employment and job creation as well as to a decrease in unemployment.
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New Estimates of Regional GDP in the UK
Julian Gough, World Economics, June 2017
Real GDP is estimated by applying a price-level estimate or deflator to nominal GDP, but GDP levels in the UK’s 12 inhabited regions are only reported at nominal prices with no allowance for differences in regional prices. A purchasing power parity (PPP) rate for the £ in each region, measuring how much a typical bundle of goods and services would cost, is required to create an accurate index to apply to nominal GDP in order to get real regional values. A solution lies in creating an expenditure-based, weighted, regional price index for consumers’ expenditure, government spending, investment and exports, to adjust nominal data to real price levels. Using imperfect public data, creating an expenditure-based index makes a significant difference to the size of each regional economy and to GDP per capita. In real terms, the London economy shrinks by 12%, the South-East contracts by 2% and all other regions increase in size.
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The Environmental Kuznets Curve: The Validity of Kuznets and its Policy Implications
Harry Booth, World Economics, March 2017
The Kuznets curve is an income inequality measure used in development studies which predicts an inverse-U shape with inequality first rising with industrialisation and then declining, as more and more workers join the high-productivity sectors of the economy. Criticism of the Kuznets curve has focused on the validity of the data it was hypothesised upon as well as its econometric techniques. Kuznets’s work was based on time-series data for just three countries: the United States, the United Kingdom and two states in Germany. Kuznets used the historical shift from agriculture to industry to presume that inequality grew in both the UK and the USA before his time-series data started, although he had no data to confirm this. Later studies using relevant, up-to-date data have found that the Kuznets curve might not be strictly true for a specific country, but that it may hold true for a cross-section of countries, at a specific point in time.
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Exploding Debt Syndrome: The Politics of the Greek Debt Crisis
Elliot Y. Neaman & Shalendra D. Sharma, World Economics, September 2016
The economic roots of the Eurozone’s sovereign debt crisis are fairly well understood by scholars and analysts, but the political forces behind the crisis less so, despite the fact that the Eurozone predicament derives fundamentally from an intersection of mostly political factors, which led to the recent breakdown in European Union relations between northern and southern states. This paper fills in many of the gaps, by examining both the historical and the political forces behind the current Eurozone debt crisis with reference to Greece’s continuing debt problems.
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The Eurozone: Was the UK Right to Opt Out?
Julian Gough, World Economics, September 2015
This article examines the performance of the British economy since the beginning of the single European currency in 1999, in relation to that of the Eurozone countries. The aim is to consider whether the retention of sterling with the freedom to pursue an independent monetary policy produced a better economic performance. Relative performance between the UK and the Eurozone countries is measured between 1999 and 2014 in terms of inflation, real GDP growth, the government public budget deficit/surplus and total government debt. The evidence indicates that the U.K. outperformed the Eurozone on almost all criteria until 2005, whereas in the following five years this better performance was gradually lost during the period of the global economic and financial crisis. However, since 2010 the UK has again outperformed the Eurozone on most measurements. The poor showing of the UK in the middle period can be attributed to policy failures by the third Labour government resulting in a deterioration in government finances, huge budget deficits and increased government debt. Since 1999 the decision to remain out of the Eurozone appears to have been justified.
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The IMF’s Uneasy Excursion into the Euro Zone
Graham Bird, World Economics, September 2015
Much of the evolutionary history of the International Monetary Fund reflects its responses to unanticipated events. The crisis in the Eurozone at the end of the 2000s was largely unexpected. For many years prior to the crisis, the IMF’s clientele had been made up of low income and emerging economies and it was generally assumed that the future pattern of IMF lending would see some of them graduating from the Fund, rather than the Fund once again lending to ‘advanced’ economies. Programs in Greece, Ireland, Portugal and Cyprus confronted the Fund with a range of unfamiliar problems. These cover the IMF as a crisis averter, crisis lender and crisis manager. In particular the conventional design of IMF adjustment programs is not feasible in countries that belong to a monetary union. In this regard the ‘major overhaul’ of conditionality made in the aftermath of the global economic crisis may have been unhelpful. While various reforms could enhance the Fund’s ability to help Eurozone countries in the future, perhaps the main lesson that emerges from this interlude is that it is better for the IMF’s assistance not to be needed in Eurozone countries.
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Measuring GDP in Europe
World Economics, June 2015
In Europe the quality of national income statistics is less constrained by the capacity and resources devoted by national statistics offices to follow international best practice than is the case in many other parts of the world. In addition the members of the European Union have to meet the harmonised standards of national accounting set by Eurostat which are based on the United Nations System on National Accounts. However, despite recent modifications both these standards fail to adequately record the size of the informal economy.
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What is Britain worth to the next generation?
Angus Hanton, World Economics, June 2015
Government economic policy implicitly aims to build up useful reserves for future generations, or at least to not burden our children and grandchildren with unsustainable debt. Surprisingly, even though this must be an important policy objective, it is rarely discussed or measured. This paper estimates what Britain is now worth to the next generation and we explain how well recent British governments have done in building up value to hand on. The results are eye-watering for anyone who has assumed that there has been a steady build-up of wealth.
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Is part of the Latvian economy already in the middle-income trap?
Igors Kasjanovs, World Economics, March 2015
There are fears that the observed moderation of growth rates in Latvia suggest it may soon be stuck in a Middle Income Trap. No uniform understanding has been reached as to what a Middle Income Trap is and what signs testify to its existence. In order to avoid the danger of this trap structural reforms will be necessary which together with higher quality investment could raise Total Factor Productivity.
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The Economic Future of Europe: Change of diet or premature death?
Jan Libich, World Economics, December 2014
What does the economic future hold for Europe? In the aftermath of the 2008 crisis, four macroeconomic threats have been subject to heated debates by economists and politicians. Some fear that Europe may face (1) secular stagnation, (2) sovereign defaults, (3) excessively high (or low) inflation and (4) collapse of the common currency euro. This paper discusses the relevance and potential drivers of these four threats. Importantly, it highlights the relationships between them, offering an analogy between the European economy and an overweight patient suffering from diabetes. The discussion implies that Europe needs long-term austerity but short-term stimulus, precisely the opposite of what most European countries have done since 2010. In particular, the paper stresses the need for conceptual reforms of public finances that take into account the ageing population trend, especially the pay-as-you-go financed pension and health care schemes. It is argued that such reforms would not only decrease the risk of costly sovereign defaults, but also reduce uncertainty in the economy, stimulate economic activity, and thus minimise the risk of a secular stagnation and a deflationary trap in the aftermath of the 2008 crisis. In addition, they would decrease the likelihood of excessive inflation further down the track caused by unpleasant monetarist arithmetic, as well as reduce the danger of a euro breakup. This scenario parallels an overweight patient adopting a suitable diet that helps him reduce his weight, blood pressure and insulin dependence – alleviating the risk of premature death.
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The Greek Economic Crisis - is the Euro to Blame?
Andreas Hatzigeorgiou, World Economics, September 2014
The euro has been at the centre of reporting and discussion on Greece’s economic crisis. This article analyses the build-up, outbreak and development of the crisis in Greece, with the aim to answer whether the crisis can be traced to the country’s entrance into the Eurozone. By identifying a few of the underlying causes of the crisis, the article concludes that Greece’s crisis cannot be blamed on membership of the EMU. Nor is the financial meltdown and global recession of 2007–2008 to blame. Even without the euro, it is likely that Greece would have found itself in an economic crisis.
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Strengthening the Early Warning Exercise: Enhancing IMF and FSB coordination
Bessma Momani, Skylar Brooks, Michael Cockburn, Warren Clarke & Dustyn Lanz, World Economics, September 2013
Following the 2007–2008 global financial crisis, the G20 leaders tasked the International Monetary Fund (IMF) and the newly created Financial Stability Board (FSB) to jointly undertake Early Warning Exercises (EWEs) in order to identify vulnerabilities within the global financial system and encourage appropriate policy responses. This paper argues that a series of challenges have prevented the EWE from realizing its full potential. In particular, the advantages accruing from the joint nature of the exercise have not been fully realized. The paper then puts forward recommendations intended to improve the process and encourage implementation of EWE findings among national policymakers.
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The EMU Versus the EPU: A historical perspective on trade, payments and the European financial crisis
Juan Carlos Martinez Oliva, World Economics, June 2013
This article draws upon the analogy between the current European institutional setting, in the face of the current European crisis, and the rules and institutions that were established in the post-war years to achieve trade liberalisation and a multilateral payments system in Europe. Differently than in the past, a feature of today’s crisis is that trade and payment imbalances have been overlooked, under the assumption that in a closely-integrated single-currency area, trade and payments imbalances do not matter. The implications are discussed in the light of the need to overcome the present crisis and to proceed towards integration goals.
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Light at the End of the Tunnel: The Eurozone’s sovereign debt problem
Elliot Y. Neaman & Shalendra D. Sharma, World Economics, June 2013
In October 2012, the Norwegian Nobel Committee honoured the EU with the 2012 peace prize for creating a peaceful and stable Europe after the destructive wars and economic crises of the twentieth century. However, it would have been more appropriate to bestow the prize on the ‘Troika’: the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), with special acknowledgement to ‘Super’ Mario Draghi, the president of the ECB who has done more than anyone to ease the Eurozone’s ongoing and existential economic crisis and keep the union still intact.
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Maastricht: Union that Foresaw its Failure but Closed its Eyes
Josh Rosner, World Economics, June 2013
As the global financial and economic crisis drags on, European regulators and policy-makers are continuing in their attempts to find a path from crisis towards stability, while balancing the public interests of independent sovereign nations desirous of a deeper financial, economic, political and fiscal union. Concurrent with these attempts, the media and government officials in the core of Europe are characterising the crisis as one stemming from profligate borrowing and reckless spending by peripheral Eurozone economies. Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labour market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy. While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at designers of the European Monetary Union, banks, in the core, officials and technocrats who failed to properly regulate the domestic banking, rating agencies and political leadership. With this as a backdrop, it logically follows that the German government and central bank are seeking to protect the markets for German exporters and the German banking sector. Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry. Either approach will lead to German debts rising markedly while its economy contracts. The costs will be astounding.
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The Eurozone: Whatever happened to convergence?
Julian Gough, World Economics, June 2013
This article examines the degree of convergence of the economies of the eurozone since the start of the single currency in 1999. Convergence, both in nominal and real forms, is measured using the coefficient of variation of several economic variables. The results suggest that while there was some convergence on inflation up to 2007, there was no convergence on economic growth, total government debt, budget deficits, unemployment or GDP/head. The financial crisis and global recession of 2007 and 2008 exposed a fault line in so large and diverse a currency union, and this now threatens the long-term future of the euro.
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The Liquidity Consequences of the Euro Area Sovereign Debt Crisis
William A. Allen & Richhild Moessner, World Economics, March 2013
We examine the liquidity effects of the euro area sovereign debt crisis on euro area banks as a group, on intra-euro area financial flows and on international liquidity. The lending capacity of the euro area banking system has been much weakened, despite the remarkable growth of the operations of the Eurosystem, including its greatly increased lending and its intermediation between national central banks in surplus and deficit countries. The euro crisis has also created international liquidity stresses.
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Life after Debt: The Greek PSI and its aftermath
Miranda Xafa, World Economics, March 2013
The Greek debt exchange (PSI) that took place in March 2012 was unprecedented in two ways: it was the biggest sovereign default ever and the first within the euro area. This paper examines the debt exchange and the subsequent debt buyback with a view to drawing lessons for policymakers and market participants. It discusses the interaction between the political dimension and the market perception, including areas of actual or potential conflicts between the two. The paper does not address Greece’s longer-term prospects for debt sustainability or euro area membership, but instead focuses narrowly on an assessment of the debt exchange and its aftermath, taking into account its impact on the broader euro area crisis.
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Understanding the Greek Crisis: Unlocking the puzzle of Greek banks’ deteriorating performance
Michael Mitsopoulos & Theodore Pelagidis, World Economics, March 2011
This paper focuses on the distortions that the Greek public debt has imposed on the Greek banking system, and suggests how these can be unwound. The low level of competitiveness of the Greek economy, which is well below the competitiveness of the developed countries, poses a great challenge for the Greek banks. At the same time it puts at risk Greece’s economy ability to service both the private and public debt, which, as an aggregate, are comparable to the indebtedness of the developed nations. An adjustment of economic activity to match the current low level of competitiveness will increase the risks faced by the financial system and make an orderly servicing of the debt of the economy very challenging. It follows that only one reasonable policy option remains: to increase the competitiveness of the economy through an aggressive reform agenda, so that it will match its level of indebtedness, and through the resulting growth shift the excessive debt of the public sector to the private sector.
Punishing European Cartels
Cento Veljanovski, World Economics, March 2011
Antitrust authorities across the world are waging war against domestic and international cartels. The European Commission in particular has intensified its prosecution activities and increased dramatically the fines it imposes on cartelists. This article undertakes a statistical overview of the Commission’s prosecution activities and fines over the last decade of pan-European (and in many cases global) cartels, principally under the current penalty guidelines which became effective on 1 September 2006.
The Euro Crisis: It isn’t just fiscal and it doesn’t just involve Greece
Clas Wihlborg, Thomas D. Willett & Nan Zhang, World Economics, December 2010
The crisis in Greece and other mainly southern Eurozone countries has been discussed primarily as a fiscal issue. Current account deficits of the same countries have received less attention in spite of the relatedness of current account and fiscal deficits. We argue that the failure of many countries within the Eurozone to develop adequate internal adjustment mechanisms is also an important factor behind the crisis. After reviewing the major perspectives that have been offered on the crisis, we present data that support our argument by demonstrating the lack of price and cost convergence in the Eurozone since 1999. Ironically, it seems that the surplus countries have carried out more of the adjustment pointed to by the endogenous optimum currency area (OCA) theory than the deficit countries. We recommend that the responsibility of a ‘European Debt Surveillance Authority’ should include surveillance of intra-euro payment flows, imbalances and adjustment in labour and goods markets, and setting benchmarks for the Eurozone guarantees of sovereign debt based on ability to adjust internally. Thereby, a potential moral hazard problem of an implicit Eurozone guarantee of countries’ sovereign debt could be avoided.
Global Financial Crisis: A mid-year review of progress to date
Priya Nandita Pooran, World Economics, September 2010
This article reviews the degree of progress in financial regulatory reform and proposes new areas for inclusion in the reform agenda. It assesses the changes and responses to the proposed structure in the European Union and further discusses current responses to the financial crisis and new regulatory issues that require attention in the global reforms.
The Eurozone: What Now?
Graham Bird, World Economics, September 2010
The financial and economic crisis in Greece in 2009/2010 has reawakened interest in the future of the euro and the eurozone. After briefly explaining its sources, this article focuses on the longer-term issues to which the crisis gives rise. It explores the underlying weaknesses of current eurozone arrangements, and assesses whether the crisis will stimulate reforms designed to remedy them. The analysis suggests that, as with many crises, the one in the eurozone will lead to only relatively modest changes; these are unlikely to go much beyond the fairly ad hoc provision of emergency finance. Fundamental reform based on closer fiscal coordination, orderly insolvency arrangements or the establishment of a European Monetary Fund are unlikely. The break-up of the eurozone also seems unlikely. Indeed the crisis may catalyse structural reforms that in the long term increase the eurozone’s durability. The crisis also has important implications for the IMF.
Greek Economic Statistics: A Decade of Deceit: So how come the rating agencies missed it again?
Brian Sturgess, World Economics, June 2010
This paper looks at the recent problems in official Greek economic data on public finances, whose reliability has been impaired by inappropriate accounting methods, the application of poor statistical methods and deliberate misreporting. Data on deficits and debt have been misleading from before Greece’s eurozone entry, but despite a regular supply of public information about the problems, the rating agencies did not respond by downgrading Greek public debt until it was too late. These agencies reacted to, rather than leading, market tends that were already under way. The issue casts doubt on the fitness for purpose of the European Statistical System where the powers of Eurostat, the statistics arm of the European Commission have been inadequate to effectively monitor the fiscal status of eurozone countries. These powers, at present limited by the principle of subsidiarity to administering a Code of Practice, must be strengthened closer to approximating a power of audit.
Greece and the State: Prometheus Bound?
Michael Massourakis, World Economics, June 2010
Pervasive state intervention in Greece has mired the economy with large-scale inefficiencies and an uneven playing field, protecting insiders and rent-seekers to the detriment of its underlying growth potential, with the political class at the same time failing miserably to address the aspirations of the people. Fiscal consolidation and structural reform, currently pursued under the EU–IMF stabilisation programme, if vigorously implemented, are expected to strengthen the Greek economy and to contribute towards the withering away of the Greek state in its present form. The Greeks are resourceful people and will not capitulate in the face of a daunting adjustment, which may prove easier than generally expected if structural weaknesses are adequately and swiftly addressed. Greece’s future lies with rebalancing the economy towards net exports, with tourism and real estate being the primary development motors.
Carbon Commitments Must Translate into Real Action
Andrew Raingold, World Economics, March 2010
The efforts of political leaders to negotiate a global agreement to reduce carbon emissions highlights the importance of consistent action at the domestic level. To gauge the efficacy of any international agreement and subsequent reductions, a clear, consistent and comparable approach to carbon disclosure must be adopted by UK companies. This allows economic benefits, as carbon reporting is an enabler for energy efficiency and a driver for better, cleaner technology in new markets. Furthermore, the pursuit of the perfect reporting framework must not be the enemy of the good, as the urgent need to address the causes of climate change requires immediate action to drive reduction in carbon emissions by UK plc.
Public Health, Advertising and Reality
Tim Ambler, World Economics, December 2009
Advertising is often blamed as the, or a, cause of public health problems such as misuse of alcohol or obesity. This paper suggests that the conclusions drawn by researchers owe more to their a priori attitudes than to an even-handed review of the evidence from both sides of the argument. The British Medical Association Science Committee’s 2009 call to ban alcohol advertising and promotion in the UK is taken as a case study. It is characterised by sweeping unsupported assertions, selective use of the literature and factual misreporting. Yet there is, or should be, common ground which should be defined and developed scientifically.
The IMF, the Credit Crunch and Iceland: A new fiscal saga?
Sheetal K. Chand, World Economics, September 2009
Iceland was badly hit by a fundamental mismatch between the assets and international liabilities of her banking system, with severe consequences for the welfare of the population. The country now has an International Monetary Fund programme. The paper asks three questions of the programme: Is it too tight? Is the balance of payment’s target appropriate? How will the country cope with the potentially huge transfer problem associated with the now frozen external liabilities of the failed Icelandic banks? The paper notes several problems, and argues that an appropriately structured and expanded fiscal policy is needed, together with burden sharing between Iceland and the international community.
Sweden’s Bank Nationalisations: Are there lessons for today?
Fredrik Erixon, World Economics, March 2009
Many banks are on the verge of bankruptcy and have received support from the government to stay afloat. Measures taken have not sufficed, and an increasing number of economists and commentators are calling for the nationalisation of banks in the United Kingdom and United States. In their advocacy, they use Sweden as an exemplar, suggesting that massive bank nationalisation was the way it fixed its collapsing banking sector in the early 1990s. This account of Sweden’s resolution policy is erroneous and exaggerates the role of nationalisation. Sweden successfully combated a banking crisis, and two banks received full government ownership. The main example of nationalisation, however, was a financial reconstruction of a bank already controlled by the government. The only real example of nationalisation of a privately owned bank hardly offers lessons for ways to resolve the current banking crisis.
Alternative Strategies for Fighting Unemployment: Lessons from the European experience
Gilles Saint-Paul, World Economics, March 2008
During more than three decades of protracted high unemployment, European countries have developed a variety of approaches in order to tackle the problem. These strategies differ in their philosophy, scopes and successes. A number of them can be understood in terms of shying away from full-fledged liberalization in order to preserve the "European Social Model". In this paper the author discusses their relative merits. He focuses on strategies that may reasonably be expected to reduce unemployment, and ignores sheer blunders based on a false view of how the economics works (such as working time reduction), as well as measures that may improve the welfare of the unemployed but are nevertheless harmful to the labour market (such as generous unemployment benefits). The general message is that some of the strategies that “preserve the European Social Model” have merits, but are unlikely to lead to an efficient labour market where finding a job or hiring a worker are no longer considered as a painful challenge.
Challenging Times for UK Monetary Policy
Andrew Sentance, World Economics, March 2008
Global economic developments have recently thrown up two major challenges for the setting of UK monetary policy. The recent global financial turmoil threatens to reinforce the slowdown in the UK and globally. But rising energy and commodity prices will push up inflation in the short term, and pose an upside risk to inflation expectations. In this article, Andrew Sentance-an external member of the Monetary Policy Committee (MPC)-argues that two issues will be critical to the future course of UK monetary policy: the course of the economic slowdown at home and abroad; and whether inflation expectations remain stable and well anchored. He argues that UK monetary policy has flexibility to adapt to changing circumstances and the data flow from the real economy will be very important in shaping future interest rate decisions. However, the MPC remains focused on its remit of keeping inflation on course to meet the 2% target for CPI inflation.
Can China Learn from Sweden?
Arne Bigsten, World Economics, June 2007
China is undergoing a very rapid process of structural and institutional transformation, which has led to dramatic increases in income levels. During this process, the country is facing a series of development challenges that need to be dealt with in order to sustain growth. The question posed in this paper is whether China has anything to learn from the Swedish process of development, or the ‘Swedish Model’. The author first describes the emergence of the Swedish Model, and then summarises its main features and the various institutions, both economic and political, that have sustained it. He discusses governance issues, the welfare state, and policies towards the private sector. He contrasts the situation of China with that of Sweden, in order to try to ascertain whether an analysis of the Swedish Model gives insights that are of relevance to China.
How Can Norway Become A Climate-Friendly Society?
Jørgen Randers & Knut H. Alfsen, World Economics, March 2007
In March 2005, the Norwegian Government appointed a seven-person expert Commission on Low Emissions and asked it to describe how Norway could cut its greenhouse gas emissions by about two–thirds below its Kyoto obligation, by 2050. The Commission delivered its unanimous recommendation in October 2006 (NOU 2006:18 Et klimavennlig Norge—Norwegian White Paper No. 18, 2006: A climate-friendly Norway) which states that such cut is not only necessary, but also feasible and not unreasonably expensive. In its report, the Commission proposed a package of 15 measures to achieve such steep cuts by 2050, largely within Norwegian territory, and indicated what must be done in the short term to start moving towards this goal. This paper summarizes the Commission’s report.
The EU, the Middle East, and Regional Integration
Bessma Momani, World Economics, March 2007
The European Union’s venture into enhancing trade linkages with the Middle East, as conceived by the 1995 Barcelona Process, had high hopes but failed in producing the intended political and economic deliverables. The Euro–Mediterranean Partnerships were flawed, as they created a hub and spoke trading relationship offering few of the welfare or (often forgotten) political benefits envisioned by the Europeans. The 2004 Agadir Agreement, however, may help rectify some of these problems by helping to stimulate intraregional trade.
Has the European Social Model a Future?
J. R. Shackleton, World Economics, September 2006
The European Social Model, involving high levels of government spending and taxation, labour and product market regulation and the involvement of the “social partners”, is in crisis. The core European economies are experiencing low economic growth, slow job creation and high levels of unemployment. In the longer term, demographic pressures are a serious concern. Faced with these problems, economists argue for reform but politicians find this difficult and the European Union is in political crisis. This article explores these issues and suggests that the answers lie at national rather than EU level.
Russia at the Crossroads: Padma Desai on transition, reform, and the legacy of Yeltsin’s ‘kamikaze crew’
An interview with introduction by Brian Snowdon
World Economics, June 2006
To set the interview in context, Brian Snowdon first traces out some important landmarks in twentieth-century Russian/Soviet Union history. In the conversation that follows, Professor Desai gives her views on a number of key issues relating to the decline of the Soviet system and problems of Russia’s transition to a market economy. Recently, Freedom House has suggested that Russia is at a ‘crossroads’ with respect to its fledgling liberal democracy and market economy. Therefore, also discussed are the prospects for survival of democracy and markets in the new Russian ‘liberal’ order. In the first part of the interview, Professor Desai also comments on the influence of socialist ideas on India’s growth and development strategy.
European Financial Market Integration: Distant dream or nascent reality?
Patrice Muller, World Economics, September 2004
European Monetary Union and a vigorous legislative agenda have profoundly changed the environment in which the European financial services industry operates. These developments should have contributed to a deepening of financial market integration in the European Union, especially within the Eurozone. However, actual progress has been very uneven. Eurozone money markets and bonds markets have achieved full or a very high level of integration. Eurozone equity markets show increasing signs of integration, although substantial barriers to cross-border trading remain. Bank credit markets, with the exception of inter-bank lending, and insurance and funds industries, remain still largely fragmented along national lines.
Does European Union Environmental Policy Pass a Cost–Benefit Test?
David Pearce, World Economics, September 2004
Most European Union countries are committed to some form of regulatory impact assessment, and in some cases these assessments involve the formal use of cost–benefit analysis. The European Treaty of Union also calls for a comparison of costs and benefits for all European regulations. Despite this, only a limited number of regulations have been subject to cost–benefit analysis. Using a variety of sources, this paper investigates whether or not a selection of major environmental regulations would pass a cost–benefit test. The general answer is that, while some do, most do not. This finding has major implications for the efficiency of European environmental legislation, and reflects on the willingness of Member States to sign up to inefficient regulation.
Fifty Years of Economic Growth in Western Europe: No longer catching up but falling behind?
Nicholas Crafts, World Economics, June 2004
Productivity growth in virtually all west European countries exceeded that of the United States throughout the period 1950 to 1995. Since then American productivity performance has strengthened and that of the EU has weakened. The most important reason is contrasting experiences with Information and Communications Technology (ICT). The article argues that this may reflect a failure of European countries to update their ‘social capability’ to the requirements of a new technological epoch and points in particular to weaknesses in human capital formation and to excessive employment protection as obstacles to rapid realization of the productivity potential of ICT.
A Single European Market in Asset Management: Vision and reality
Friedrich Heinemann, World Economics, March 2004
In spite of progress with integration, the European single market is still far from perfect. In particular, financial services markets are still heavily segmented along national borders—even in the era of the Internet and the Euro. In order to understand the reasons for and consequences of incomplete integration, a detailed analysis is presented for the European asset management market. It turns out that fragmentation is very costly both in micro- and macroeconomic terms. The following obstacles are identified to be most relevant: tax discrimination, certain properties of existing distribution channels, and regulative issues related to fund mergers and registration. Only if these issues are addressed by legislators and the industry can significant progress in integration be achieved.
Five Centuries of Energy Prices
Roger Fouquet & Peter Pearson, World Economics, September 2003
Concerns about rising energy prices tend to occur in times of economic expansion, to disappear in times of recession. A recurring fear is that, in the long run, real energy prices will trend upwards. This paper presents evidence from five hundred years of prices of energy sources for the United Kingdom. Over this time period, there is little support for any general trend of rising fuel prices—and some evidence of significant declines. Using this information on prices and consumer expenditure to weight the series, an ‘average price of energy’ series has been created. Reflecting the substitution away from more scarce fuels (driving prices down) and towards more valuable ones (driving prices up), over more than five hundred years—and albeit with significant long-lived fluctuations—there seems little evidence of a rising long-run trend in the real price of ‘energy’.
Is Economic Growth Good For Us?
Nicholas Crafts, World Economics, September 2003
This article reviews Britain’s experience of economic growth in the twentieth century. It argues that average living standards have risen much more rapidly than is generally appreciated. The main reasons for this include increased life expectancy which is highly valued by the public and downward bias in conventional estimates introduced by traditional price deflators which do not measure the true cost of living. The main policy implication of this analysis is the need to think about the value of outcomes if appropriate public expenditure policies are to be implemented.
Does Britain Need More Immigrants? A Debate
Nigel Harris & David Coleman, World Economics, June 2003
In this debate, Nigel Harris and David Coleman discuss the pros and cons of migration. Taking the case of Britain, they address issues such as the desirability or otherwise of migration controls, gains and losses from migration, the ‘optimum’ size and composition of the country’s workforce, and the demographic, social and political consequences of migration.
Measuring Consumer Inflation in the United Kingdom: Recent developments and the future outlook
David Fenwick, World Economics, March 2003
Responding to Mick Silver’s proposals regarding the RPI, David Fenwick of the ONS summarises some of the issues that confront compilers of price indices.
Some Proposed Methodological Developments for the UK Retail Prices Index
Mick Silver, World Economics, March 2003
The Retail Prices Index (RPI) is one of the UK’s most important macroeconomic indicators, as well as being used for indexation/adjustments for inflation to wages and benefits. This paper argues that the dynamic changes in product markets and consumers’ responses to price changes need to be incorporated into the RPI if it is to effectively measure changes in the cost of living. The quite positive and innovative work undertaken by the Office for National Statistics (ONS) is acknowledged. However, the basis of the RPI, in measuring the price changes of a matched, fixed basket of goods, is considered inappropriate to modern markets. Some proposals are made.
Demographics and Pension Reforms in the Major Central and Eastern European Countries
Dieter Bräuninger, World Economics, March 2003
Today in the Central and Eastern European (CEE) countries there are barely 30 pensioners for every 100 persons of working age. By 2050, the number could rise to almost 80 pensioners. So far Poland has responded the most rigorously to the challenge, establishing a modern three-pillar pension system. The new second pillar forms the core of the bulwark against future demographic strain, with private savings being accumulated in personal accounts kept at private pension funds. Hungary has also established a second pillar of private pension funds, but the necessary restructuring of the state pension scheme is not proceeding fast enough. In the Czech Republic, a three-pillar system thus far exists only on paper.
How to Reform Europe’s Fiscal Policy Framework
Lars Calmfors & Giancarlo Corsetti, World Economics, March 2003
The current budgetary problems of some EU member states have intensified the debate on Europe’s fiscal policy framework. It is not enough to change the interpretation of the Stability and Growth Pact. More fundamental revisions of the EU Treaty are needed in order to strike a reasonable balance between longrun sustainability and short-run flexibility. The ceiling on budget deficits should be conditioned on the government debt level, such that the scope for stabilisation policy in downswings is increased in low-debt countries. In addition, the enforcement of the rules should be depoliticised: decisions on sanctions against states violating the rules should be transferred from the political level of the Council of Ministers to the judicial level of the European Court of Justice.
Some Lessons from a Single Currency
Alan J. Brown, World Economics, March 2003
This article looks at the early experience of the Euro and argues that both the original rules established for the European Central Bank and the Stability and Growth pact need to be reconsidered. Failure to do so will result in the whole European economy delivering less growth and prosperity. Without a selfcorrecting mechanism like transfer payments, a single monetary policy is procyclical and destabilizing. Countries growing fast and in danger of over-heating face low or negative real interest rates. Countries in recession face too high real interest rates and are pushed further into sub-potential growth. The Stability and Growth pact further restricts policy options.
Why The Five Economic Tests?: The decision about British membership of a single European currency in historical context
Ed Balls, World Economics, March 2003
Chief Economic Adviser to the Treasury, Ed Balls, sets out the government’s approach to making the decision about British membership of a single European currency in an historical context. The basis for deciding whether there is a clear and unambiguous economic case to join the single currency is the Treasury’s detailed assessment of the ‘five economic tests’. The tests are designed to avoid past failures of politicians and policymakers who paid insufficient attention to the economics in making key decisions affecting the national interest. Balls reflects upon historical examples of such failures and lessons to be learned, with a particular historical focus on 1925 and the decision to re-enter the Gold Standard.
From Socialism to Capitalism and Democracy: János Kornai on the trials of socialism and transition
An interview with introduction by Brian Snowdon
World Economics, March 2003
János Kornai is generally regarded as the world’s leading scholar on socialist economic systems. In this interview, Professor Kornai discusses the evolution of his thinking on the political economy of the socialist system, its characteristics, reform, transition and future.
Continuities and Discontinuities in Global Development: Lessons from new East/West comparisons
Kenneth Pomeranz , World Economics, December 2002
Much literature normalises a ‘North Atlantic’ pattern of development, and sees a regionally specific ‘East Asian’ path emerging relatively recently. However, development patterns in core regions of Europe and East Asia were surprisingly similar until almost 1800; Europe’s subsequent divergence was shaped by exceptional resource bonanzas. East Asian growth has been less resourceintensive, and more continuous with pre-1800 patterns. Since 1978, ‘East Asian’ patterns again characterise coastal China, but China’s interior poses greater challenges; current interest in more resource-intensive, state-driven development strategies for those regions is thus unsurprising, but environmentally and socially risky.
Ready to Join the EU?: On the status of reform in the candidate countries
Federico Foders, Daniel Piazolo & Rainer Schweickert, World Economics, December 2002
This paper presents a new set of indicators concerning the status of economic reform in the candidate countries for the enlargement of the European Union which is scheduled for 2004. After an overview of indicators of institutional development, macroeconomic policy and trade policy, a composite index is derived. It turns out that the ranking of the candidate countries according to the composite index diverges from the ranking provided in the progress reports of the European Commission.
The UK’s Achievement of Economic Stability: How and why did it happen?
Tim Congdon, World Economics, December 2002
The UK achieved a remarkable degree of macro-economic stability in the 1990s. Contrary to expectations when the pound was expelled from the European exchange rate mechanism in September 1992, over the next ten years inflation was kept almost exactly on target and its volatility declined by over 90 per cent compared with the previous 20 years. Stability was achieved when the official aim was to balance the budget and major industries were being de-nationalised, contradicting claims that Keynesian policies are needed.
The Quest for Stability
Alan Budd, World Economics, September 2002
The UK seems to be enjoying a golden age of macroeconomic policy-making. Growth is steady; inflation is low and stable, and unemployment is low. After years of trying to achieve economic stability we seem to have found the answer. This paper explores the history of policy-making from the late 1950s. For many years the presumption was that active demand management could be directed at achieving a desirable (low) level of unemployment. Pursuit of that policy helped produce the disasters of 1975 and brought the recognition of supply-side constraints. Progress has been uneven but the system set in place after 1992 and the move, four and a half years later, to the establishment of the Bank of England’s Monetary Policy Committee have produced an effective and highly successful system of policy-making. Ironically, stability of output, and a low level of unemployment, have been achieved when they have ceased to be explicit objectives of policy.
Slobodan Milosevic and the Fire of Nationalism
Ronald Wintrobe, World Economics, September 2002
This paper is an economist’s attempt to understand the behaviour of dictators with special reference to the Milosevic regime in Serbia. The author focuses on nationalism, ethnic cleansing and war, especially the most recent war with NATO. The basic argument is simple. First, like any dictator, Milosevic needed support in order to survive in office. His provocative and warlike actions towards other groups are best understood, not as the latest round in a centuries-old tradition of ethnic fighting, but as the attempt of a competitive politician to survive in a situation where the old basis of power had collapsed. Second, in attempting to survive the wave of democratization that swept Eastern Europe after 1989, Milosevic played a wild card—the nationalist card. Nationalism can be wild because, under some circumstances, it is contagious. Especially when combined with the security dilemma, it can spread uncontrollably. Ethnic cleansing and war are seen in this light as neither deliberate, coldly planned strategies of brutal repression, nor the results of complete miscalculation, but the results of a process in which the leadership of the regime was reacting to events which it may have set in motion, but did not entirely control.
Does the Eurozone Face 50 Years of Economic Stagnation?
Tim Congdon, World Economics, June 2002
The newly-formed European currency will compete with the dollar to become the world’s leading currency in the 21st century. Its prospects in this competition will depend partly on the size of the European economy compared with the US economy. This article argues that unprecedented demographic trends will reduce employment and curb output growth in Europe, and so cause the European economy to lose ground relative to the USA. The demographic problems are more serious in Germany and Italy, where a falling population of working age may lead to declining employment and stagnating output over periods of 20 or 30 years. Against this background the euro will fail to supplant the dollar as the world’s leading currency.
A Night at the Opera: Subsidies, prices and repertoire at London’s opera houses
Jeff Frank & Philip Wrigley, World Economics, September 2001
This paper considers how the behaviour of the two London opera houses differs from profit-maximisation, possibly in response to the high level of government funding and private donations. The opera houses put on more innovative and artistically rewarding operas than would be the case with profit-maximisation. They also have clear access policies in offering low-price and discounted tickets.
Russia’s Post-Communist Economy
Peter Oppenheimer & Brigitte Granville, World Economics, March 2001
Ten years after the break-up of the Soviet Union, Russia’s measured output was still showing a net decline of around 40 per cent – but with no comparable decline in average living standards, both because the output drop affected mainly the defence sectors and because Russia’s participation in international trade had increased. At the same time there was greater inequality. And despite expansion of small businesses and the service sector, industrial restructuring had made only slight progress. This reflected geographical problems as well as underdevelopment of key market institutions such as property rights, hard budget constraints and the banking system, which meant that capital and labour markets barely functioned.
Eastern Enlargement and EU Labour Markets: Perceptions, challenges and opportunities
Tito Boeri & Herbert Brücker, World Economics, March 2001
This paper summarises the key findings of a recent study on the impact of Eastern Enlargement of the European Union (EU) on labour markets in the current Member States. The study focuses on three main channels along which enlargement may affect labour markets in the EU, namely i) trade, ii) foreign direct investment, and iii) migration. A main conclusion of the study is that trade and capital movements are very unlikely to lead to an equalisation of factor prices. Thus, strong economic incentives to migration are bound to be present. The study indicates that such an influx of migrants will have only a moderate impact on wages and employment even in Austria and Germany. European leaders will soon have to formulate a joint position regarding this fundamental issue. The authors argue for keeping actual migration flows under control for a transitional period.
The Modern Motor Industry: Nowhere for the inefficient to hide
Garel Rhys, World Economics, March 2001
The motor industry is experiencing one of its periods of massive change. This involves considerable micro- and macroeconomic effects, reflecting the structure and behaviour of the industry and its scale of operations within an economy. The industry is a highly rivalrous oligopoly, where although there is product differentiation, competition, both price and non-price, is considerable. This impacts upon the nature of vehicle demand, including environmental issues. Supply conditions in the industry generate interesting data on short-run and long-run economies of scale issues. The analysis is on a global basis, where new manufacturing centres are appearing. Continued consolidation has occurred and this affects the UK which is representative of most auto making centres in that enterprises are controlled by foreign owned multinationals.
From Rags to Riches: Ireland’s economic boom
Brendan Walsh, World Economics, December 2000
This article explores the factors behind the Irish economic renaissance of the 1990s. These include the fiscal correction of the 1980s, the availability of an ample supply of well-educated labour, a competitive exchange rate, and the inflow of EU aid. The reintroduction of ‘social partnership’ is credited with maintaining a moderate rate of wage inflation and facilitating the exceptional growth of employment. The dominant role played by a steady inflow of high tech FDI is acknowledged. The reasons for the Irish success in attracting foreign investment and the role of industrial policy in transforming the economy are discussed. The article concludes with an appraisal of the current concern over rising inflation and fear of a hard landing.
Goods and Bads
Ralph Turvey, World Economics, December 2000
There is a high degree of symmetry between economic goods and economic bads. Snow, litter and street mud are cited as examples. Economic growth obviously results in an increase in the supply of bads as well as goods. In addition, however, because it raises the value of time it can turn goods into bads and it can result in an end to the transformation of bads into goods. This is illustrated in some detail by two case studies for nineteenth century London, relating to domestic refuse and to horse manure. As a result of economic growth, horse manure had almost ceased to be an economic good and had become an economic bad by the end of the century.
Poles Apart: Labour market performance and the distribution of work across households
Paul Gregg, Kirstine Hansen & Jonathan Wadsworth, World Economics, June 2000
Analysis of labour market performance using individual level data can reach radically different conclusions to those provided by a household-based analysis, using the same source of information. In Britain and other OECD countries the number of households without access to earned income has grown despite rising employment rates. Built around a comparison of the actual jobless rate in households with that which would occur if work were randomly distributed, the authors show that work is becoming increasingly polarised in many countries. Changing household structure can only account for a minority of the rise in workless households, so that labour market failure is the dominant explanation. Polarisation of work will have important welfare and budgetary consequences for any country.
The Thirty-five Hour Working Week: Flexibilité, compétitivité, productivité-a French Revolution
Alan Kirman, World Economics, June 2000
The introduction of a reduced working week (RWW) in France has been widely condemned as an arbitrary additional constraint in an already rigid labour market. This article explores the origins of the law, and the reasons for the negative appreciation by economists of this measure. However, it goes on to suggest that the concessions gained by the employers in terms of flexibility coupled with the state aid involved have resulted in an increase in labour market flexibility in France. This may explain the fact that, contrary to the predictions of many economists, the French economy is now growing faster rather than slower as compared to the period before the introduction of the legislation, and that unemployment is falling.
Welfare-to-work and the New Deal
Richard Layard, World Economics, June 2000
Welfare-to-work is on trial in many countries. In Britain it has become the
government’s most important policy for lowering unemployment and expanding
labour supply. But can it work? And what lessons does Britain’s experience
provide for other countries? This paper argues that whilst the Welfare-to-Work
approach has the power to transform the lives of millions—by making them self-sustaining
rather than dependent—it requires extreme sensitivity. The help must
be of very high quality and the spirit of the policy must be visibly in the clients’
interest. The author concludes that the New Deal has been an extraordinary
success from that angle, with very high levels of client satisfaction. It is a good
example for other countries to follow. But each future step must be as sensitive as
the last.


Housing in the South East of England: Some issues raised by the Government’s plans
David Miles, World Economics, June 2000
Plans recently unveiled by the UK government will, if implemented, generate a
major increase in new housebuilding in one of the most crowded and congested
parts of the UK. The plans fail to take account of the impact on people living in
London and the South East—and in the rest of the UK—of such a policy. The
policy is based on a simplistic view of how demographic change affects the
housing market and it reflects a misunderstanding of economic forces and a
failure to think about impacts outside the South East. More seriously it reflects a
form of central planning that is insensitive to the real needs of people.


Extending the UK National Accounts: What can be done?
Amanda Rowlatt, World Economics, March 2000
The national accounts measure economic activity. The UK is developing "satellite accounts" which use the framework of the national accounts but aim to quantify other aspects of living standards. This article starts by comparing satellite accounts with the use of indicators to measure the quality of life. It then reports on progress with the UK environmental accounts, and with the household accounts, which measure the productive unpaid work done in the home. It concludes with a discussion of the scope for developing a wider range of satellite accounts for the UK.


European Pension Reforms: A study by Merrill Lynch
Jan Mantel & David Bowers, World Economics, March 2000
Are the present pension systems in Europe substainable? Can the pensions time bomb caused by demographic changes be defused? This study describes developments in Europe, but the theory, the problems and the solutions are similar for most developed nations in the rest of the world. The combination of declining labour market participation rates–which magnifies the demographic ageing problem on public finances–and expectations of future ageing of the population will make most public retirement schemes expensive to run and major reforms are necessary. European governments have a number of options to compensate for the negative effects of ageing on pensions. The most effective strategy is to increase the effective and/or official retirement age. But only a combination of measures will be able to take away completely the negative financial effect of ageing on state pension schemes. What is clear from the study is that most measures to be taken to combat the situation will include some form of pain: the pensioner or the present generation of workers or governments’ finances or all of them together will suffer some negative consequences.


Pension Reform in Germany: To fund or not to fund
Axel Börsch-Supan, World Economics, March 2000
German public retirement insurance is in many respects an extreme example of the typical European pay-as-you-go pension system because almost 85% of retirement income stems from this system and only 15% comes from private sources such as funded pensions, labour income, and family transfers. Public retirement insurance has come under severe pressure from population ageing and incentive effects reducing labour supply. This paper argues that pre-funding a significant part of the German system will alleviate both pressures.


The Public/Private Mix in UK Pension Policy
Phil Agulnik & Nicholas Barr, World Economics, March 2000
The UK government aims to shift the balance between public (Pay-As-You-Go) and private (funded) pensions from 60:40 today to 40:60 by 2050 (UK DSS 1998). What is the economic rationale for this shift? Funding pensions may have a positive effect on economic growth and the long-term sustainability of the public finances, but such a move is only one of a menu of policies capable of achieving these outcomes. It follows that some other ratio between public and private provision would be possible, and there are a range of policy directions open to the government.


Achieving the goals of UK Pension Reform
Frank Field, World Economics, March 2000
There is an inevitable tension between the aim of providing enough income in retirement for those genuinely unable to build up a sufficiently large fund of their own and the aim of preserving people’s incentives to save for their own retirement. The author argues that if the current UK government’s proposals for pension reform are implemented, a significant proportion of the working population will have their incentives for retirement saving undermined and this situation will become a further hurdle in the way of successful pensions reform.