Fiscal adjustment and economic growth in the European Union

The current world economic crisis induced countries to launch wide-scale spending programmes all over the world. Member states of the European Union have not been an exception to this trend. While deficit spending may increase the aggregate demand, it can also accelerate indebtedness and make the required spending cuts politically risky later on. However, deficit financing is not a new phenomenon in the EU; it has been widely practiced in the last couple of decades. As the crisis seems to come to an end, countries with huge deficits should adopt exit strategies now, thereby reducing deficit and debt and reintroducing fiscal discipline, a requirement laid down in the Stability and Growth Pact. Nevertheless, former adjustment processes can provide ample evidence for successful and politically viable fiscal consolidations. In certain cases, even economic activity started to accelerate as a response to the welldesigned adjustment measures. Based on the previous experiences of EU states, the aim of this paper is, therefore, to identify the conditions that may determine a fiscal consolidation to be successful in terms of a reduced debt ratio and a positive economic growth.

Gázolaj-jövedékiadó verseny az Európai Unióban (Fiscal competition on the market for diesel fuel in the European Union)

A tanulmány azt a kérdést vizsgálja, hogy versenyeznek-e az európai kormányok gázolajra vonatkozó jövedékiadó-kulcsaikkal a nagyobb adóbevételekért, és ha igen, befolyásolja-e az országok mérete kormányaik adóztatási stratégiáját. Az üzemanyagturizmussal szembesülő kormányok adókivetési magatartását egy kétországos adóverseny modellel jelezzük előre, amelyben a standard modellektől eltérően a fogyasztók kereslete árrugalmas. Megmutatjuk, hogy ha a kereslet nem teljesen rugalmatlan, mint Nielsen [2001], illetve Kanbur-Keen [1993] modelljeiben, akkor a nagy ország kormányának egyensúlyi viselkedése nemcsak abban különbözik a kicsiétől, hogy nagyobb adót állapít meg, hanem abban is, hogy válaszfüggvénye meredekebb. Az aszimmetrikus adóverseny általunk használt modelljét a dízelüzemanyagoknak 16 európai ország 1978 és 2005 közötti jövedékiadó-adatain vizsgáljuk. Az 1995 és 2005 közötti időszakra vonatkozó becslési eredményeink megerősítik, hogy az európai országok szomszédaik adókulcs-változtatásának hatására változtattak saját adókulcsaikon, és hogy a területileg/gazdaságilag kisebb országok kisebb intenzitással reagáltak szomszédaik adóváltoztatásra, mint a nagyobbak. Tanulmányunk ezzel magyarázatot nyújt arra is, hogy miért erősödött fel a tagállamok jövedéki adókulcsainak méret szerinti differenciálódása az elmúlt bő tíz évben, valamint hogy miért nem sikerült az Európai Uniónak a minimumadószintre vonatkozó előírásával előbbre lépnie az egységes adóztatás megvalósításában. / === / The paper assesses spatial competition in diesel taxation among European governments. By adding an extension to the standard model, it is shown that asymmetric competition – small countries undercutting large – implies that small countries respond less strongly to tax changes by their neighbours than large countries do. An estimate is then made of the fiscal reaction functions for national governments, employing a first-difference regression model with a weighting scheme constructed from road-traffic density data at national borders. Data from 16 countries (EU-15 minus Greece plus Norway and Switzerland) between 1978 and 2005 provides evidence that European governments set their diesel tax interdependently, and moreover, that small European countries tend to react less strongly to changes in their competitors' tax rate than large countries do.

Rules-based economic governance in the European Union: A reappraisal of national fiscal rules.

The economic and financial crisis of 2007/2009 has posed unexpected challenges on both the global and the regional level. Besides the US, the EU has been the most severely hit by the current economic crisis. The financial and banking crisis on the one hand and the sovereign debt crisis on the other hand have clearly shown that without a bold, constructive and systematic change of the economic governance structure of the Union, not just the sustainability of the monetary zone but also the viability of the whole European integration process can be seriously undermined. The current crisis is, however, only a symptom, which made all those contradictions overt that were already heavily embedded in the system. Right from the very beginning, the deficit and the debt rules of the Maastricht Treaty and the Stability and Growth Pact have proved to be controversial cornerstones in the fiscal governance framework of the European Economic and Monetary Union (EMU). Yet, member states of the EU (both within and outside of the EMU) have shown an immense interest in adopting numerical constraints on the domestic level without hesitation. The main argument for the introduction of national fiscal rules was mostly to strengthen the accountability and credibility of national fiscal policy-making. The paper, however, claims that a relatively large portion of national rules were adopted only after the start of deceleration of the debt-to-GDP ratios. Accordingly, national rules were hardly the sole triggering factors of maintaining fiscal discipline; rather, they served as the key elements of a comprehensive reform package of public budgeting. It can be safely argued, therefore, that countries decide to adopt fiscal rules because they want to explicitly signal their strong commitment to fiscal discipline. In other words, it is not fiscal rules per se what matter in delivering fiscal stability but a strong political commitment.

Trimming the sails. The comparative political economy of expansionary fiscal consolidations. A Hungarian perspective

Provides a multidisciplinary and systematic analysis of the concept of fiscal consolidations. This book discusses the concept, suggesting that fiscal adjustment can be in trade-off with economic growth if certain conditions are met. Fiscal consolidation has significant short term costs which dampen economic growth. This widely shared consensus in literature on political economy makes fiscal adjustment highly unpopular. Benczes conducts a systematic analysis to find out whether it is possible to have fiscal consolidation and experience economic growth even in the short run.The book provides a clear, multidisciplinary and systematic analysis of the relatively new concept of the so-called expansionary fiscal consolidations. This concept suggests that fiscal adjustment can be in trade-off with economic growth if certain conditions are met. But why do only a few countries and only at certain times experience the expansionary effects, while others not at all? The necessary conditions and circumstances have been totally neglected in the literature, or analyzed only partially at best.Having evolved a theoretical framework, it is tested on a difficult case: Hungary, which has had the highest deficit in the European Union. The main question was whether Hungary has a chance to experience short term growth effects in times of adjustment. ----- Contents: List of Figures List of Tables Acknowledgements 1. Introduction Part One: A critical Assessment of the Concept of Non-Keynesian Effects 2. Stylized Facts of EU Countries’ Major Fiscal Episodes 3. An Expectational View of Fiscal Policy: A Non-Linear Approach to Fiscal Consolidation 4. The Composition of Adjustment and the Structure of Labor Markets: A Linear Approach to Fiscal Consolidation Part Two: Testing the Institutional Conditions of Non-Keynesian Effects in Hungary 5. From Goulash Communism To Neo-Kadarism: An Overview 6. Financial Intermediation in Hungary—a Comparative Perspective 7. The Structure of the Hungarian General Budget—a Decompositional Analysis 8. The Labor Market and Wage Bargaining in Hungary—the (Ir)relevance of a Social Pact 9. Conclusion References Appendices Index

Tanulságok a gazdasági és monetáris unió számára a 2008-as világgazdasági válság kapcsán (Lessons for the Economic and Monetary Union from the 2008 global economic crisis)

Írásunkban a 2008-ban kitört világgazdasági válságnak a Gazdasági és Monetáris Unióra gyakorolt hatásait elemezzük. Tanulmányunkban rávilágítunk a Gazdasági és Monetáris Unió két olyan problémájára, amelyek a válság után váltak igazán nyilvánvalóvá. Egyrészt a görög államcsődveszély, illetve egyes, korábban jól teljesítő országok botladozása jelzi, hogy a Monetáris Unió intézményrendszere legalábbis hiányos. A másik kérdés összefügg az előzővel, és azon országok szemszögéből érdekes, amelyek csatlakozni kívánnak a GMU-hoz: felerősödtek azok a vélemények, amelyek a csatlakozás elhalasztása mellett foglalnak állást. Tanulmányunk második részében ezt a kérdést járjuk körbe. / === / In our paper we are analyze the effects of the economic crisis of 2008 on the Economic and Monetary Union. We are focusing on two core problems of the EMU which came to surface only after the outbreak of the crisis. First, we address the fiscal problems of Greece and other member states which performed well before the crisis. These problems show that there are major institutional shortcomings in the Monetary Union. The second question is connected to the first one and concerns the new member states of the European Union and their strategies to join the Euro zone. After the crisis more and more voices in the new member states suggest postponing EMU membership.

Governance in the European Union - Applying the "trilemma of global politics"

The European Union with its sophisticated institutional system is the most important regional integration on Earth. This tight form of economic integration converges to the level that Dani Rodrik calls hyperglobalization in his model, the political trilemma of globalisation. In our paper we develop the mentioned model and then we apply it to the case of the European Integration. We argue that if we want to maintain the deep integration among member states in the EU we have to pass more and more functions of the nation states to the federation level. In case of the EMU that means that federal fiscal policy is needed which could lead to multi-speed Europe considering new member states’ reluctance to give up their specific institutions.

Robert J. Barro és a költségvetési túlköltekezés (Robert J. Barro and fiscal overspending)

Robert J. Barro, a Harvard Egyetem professzora főként a gazdaságpolitika makroökonómiai modellezése területén elért eredményei alapján ismert a közgazdászok körében. Tevékenysége kiterjed mind az elméleti, mind pedig az empirikus kutatások területére. Jelen tanulmány Barro azon kutatásainak feltételezéseit és eredményeit összegzi, amelyek a ricardói ekvivalenciaelvből kiindulva a költségvetési politika elméletét magyarázó újszerű eredmények kibontakozását segítették elő. A 80-as években az Egyesült Államok magas költségvetési hiánya számos közgazdászt ösztönzött hasonló témájú elmélet kidolgozására. Mivel hazánkban szinte mindennapos vita forrása a költségvetési hiány túlzott mértéke, ami veszélyezteti a monetáris közösségben való részvételünket, különösen érdekes és időszerű annak áttekintése, hogy hogyan gondolkodik egy modern közgazdász a költségvetési hiány okairól és következményeiről. ________________ The question of budgetary discipline emerges in relation to the criteria of the Economic and Monetary Union in almost all European special journals today. There is much less attention paid to budgetary overspending, the adjustment of which caused a serious puzzle for the government and the economists of the United States in the 80's. The Lucasian world of new classical economics has questioned the effectiveness of government intervention, it confuted above all the efficiency of fiscal policy. The macroeconomic models of Barro (1979, 1986) introduced in the present study - building upon the theoretical approach of economic policy on similar foundations - examine the effect of budgetary spending principally from a long-run perspective. His empirical analysis, overarching almost seventy years (1916–1982), is based upon the time series of variables affecting the budgetary deficit of the United States, distinguishing the effect of the usual government expenses from the over average items within. On the basis of his investigation on the United States and the United Kingdom he, furthermore, did not reject the economic invigorating role of government spending, he opposed Lucas' conclusions and got a modest step closer to the Keynesian standpoint in this sense. Barro, however, irrefutably argues on classical grounds, he recalls and reevaluates the Ricardian equivalence principle, summarizes the critiques raised against it and unintentionally praises the Classical economists. According to Barro we cannot ignore the one-time theorem of Ricardo if we are endeavoring to model government spending - we have to count with it if not definitely as a positive, but at least as a normative economic relationship.

Gazdasági kormányzás a gazdasági és monetáris unióban - a globális politika lehetetlen szentháromsága szemszögéből (Economic governance in the economic and monetary union – applying the trilemma of global politics)

Az Európai Unió a világgazdaság egyik legfontosabb integrációja. A benne megvalósuló gazdasági integráció szorossága megfelel annak a szintnek, amit Rodrik hiperglobalizációnak nevez. Az elmélet szerint a politika szintjén egyszerre nem megvalósítható a demokratikus politikai döntéshozatal, a teljes világgazdasági integráció, illetve a nemzetállam. A trilemma a globalizáció útjában álló intézményi különbségeken alapszik. Megoldása három módon lehetséges: a demokrácia kiiktatásával a megoldás az arany kényszerzubbony, ahol a piaci mechanizmusok veszik át az állami gazdaságpolitika szerepét; a globális kormányzás megvalósulása esetén a szuverén nemzetállamok tűnnek el a nemzetközi rendszerből; végül a Bretton Woods kompromisszum esetében a globalizáció útjába állítunk akadályokat. Írásunkban a modellt az európai integrációra, egészen pontosan a Gazdasági és Monetáris Unióra alkalmazzuk. Érvelésünk szerint, ha fent kívánjuk tartani az integráció szorosságát, erősíteni kell az integráció szintjén a gazdasági kormányzást, ami pedig csak a tagállami szuverenitás rovására mehet. Ez, mely a GMU esetében leginkább a fiskális föderáció erősítését jelenti ugyanakkor, megnövelve az integráció költségeit, egy többsebességes Európa kialakulása irányába hathat. _____ The European Union with its sophisticated institutional system is the most important regional integration on Earth. This tight form of economic integration converges to the level that Dani Rodrik calls hyperglobalization in his model, the political trilemma of globalisation. In this model Rodrik assumes that from the three desired element of world politics (deep economic integration, the nation state, and democratic politics) only two can be chosen. We can either choose deep integration and the nation state but then we have to abandon democracy; or we can choose deep integration and democracy, but then we have to forfeit the nation state; or we have to circumscribe globalisation to maintain democracy and the nation state. In our paper we develop the mentioned model and then we apply it to the case of the European integration. We argue that if we want to maintain the deep integration among member states in the EU we have to pass more and more functions of the nation states to the federation level. In case of the EMU that means that federal fiscal policy is needed which could lead to multi-speed Europe considering new member states reluctance to give up their specific institutions.

On the new economic philosophy of crisis management in the European Union

This essay attempts to go beyond presenting the bits and pieces of still ongoing crisis management in the EU. Instead it attempts at finding the ‘red thread’ behind a series of politically improvised decisions. Our fundamental research question asks whether basic economic lessons learned in the 1970s are still valid. Namely, that a crises emanating from either structural or regulatory weaknesses cannot and should not be remedied by demand management. Our second research question is the following: Can lacking internal commitment and conviction in any member state be replaced or substituted by external pressure or formalized procedures and sanctions? Under those angles we analyze the project on establishing a fiscal and banking union in the EU, as approved by the Council in December 2012.