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.

Adjusting to a credit cycle bust: The role of fiscal policy. CEPS Commentary, 27 July 2012

In response to the often-heard accusation that “austerity is killing growth in Europe”, Daniel Gros asks in this new Commentary: “What austerity?” Looking at the entire budget cycle, he finds that the picture of austerity killing growth simply does not hold up. Since the bursting of the bubble in 2007, Gros reports that the economic performance of the US has been very similar to that of the euro area: GDP per capita is today about 2% below the 2007 level on both sides of the Atlantic; and the unemployment rate has increased by about the same amount as well: it increased by 3% both in the US and the euro area. Thus, he concludes that over a five-year period, the US has not done any better than the euro area although it has used a much larger dose of fiscal expansion.

Comparative regional perspectives: the Bologna process and higher education attainment. Jean Monnet/Robert Schumann Paper Series Vol 13 No. 11, August 2013

Since 1999, countries have voluntarily chosen to reform their higher education systems to join the European Higher Education Area. This paper compares Bologna Process implementation across four regions within the European Union. While there are 47 countries participating in the Bologna Process, this paper uses statistical analysis to consider 25 of the 28 EU Member States. The time period of analysis is 2000-2011, prior to Croatia’s accession to the EU on 1 July 2013. Across Europe there are inter-regional differences in how the Bologna Process has been implemented and in the political economy contexts that influence higher education reform for policy convergence. There are three explanatory variables in the political economy context: 1. competitive economic pressures and globalization 2. domestic politics at the national level 3. leadership from the supranational European Union that socially constructs regional norms Tertiary education attainment is the dependent variable of interest in this research. The objective of 40%, for 30-34 year olds, is Europe 2020 benchmark target. There are additional higher education reform criteria encompassed in the Bologna Process. These criteria concern Credit and Degree Structure, Quality Assurance, and Recognition of academic degrees among countries in the EHEA. This tertiary education attainment variable, which is of interest in this paper, does not capture the entire implementation process. Nevertheless, it is a measure of one important indicator of success in providing higher education access to populations within the context of democratic governance. This research finds that statistically GDP Per Capita is the most significant variable in relationship to tertiary education attainment across four regional areas in the European Union.

Regional business cycles and the emergence of sheltered economies in the southern periphery of Europe. Bruges European Economic Research (BEER) Papers 7/November 2006

Recent research has highlighted that in the last few years the evolution of regional disparities in many European states has become pro-cyclical. This represents a change with respect to the predominantly anti-cyclical pattern of the 1960s and 1970s. This paper addresses the question of whether and when this change has taken place in the southern periphery of Europe, before analyzing the factors that may have played a role in such a change. The analysis relies on a regional database that includes the evolution of the GDP per capita of NUTS II regions in five European countries (France, Greece, Italy, Portugal, and Spain) between 1980 and 2000. The results of the analysis support the hypothesis of a change towards a pro-cyclical evolution of regional disparities in the cases of Italy, Portugal, and Spain, but not in those of Greece and France. A relationship between these pro-cyclical patters and the emergence of less dynamic sheltered economies is also detected in peripheral regions. This lack of dynamism is related to the fact that numerous peripheral areas in southern Europe have become increasingly dependent on factors such as transfers or public investment and employment, and therefore are less exposed to changes in market conditions.

The grand divergence: global and European current account surpluses. Bruegel Working Paper 2015/08, 13 August 2015

Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses.

A Convergence Process in Household Credit in Central and Eastern Europe. ECRI Commentary No. 16, 30 October 2015

The liberalisation of Eastern Europe’s market during the 1990s and the 2004 EU enlargement have had a great impact on the economies of Central and Eastern Europe (CEE). Indeed, prior to these events, the financial system and household credit markets in CEE were underdeveloped. Nonetheless, it appeared to numerous economists that the development of the CEE financial system and credit markets was following an intensely positive trend, raising the question of sustainability. Many variables impact the level and growth rate of credit; several economists point out that a convergence process might be one of the most important. Using a descriptive statistics approach, it seems likely that a convergence process began during the 1990s, when the CEE countries opened their economies. However, it also seems that the main driver of this household credit convergence process is the GDP per capita convergence process. Indeed, credit to households and GDP per capita have followed broadly similar tendencies over the last 20 years and it has been shown in the literature that they appear to influence each other. The consistency of this potential convergence process is also confirmed by the breakdown of household credit by type and maturity. There is a tendency towards similar household credit markets in Europe. However, it seems that this potential convergence process was slowed down by the financial crisis. Fortunately, the crisis also stabilised the share of loans in foreign currency in CEE countries. This might add more stability to credit markets in Eastern Europe.

Brexit – potential economic consequences if the UK exits the EU. Policy Brief #2015/05

If the United Kingdom (UK) exits the EU in 2018, it would reduce that country’s exports and make imports more ex-pensive. Depending on the extent of trade policy isolation, the UK’s real gross domestic product (GDP) per capita would be between 0.6 and 3.0 percent lower in the year 2030 than if the country remained in the EU. If we take into ac-count the dynamic effects that economic integration has on investment and innovation behavior, the GDP losses could rise to 14 percent. In addition, it will bring unforeseeable political disadvantages for the EU – so from our perspective, we must avoid a Brexit.

Institutions and Growth in Europe. CEPS Working Document No. 421, April 2016

This paper provides empirical evidence in support of the view that the quality of institutions is an important determinant of long-term growth of European countries. When also taking into account the initial level of GDP per capita and government debt, cross-country institutional differences can explain to a great extent the relative long-term GDP performance of European countries. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor long-term real growth performance. Interestingly, the detrimental effect of high debt levels on long-term growth seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The quality of national institutions seems to enhance the long-term GDP performance across a large sample of countries, also including OECD countries outside Europe. The paper offers some evidence that, in the presence of good institutions, conditions for catching-up seem generally good also for euro-area and fixed exchange rate countries. Looking at sub-groupings, it seems that sound institutions may be particularly important for long-term growth in the countries where the exchange rate tool is no longer available (and where also sovereign debt is high), and less so in the countries with flexible exchange rate regimes. However, this result is preliminary and requires further research. The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

An Italian job: the need for collective wage bargaining reform. Bruegel Policy Brief ISSUE 2016/11 - JULY 2016

Highlights: Since the mid-1990s, Italy has been characterised by a lack of labour productivity growth, combinedwith a 60 percent growth in labour costs, 20 percentage points above euro-area average consumer price growth. As a consequence, Italy has become less competitive compared to its euro-area partners, the profitability of its firms has dropped and real GDP-per-capita has flatlined. • At the root of the substantial discrepancy between wages and productivity is Italy’s system of centralised wage bargaining which, in many ways, is designed without regard for the underlying industrial structure and geographical heterogeneity of the Italian economy.This has fostered perverse incentives and imbalances within Italy. • Collective wage bargaining, and in particular the determination of base salaries, should be moved from the national to the regional level for all contracts, in the public and private sectors.The Mezzogiorno,which might superficially be seen as losing out from this policy, would actually gain the most in competitiveness terms. • Furthermore, measures should be taken so that, in the long run, the Italian industrial structure evolves into a less fragmented small-company-based economy. This firm consolidation would likely expand the use of firm-level agreements and performance payments, and would improve Italy’s productivity and competitiveness overall.