Big business in the Russian economy and politics under Putin's rule; The Russian power industry shortly before reforms; Ukrainian metallurgy: the economic link in the oligarchical system. OSW Study 5/2002

Big business in Russia: The pace of ownership transfer in the Russian economy has speeded up considerably over the last year. There has been a significant rise in the number of acquisitions of whole enterprises, and large blocks of shares in individual firms and plants. Similarly the number of mergers, bankruptcies and take-overs of failing firms by their strongest competitors has grown. The Russian power industry: This study is an overview of the current condition and principles on which the Russian power sector has been functioning so far. This analysis has been carried out against the background of the changes that have been taking place in the sector since the beginning of the 1990s. This text also contains a description of guidelines and progress made so far in implementing the reform of the Russian power industry, the draft of which was adopted by the government of the Russian Federation in summer 2001. However, the purpose of this study is not an economic analysis of the draft, but an attempt to present the political conditions and possible consequences of the transformations carried out in the Russian power sector. The final part attempts to evaluate the possibilities and threats related to the implementation of the reform in its present shape. Ukrainian metallurgy: The metallurgic sector, like the east-west transit of energy raw materials, is a strategic source of revenue for Ukraine. Over the last ten years, this sector has become Kiev's most important source of foreign currency inflows, accounting for over 40 per cent of its total export revenues. The growth of metallurgic production, which has continued almost without interruption since the mid-1990s, has contributed considerably to the increase in GDP which Ukraine showed in 2000, for the first time in its independent history.

The Penetration of Financial Instability in Agricultural Credit and Leveraging. Factor Markets Working Paper No. 2, September 2011

This paper describes the aggregate rural capital markets of the EU and the main differences between the markets of its member countries. The results of our study suggest that the agricultural credit markets are still quite segmented and the segments are country- rather than currency- or region specific. Financial instability in Europe is also penetrating the agricultural sector and the variation of interest rates for agricultural credit is increasing across countries. Perhaps the most dramatic signal of growing financial instability is that the financial leverage (gearing rate) of European farms rose in 2008 by almost 4 percentage points, from 14 to 18%. The 4 percentage-point annual rise was twice the 2 percentage-point rise observed during the economic recession in the late 1980s and early 1990s. The distribution of the financial leverage of agriculture across countries does not, however, reflect the distribution of country-specific risk premiums in the manner that they are observed in government bond yields. Therefore, in those countries that have the weakest financial situation in the public sector and in which the bond markets are encumbered with high country-specific risk premiums, the agricultural sector is not directly exposed to a very large risk of increasing interest rates, since it is not so highly leveraged. For example in Greek and Spanish agriculture, the financial leverage (gearing) rate is only 0.6% and 2.2% respectively, while the highest gearing rates are found elsewhere (in Denmark), reaching 50%.

The fiscal compact - Europe's "hard core" based on German economic conditions. OSW Commentary No. 71, 2012-03-07

On 2 March, the leaders of 25 EU member states signed the Treaty on stability, coordination and governance in the economic and monetary union. It will introduce new fiscal constraints and officially vest new competences in the eurozone countries. Thus, their right to coordinate economic policy among them will be sanctioned. So far, the Lisbon Treaty has only provided for organisation of informal Eurogroup meetings, to be attended by representatives of the European Commission. The principles introduced by the compact, if the eurozone countries are really determined to observe its provisions, will create a new way of managing the single currency. Within the next few years, the most indebted countries will have to carry out radical reforms to boost their competitiveness and adjust it to German standards. During this period the Federal Republic of Germany will most probably decide to offer higher loan guarantees to relieve these countries’ budgets. The compact’s political consequences are also of great significance, especially considering how the treaty was finalised. The eurozone states have in fact accepted that the direction for changes will be devised by France and Germany, and the role of European institutions such as the Commission or the Parliament may weaken. From the perspective of eurozone candidate countries, the introduction of the fiscal compact means expanding the scope of conditions they must meet to become members of the single currency area. In the future, a country, in order to adopt the single currency, will have to meet the structural deficit criterion, and also most probably carry out economic reforms such as unifying its fiscal system. These goals will be achieved across the eurozone gradually, in the subsequent stages of the economic governance reform.

Russia in Crisis: Year One. OSW Report, January 2010

Economic conditions which had favoured Russia’s development suddenly changed in mid-2008. The Russian economy was hit, on the one hand, by a drastic slump in oil prices (which fell from nearly US$150 to US$50 between July 2008 and January 2009), and on the other by the outflow of investors (a net of US$130 billion of capital left Russia in the fourth quarter of 2008). Within several months, the financial crisis became an economic crisis affecting the entire economy. The financial reserves accumulated in times of prosperity (more than US$162 billion in the stabilisation funds and nearly US$598 billion in the currency and gold reserve) alleviated the negative impact of the crisis, although this failed to prevent the deep declines in macroeconomic indicators. Russia is one of the states most severely affected by the crisis. In the first half of 2009, its GDP fell by 10.4% compared to the same period in the previous year, while industrial production dropped by nearly 15%, and a decrease in investments of over 18% was reported. The poor economic performance has strongly affected the Russian budget, which reported a deficit for the first time in ten years in 2009. During the first year of the crisis (August 2008 – September 2009), Russia’s financial reserves were seriously reduced as a result of the government’s anti-crisis policy and interventions from the central bank: the reserve fund decreased by nearly 45% to US$76 billion, and the central bank’s reserves shrunk by nearly US$200 billion to US$409 billion. Meanwhile, however, the money in the National Welfare Fund, which had been intended almost entirely to subsidise the Pensions Fund between 2010 and 2015, rose almost three-fold (to US$90 billion). According to government forecasts, the money from the reserve fund is also supposed to be spent fully in 2010. The financial crisis has triggered a dynamic outflow of capital from the Russian market. So-called speculative capital was the first to demonstrate the lack of confidence in the Russian market. In the first half of 2009, the growth rate of long-term investments also decreased noticeably, although no spectacular withdrawal of direct investments from Russia has been observed. The economic crisis has also halted the foreign expansion of Russian private capital, while state-owned capital strengthened its position as an investor. Russia’s raw materials companies continue to be the main category of foreign investors; however, new technologies are gaining prominence as the second main direction of Russian investments.

Is Independence Possible in an Interdependent World? Scotland vs. the UK's Participation in the European Economy. Bruges European Economic Policy (BEEP) Briefing 30/2013

Many commentators have criticised the strategy used to finance regional governments such as the Scottish Parliament – both the block grant system and the limited amount of fiscal autonomy devised in the Scotland Act of 2012. This lecture sets out to identify what level of autonomy or independence would best suit a regional economy in a currency union, and also the institutional changes needed to sustain those arrangements. Our argument is developed along three lines. First, we set out the advantages of a fiscal federalism framework and the institutions needed to support it, but which the Euro-zone currently lacks. The second is to elaborate a model of fiscal federalism where comprehensive powers of taxation and spending are devolved (an independent Scotland and the UK remain constituent members of the EU and European economy). Third, we evaluate the main arguments for the breakup of nations or economic unions with Scotland and the UK as leading examples. We note that greater autonomy may not result in increases in long run economic growth rate, but it does imply that enhancing the fiscal competence and responsibility of regional governments would result in productivity gains and hence higher levels of GDP per head. That means the population is permanently richer than before, even if ultimately their incomes continue to grow at the same rate. It turns out that these improvements can be achieved through devolved tax powers, but not through devolved spending powers or shared taxes.

Struggling with an Opportunity: The first 10 years with the EU for Central Europe and the Baltics - A few lessons. CEPS Essay No. 12, 2 May 2014

In 2004, ten new members joined the European Union, radically reshaping its geography and governance characteristics. Earlier expectations predicted a more gradual process of accession – like a more gradual earlier evolution had been expected for the new European currency that had been adopted in 1999 by no less than 11 members. But these were the times of euro-enthusiasm. In their new CEPS Essay, Kálmán Mizsei and Ádám Kullmann offer some interesting and instructive insights from the experience in the newest member states following their accession 10 years ago for improving the effectiveness with which the EU structural and cohesion funds are spent.

Rural Labour Market Developments in the Former Yugoslav Republic of Macedonia. Factor Markets Working Paper No. 5, September 2011

The significant changes in the quantitative and qualitative characteristics of human resources in rural Macedonia can be explained by the continued trend of emigration from villages to urban areas and abroad. The intensity of emigration has altered the demographic structure and reproductive base of the rural population, along with the income of rural households. The rural and agricultural labour market faces a mismatch with respect to the unfavourable age, education and spatial distribution of the total labour force. A reduction in the participation of women in the agricultural labour force is a new feature. The overall transformation is apparent in the income structure of rural households. An increase in the share of households with mixed income sources notably stems from households that receive remittances and foreign currency funds from family members abroad. The demographic revitalisation of rural areas depends on economic revitalisation, with a more rational use of the labour force and human resources, as well as a restructuring of agricultural production and agricultural holdings. In addition, improvements are necessary in the functioning of market institutions to better meet the needs of smaller farmers and the rural economy.

EMU Convergence: Reason for Encouragement. ACES Working Paper (Report) No. 6, 2007

The purpose of this paper is to investigate whether convergence is actually occurring within Europe, which groups of countries are converging, and the macroeconomic indicators for which such convergence is apparent. Free trade and a single currency should lead to convergence in rates of inflation, but perhaps not in unemployment rates or in GDP growth. These latter aspects of economic performance are politically important, because the voters become decidedly displeased if unemployment is high and growth slow, as has been the case in France, Germany, and Italy during recent years.

One money with several cycles? Evaluation of European business cycles using cluster analysis. ACES Cases No. 2009.3

Optimal currency area theory suggests that business cycle comovement is a sufficient condition for monetary union, particularly if there are low levels of labour mobility between potential members of the monetary union. Previous studies of co-movement of business cycle variables (mainly authored by Artis and Zhang in the late 1990s) found that there was a core of member states in the EU that could be grouped together as having similar business cycle comovements, but these studies always used Germany as the country against which to compare. In this study, the analysis of Artis and Zhang is extended and updated but correlating against both German and euro area macroeconomic aggregates and using more recent techniques in cluster analysis, namely model-based clustering techniques.

Measuring the intermittent synchronicity of macroeconomic growth in Europe. ACES Cases No. 2010.1

Synchronization of growth rates are an important feature of international business cycles, particularly in relation to regional integration projects such as the single currency in Europe. Synchronization of growth rates clearly enhances the effectiveness of European Central Bank monetary policy, ensuring that policy changes are attuned to the dynamics of growth and business cycles in the majority of member states. In this paper a dissimilarity metric is constructed by measuring the topological differences between the GDP growth patterns in recurrence plots for individual countries. The results show that synchronization of growth rates were higher among the Euro area member states during the second half of the 1980s and from 1997 to roughly 2002. Apart from these two time periods, Euro area member states do not appear to be more synchronized than a group of major international countries, signifying that globalization was the major cause of international business cycle synchronization.

Which Union for Europe’s Capital Markets? ECMI Policy Brief No. 22, 13 February 2015

The call for a Capital Markets Union has been a useful device to raise awareness about the need for more integration in Europe's capital markets. Despite years of harmonising regulation and a single currency, Europe’s capital markets remain fragmented. This Policy Brief calls for targeted measures to overcome fragmentation, through enhanced enforcement, strengthening of the European supervisory authorities, enhanced disclosure and comparability of financial information and the mobilisation savings in EU-wide investment funds.

Europe on the Road to the Third Stage of EMU: Recent Evidence. CES Germany & Europe Working Papers, No. 07.2, 1996

The paper deals with Europe's effort to proceed to the thud stage of EMU and establish a common currency. It is argued that the success of the common currency experiment will greatly depend on the fulfillment of the Optimum Currency Area (OCA) criteria, on the adoption of the proper adjustment policies as well as on the political desirability of the project. The paper is organized as follows: Section 1 deals briefly with the index of criteria that define an OCA. Section 2 examines the extent to which Europe experiences common demand disturbances, while sections 3 and 4 focus on evidence about the mobility of factors of production across Europe, namely labor and capital. Section 5 examines the possibility of an increase in trade volume across the EU under fixed exchange rates or a common currency regime. Section 6 sheds light on the possibility of the EURO (the ex-ECU} to become a vehicle currency in the international financial system, and Section 7 is concerned with the benefits and costs of the establishment of a European Central Bank (ECB), paying special attention to seigniorage revenues. Section 8 deals with the necessity of establishing an EU federal mechanism facilitating adjustment. Section 9 sketches out a proper role for a hegemonic power in a common currency regime. Finally, section 10 examines EMU prospects during the transitional period. The paper closes with some concluding remarks, where the role of politics and coordination of economic policies are particularly emphasized as of cardinal importance on the road to the third stage of EMU.

The Fate of Greece in a ‘Genuine Economic and Monetary Union’: Lessons from a small island state. CEPS Hi-Level Brief, 19 June 2015 Friday, 19 June 2015

As the Greek debt drama reaches another supposedly decision point, Daniel Gros urges creditors (and indeed all policy-makers) to think about the long term and poses one key question in this CEPS High-Level Brief: What can be gained by keeping Greece inside the euro area at “whatever it takes”? As he points out, the US, with its unified politics and its federal fiscal transfer system, is often taken as a model for the Eurozone, and it is thus instructive to consider the longer-term performance of an area of the US which has for years been kept afloat by massive transfers, and which is now experiencing a public debt crisis. The entity in question is Puerto Rico, which is an integral part of the US in all relevant economic dimensions (currency, economic policy, etc.). The dismal fiscal and economic performance of Puerto Rico carries two lessons: 1) Keeping Greece in the eurozone by increasing implicit subsidies in the form of debt forgiveness might create a low-growth equilibrium with increasing aid dependency. 2) It is wrong to assume that, further integration, including a fiscal and political union, would be sufficient to foster convergence, and prevent further problems of the type the EU is experiencing with Greece.

Post-Summit Commentary – Greece on the brink. EPC Commentary, 29 June 2015

The developments of recent days have been dramatic – the saga of the Greek crisis has probably opened its decisive chapter. Negotiations between Athens and its creditors failed after the Greek government decided to leave the negotiating table and hold a referendum on 5 July. The future of the country in the common currency and the potential consequences for the EU and the euro are uncertain. There are clear signs of fatigue, everywhere. But there is still time to avert the worst, if there is the political will on all sides to work on a new perspective for Greece and for the future of the Economic and Monetary Union (EMU).

A ship run aground Deepening problems in the Ukrainian economy. OSW Commentary Number 173, 16 June 2015

The drop in Ukraine’s GDP by nearly 18% in the first three months of 2015 (versus the corresponding period in 2014) has confirmed the decline of the country’s economy. Over the last 14 months, the Ukrainian currency was subject to an almost threefold devaluation against the US dollar, and in April 2015 the inflation rate was 61% (year-on-year), which exacerbated the impoverishment of the general public and weakened domestic demand. The main reason behind the crisis has been the destruction of heavy industry and infrastructure in the war-torn Donbas region, over which Kyiv no longer has control, as well as a sharp decline in foreign trade (by 24% in 2014 and by 34% in the first quarter of 2015), recorded primarily in trading volume with Ukraine’s major trade partner, i.e. Russia (a drop of 43%). The conflict has also had a negative impact on the production figures for the two key sectors of the Ukrainian economy: agriculture and metallurgy, which account for approximately 50% of Ukrainian exports. The government’s response to the crisis has primarily been a reduction in the costs of financing the Donbas and an increase in the financial burden placed on the citizens and companies of Ukraine. No radical reforms which would encompass the entire system, including anti-corruption reforms, have been carried out to stop the embezzlement of state funds and to facilitate business activity. The reasons for not initiating reforms have included the lack of will to launch them, Ukraine’s traditionally slow pace of bureaucratic action and growing dissonance among the parties making up the parliamentary coalition. The few positive changes, including marketisation of energy prices and sustaining budgetary discipline (in the first quarter of 2015, budgetary revenues grew by 25%, though partly as a result of currency devaluation), are being carried out under pressure from the International Monetary Fund, which is making the payment of further loan instalments to the tune of US$ 17.5 billion conditional upon reforms. Despite assistance granted by Western institutional donors and by individual states, the risk of Ukraine going bankrupt remains real. The issue of restructuring foreign debt worth US$ 15 billion has not been resolved, as foreign creditors who hold Ukrainian bonds have not consented to any partial cancellation of the debt. Whether Ukraine’s public finances can be stabilised will depend mainly on the situation in the east of the country and on the possible renewal of military action. It seems that the only way to rescue Ukraine’s public finances from deteriorating further is to continue to ‘freeze’ the conflict, to gradually implement wide-ranging reforms and to reach a consensus in negotiations with lenders.