Fiscal Divergence and Business Cycle Synchronization: Irresponsibility is Idiosyncratic

Using a panel of 21 OECD countries and 40 years of annual data, we find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. That is, fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systematically associated with more synchronized business cycles. We also find evidence that reduced fiscal deficits increase business cycle synchronization. The Maastricht "convergence criteria," used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. They may thus have indirectly moved Europe closer to an optimum currency area, by reducing countries’ abilities to create idiosyncratic fiscal shocks. Our empirical results are economically and statistically significant, and robust.

On the peculiar relevance of a fundamental dilemma of minimum-wage regulation in post-socialism – apropos of an international investigation

To the extent minimum-wage regulation is effective in fighting against excessive earnings handicaps of those at the lower end-tail of earnings distribution, it may have the side-effect of worsening their employment prospects. A demand-and-supply interpretation of data on the relative employment rate and earnings position of the least educated in the EU27 suggests that the resulting dilemma might be particularly relevant for minimum-wage policies in post-socialist countries.

A comprehensive approach to the euro-area debt crisis

The euro area‘s sovereign debt crisis continues though significant steps have been taken to resolve it. This paper proposes a comprehensive solution to the crisis based on three pillars: a plan to restore banking sector soundness in the whole euro area, a resolution of sovereign debt crisis -including a revision of EU assistance facilities and a reduction of the Greek public debt- and a strategy to foster growth and competitiveness. The paper provides novel estimates and analysis focusing on the current situation of Greece, Ireland, Portugal and Spain.

The threat of "currency wars": A European perspective

The ‘currency war’, as it has become known, has three aspects: 1) the inflexible pegs of undervalued currencies; 2) recent attempts by floating exchange-rate countries to resist currency appreciation; 3) quantitative easing. Europe should primarily be concerned about the first issue, which relates to the renewed debate about the international monetary system. The attempts of floating exchange-rate countries to resist currency appreciation are generally justified while China retains a peg. Quantitative easing cannot be deemed a ‘beggar-thy-neighbour’ policy as long as the Fed’s policy is geared towards price stability. Current US inflationary expectations are at historically low levels. Central banks should come to an agreement about the definition of price stability at a time of deflationary pressures. The euro’s exchange rate has not been greatly impacted by the recent currency war; the euro continues to be overvalued, but less than before.

Beyond the crisis: prospects for emerging Europe

This paper assesses the impact of the 2008-09 global financial and economic crisis on the medium-term growth prospects of the countries of central and eastern Europe, the Caucasus and Central Asia, which began an economic transition about two decades ago. We use crosscountry growth regressions, putting special emphasis on a proper consideration of the crisis and robustness. We find that the crisis has had a major impact on the within-sample fit of the models used and that the positive impact of EU enlargement on growth is smaller than previous research has shown. The crisis has also altered the future growth prospects of the countries studied, even in the optimistic but unrealistic case of a return to pre-crisis capital inflows and credit booms.

The Case for Reforming Euro Area Entry Criteria

The global economic and financial crisis has raised further concerns about the euro-entry criteria, in addition to other factors, such as the effective tightening of the criteria due to the enlargement of the EU from 12 to 27 members, the highly unfavourable property of business cycle dependence, the internal inconsistency of the criteria due to the structural price level convergence of Central and Eastern European countries, and the continuous violation of the criteria by euro-area members. The interest rate criterion became a highly volatile measure. Many US metropolitan areas would fail to qualify to be members of the US monetary union by applying the currently used inflation criterion to the US. It is time to reform the criteria and to strengthen their economic rationale within the legal framework of the EU treaty. A good solution would be to relate all criteria to the average of the euro area and simultaneously to extend the compliance period from the currently considered one year to a longer period.

Fiscal Federalism in Crisis: Lessons for Europe from the US

The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. A higher level of fiscal federalism would strengthen the euro area, but is not inevitable. Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk. Introduction of a Eurobond covering up to 60 percent of member states’ GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.

Financial Transaction Tax: Small is Beautiful

The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financialtransaction taxes.

The importance of institutions in expansionary fiscal consolidations. A critical assessment of non-Keynesian effects

The short-term effects of fiscal consolidation have attracted an increasing attention from both the academia and policy makers in the recent years. Authors in the literature on non- Keynesian effects usually put the emphasis on the need for the devaluation of the national currency, the accommodating reaction of the monetary authority and the favourable international economic conditions as the necessary accompanying tools of fiscal consolidation, in order to realise short-term expansionary effects. Some also add the necessity of large-scale adjustment; while others support the view that a high and increasing debt ratio or increasing government spending, by triggering an unavoidable adjustment, is the key to experiencing short-term expansionary effects. The composition of adjustment also became a crucial explanation for non-Keynesian effects. However, as the following critical assessment of the literature on expansionary fiscal consolidations will reveal, institutional conditions, such as the importance of the depth of financial intermediation and the influencing role of labour market structure, can prove to be crucial in the occurrence of the desired expansionary short-term effects.

Ütemvakság

A gazdaság növekedés felgyorsulása hosszú távon először szükségszerűen csak egy rövid helyreállítási perióduson keresztül valósulhat meg, amelynek során a növekedés ütemét a válságok miatt elmaradt vagy más okból elmulasztott növekedés pótlása gyorsítja fel. Ez azonban messze nem jelenti a hosszú távú növekedési ütem felgyorsulását. A jelenséget először Jánossy Ferenc írta le, akinek megállapításai ma is érvényesek: egy jelentős visszaesés, majd stagnálás után a növekedési ütem 2005 után visszaállt az 1980 óta kialakult 1,5 százalékos hosszú távú ütemre. A Jánossy-féle szakmastruktúra-tényező nem más, mint a tudástőke: a munkaképes lakosság személyes tudása, jártassága és motivációja. Ezek az összetevők egy újrafogalmazott termelési függvény emberi elemei számos új és már korábban is ismert tényező mellett. Az emberi erőforrások nyilvántartása nem kompetenciaalapú, és emiatt a hosszú távú növekedési ütem alacsony szintjét sem tudjuk megmagyarázni. A növekedési ütem ingadozásai mögött elsősorban gazdaságpolitikai hibákat, érdemeket keresünk, holott az emberi beruházások elégtelen szintje jelenti a problémát, amely a múlt örökségnek és a jelen terheinek súlya alatt nem oldódik meg automatikusan. A magyar gazdaság egy újabb helyreállítási periódus előtt áll, s a gazdasági átalakítás alapvető feladata a foglalkoztatható lakosság aktivizálása, enélkül minden növekedési gyorsulás csak átmeneti helyreállítási periódus marad. JEL kód: B23, C22, E01, O11. /===/ Acceleration of economic growth in the long term can primarily be achieved only through a short period of consolidation, in which the growth rate of growth by recession or made up for by growth potential neglected for other reasons. But this is far from equivalent to an acceleration of the long-term growth rate. The phenomenon was described first by Ferenc Jánossy, whose conclusions remain valid to this day: after a substantial slump and a period of stagnation, the growth rate recovered after 2005 the long-term rate of 1.5 per cent that had set in after 1980. Jánossy's trade structure factor amounts to capital in knowledge: the personal know-how, expertise and motivation of the able-bodied population. These factors are the human constituents of a newly formulated production function, along with numerous new and previously known factors. The registration of human resources is competence- based and so it cannot explain the low level of the long-term growth rate either. People tend primarily to see failures and achievements of economic policy behind the failures and achievements of economic policy, when the real problem is inadequate human investment, which will not resolve itself automatically under the weight of the past and present burdens. The Hungarian economy is on the brink of a new period of recovery, and the basic task of economic transformation is to activate the employable population, without which any acceleration of growth will amount only to a temporary period of recovery.

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

Market reform and state paternalism in Hungary: a path-dependent approach

Hungary is one of the worst-hit countries of the current financial crisis in Central and Eastern Europe. The deteriorating economic performance of the country is, however, not a recent phenomenon. A relatively high ratio of redistribution, a high and persistent public deficit and accelerated indebtedness characterised the country not just in the last couple of years but also well before the transformation, which also continued in the postsocialist years. The gradualist success of the country – which dates back to at least 1968 – in the field of liberalisation, marketisation and privatisation was accompanied by a constant overspending in the general government. The paper attempts to explore the reasons behind policymakers’ impotence to reform public finances. By providing a path-dependent explanation, it argues that both communist and postcommunist governments used the general budget as a buffer to compensate losers of economic reforms, especially microeconomic restructuring. The ever-widening circle of net benefiters of welfare provisions paid from the general budget, however, has made it simply unrealistic to implement sizeable fiscal adjustment, putting the country onto a deteriorating path of economic development.

Az euróövezet bővítése és euróbevezetési stratégiák (Euro-area enlargement and euro adoption strategies)

Tanulmányunk azokat a kockázatokat és kihívásokat vizsgálja, amelyekkel az új EU tagállamok szembesülnek az euróhoz vezető úton, valamint elemzi az euró bevezetésével és a bevezetés időzítésével kapcsolatos stratégiákat is. Megvizsgáljuk a reál- és nominálkonvergencia kapcsolatát az euróövezetbe csatlakozás szemszögéből. Véleményünk szerint a gazdaság egy főre jutó jövedelemben mért kezdeti fejlettségi szintje, valamint a reálkonvergencia sebessége kihatnak a követendő stratégiákra és a belépés időzítésére. Minél alacsonyabb ugyanis egy ország egy főre jutó jövedelme, annál nagyobb az árszínvonalbeli lemaradása (amit be kell hoznia), és az új tagok jelenlegi helyzetét figyelembe véve annál nagyobb a veszélye annak, hogy a hitelek növekedése túlzottá, a gazdaság túlfűtötté válik. Úgy gondoljuk, hogy az inflációkövetés lebegő árfolyam mellett megfelelőbb az árszínvonal felzárkózási folyamatának kezelésére, mint valamilyen merev árfolyamrögzítés. Elemezzük a maastrichti kritériumokat az új EU-tagállamok gazdasági jellemzőinek szempontjából, és az inflációs kritérium módosítását javasoljuk, amely jelenlegi formájában elvesztette közgazdasági értelmét. JEL kód: E31, E52, E60, F30. /===/ This paper commissioned by DG ECFIN from the EU Commission as part of the EMU@10 project and published in Hungarian by the permission of the EU Commission. The origi-nal English version is available at http://ec.europa.eu/economy_finance/publications/ publication_summary12103_en.htm. The paper discusses the risks and challenges faced by new members on the road to the euro and the strategies and timing of euro adoption. It investigates the real/nominal convergence nexus from the perspective of euro-area entry, arguing that the initial level of economic development, as measured by per capita income, and the speed of real convergence have a bearing on the strategies to follow and the timing of entry into the euro area, for the lower per capita income is, the larger is the price-level gap to close and the greater the danger of credit booms and overheating. It is argued argue that inflation targeting with floating rates is better suited than hard pegs to managing the price-level catch-up process. A suggestion is made for modifying the Maastricht inflation criterion, which as currently defined has lost its economic logic.

A fiskális divergencia és a konjunktúraciklusok együttmozgása - a felelőtlen fiskális politika az aszimmetrikus sokkok forrása (Fiscal divergence and business cycle synchronization: irresponsibility is idiosyncratic)

A világ 115 országának - köztük 21 OECD-tagország - 40 évnyi adatait vizsgálva, arra a következtetésre jutottunk, hogy a hasonló állami költségvetési pozíciójú országok konjunktúraciklusai között szorosabb együttmozgás mutatható ki. Azaz, a fiskális konvergenciát (amelyet a költségvetési egyenleg GDP-hez viszonyt arányának konvergenciájaként definiáltunk) összehangoltabb konjunktúraciklusokkal lehet összefüggésbe hozni. Kutatásaink során arra is találtunk bizonyítékot, hogy a kisebb mértékű költségvetési deficitek növelik a konjunktúraciklusok együttmozgását. A maastrichti konvergenciakritériumok - amelyek az európai monetáris unió követelményeinek való megfelelést hivatottak meghatározni - a fiskális konvergenciát és a költségvetési deficit csökkentését ösztönözték, s ezzel közvetett módon hozzásegítették Európát egy optimális valutaövezet létrehozásához azáltal, hogy csökkent az egyes országok lehetősége a felelőtlen fiskális politika által gerjesztett sokkhatások létrehozására. Az általunk feltárt empirikus eredmények gazdasági és statisztikai szempontból is szignifikánsak és robusztusak. _____ Using panels of 115 countries of world – including 21 OECD countries – and 40 years of annual data, the authors find that countries with similar government budget positions tend to have business cycles that fluctuate more closely. Thus fiscal convergence (in the form of persistently similar ratios of government surplus/deficit to GDP) is systemati-cally associated with more strongly synchronized business cycles. Evidence is also found that reduced fiscal deficits increase business-cycle synchronization. The Maastricht "con-vergence criteria", used to determine eligibility for EMU, encouraged fiscal convergence and deficit reduction. So they may, indirectly, have moved Europe closer to an optimum currency area, by reducing countries abilities to create idiosyncratic fiscal shocks. The empirical results of the study are economically and statistically significant, and robust.