The Coherence of the European Foreign Policy: A Real Barrier or an Academic Term?

The purpose of the present study is to break down, in a general and summarised way, the concept of the coherence of the European Foreign Policy, in order to analyse its meaning, its scope and its implications. This focus on coherence will be specifically dealt with upon the analysis of the impact of this phenomenon on single institutional framework, as defined by the Treaty on European Union.

The Role of Parliaments in European foreign policy

This book addresses the debate on the democratic deficit of European foreign and defence policies. This debate revolves around two dimensions. The first one has to do with the accountability of CFSP institutions. Is the current degree of parliamentary oversight of these policies the most appropriate? Has the disengagement of national parliaments regarding European foreign policy been counterbalanced by giving sufficient powers to the European Parliament? And, regarding the European Security and Defence Policy (ESDP), are national parliaments effectively controlling it? The second dimension of the debate is related to the wider question of whether the European Parliament is capable of legitimising EU policy outcomes. In the absence of a Europe-wide demos and of a true party system, what interests do Members of the European Parliament (MEPs) represent when dealing with foreign policy issues? Are there transnational cleavages in foreign policy or are they mainly national? Furthermore, is the European Parliament developing a transnational, autonomous stance on foreign policy issues, different from that of the Council or the Commission? The present volume is the result of the 2nd Meeting of the FORNET Working Group on “Evolution and Accountability of CFSP Institutions” organised by the Observatory of European Foreign Policy (Research line of the Institut Universitari d’Estudis Europeus), which took place in Barcelona, the 4 and 5 March 2005.

Institutions, Public Debt and Foreign Finance

We study the role of domestic financial institutions in sustaining capital flows to the private and public sector of a country whose government can default on its debt. As in recent public debt crises, in our model public defaults weaken banks' balance sheets, disrupting domestic financial markets. This effect leads to a novel complementarity between private capital inflows and public borrowing, where the former sustain the latter by boosting the government's cost of default. Our key message is that, by shaping the direction of private capital flows, financial institutions determine whether financial integration improves or reduces government discipline. We explore the implications of this complementarity for financial liberalization and debt-financed bailouts of banks. We present some evidence consistent with complementarity.

The impact of "early" nineteenth-century globalization on foreign trade in the Southern Cone: A study of British trade statistics

This paper deals with the impact of "early" nineteenth-century globalization (c.1815-1860) on foreign trade in the Southern Cone (SC). Most of the evidence is drawn from bilateral trades between Britain and the SC, at a time when Britain was the main commercial partner of the new republics. The main conclusion drawn is that early globalization had a positive impact on foreign trade in the SC, and this was due to: improvements in the SC's terms of trade during this period; the SC's per capita consumption of textiles (the main manufacture traded on world markets at that time) increased substantially during this period, at a time when clothing was one of the main items of SC household budgets; British merchants brought with them capital, shipping, insurance, and also facilitated the formation of vast global networks, which further promoted the SC's exports to a wider range of outlets.

Discrete devaluations and multiple equilibria in a first generation model of currency crises

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999

For most of the post-war period, Europe s capital markets remained largely closed to international capital flows. Thispaper explores the costs of this policy. Using an event-study methodology, I examine the extent to which restrictions ofcurrent and capital account convertibility affected stock returns. The delayed introduction of full currency convertibilityincreased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapseof the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mountingevidence suggesting that capital account liberalization facilitates growth.

Does foreign direct investment crowd out domestic entrepreneurship?

In analyzing firm entry and exit across Belgian manufacturing industries,this paper presents evidence that import competition and foreign directinvestment discourage entry and stimulate exit of domestic entrepreneurs.These results are in line with theoretical occupational choice modelsthat predict foreign direct investment would crowd out domesticentrepreneurs through their selections in product and labor markets.However, the empirical results also suggest that this crowding out effectmay be moderated or even reversed in the long-run due to the long termpositive effects of FDI on domestic entrpreneurship as a result oflearning, demonstration, networking and linkage effects between foreignand domestic firms.

Optimal monetary and fiscal policy in a currency union

We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and study its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the countrylevel, through the choice of government spending. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal cooperative policy arrangement requires that inflation be stabilized at the union level by the common central bank, while fiscal policy is used by each country for stabilization purposes. By contrast, when the fiscal authorities act in a non-coordinated way, their joint actions lead to a suboptimal outcome, and make the common central bank face a trade-off between inflation and output gap stabilization at the union level.

Circulation of private notes during a currency shortage

This paper provides a search theoretical model that captures two phenomena that have characterized several episodes of monetary history: currency shortages and the circulation of privately issued notes. As usual in these models, the media of exchange are determined as part of the equilibrium. We characterize all the different equilibria and specify the conditions under which there is a currency shortage and/or privately issued notes are used as means of payment. There is multiplicity of equilibria for the entire parameter space, but there always exist an equilibrium in which notes circulate, either alone or together with coins. Hence, credit is a self-fulfilling phenomenon that depends on the beliefs of agents about the acceptability and future repayment of notes. The degree of circulation of coins depends on two crucial parameters, the intrinsic utility of holding coins and the extent with which it is possible to find exchange opportunities in the market.

Monetary unions and the transaction cost savings of a single currency

This paper studies the transaction cost savings of moving froma multi-currency exchange system to a single currency one. Theanalysis concentrates exclusively on the transaction andprecautionary demand for money and abstracts from any othermotives to hold currency. A continuous-time, stochastic Baumol-like model similar to that in Frenkel and Jovanovic (1980) isgeneralized to include several currencies and calibrated to fitEuropean data. The analysis implies an upper bound for thesavings associated with reductions of transaction costs derivedfrom the European Monetary Union of approximately 0.6\% of theCommunity GDP. Additionally, the magnitudes of the brokeragefee and the volatility of transactions, whose estimation hastraditionally been difficult to address empirically, areapproximated for Europe.

Separated by a common currency? Evidence from the Euro changeover

We study the price convergence of goods and services in the euro area in 2001-2002. To measure the degree of convergence, we compare the prices of around 220 items in 32 European cities. The width of the border is the price di¤erence attributed to the fact that the two cities are in different countries. We find that the 2001 European borders are negative, which suggests that the markets were very integrated before the euro changeover. Moreover, we do not identify an integration effect attributable to the introduction of the euro. We then explore the determinants of the European borders. We find that different languages, wealth and population differences tend to split the markets. Historical inflation, though, tends to lead to price convergence.

Foreign ownership and productivity dynamics

In analyzing the distinctive contribution of foreign subsidiaries anddomestic firms to productivity growth in aggregate Belgian manufacturing,this paper shows that foreign ownership is an important source of firmheterogeneity affecting productivity dynamics. Foreign firms havecontributed disproportionately large to aggregate productivity growth,but more importantly reallocation processes differ significantly betweenthe groups of foreign subsidiaries and domestic firms.