Formal and Informal Labour Markets: Challenges and Policy in the Central and Eastern European New EU Members and Candidate Countries

The paper aims at comparing the formal and informal labour marketsin the Central and Eastern European new EU Member States andcandidate countries of the European Union. First, the currentsituation of the labour market is described, focusing on therecent developments since the breaking up of the East. Thenthe policy design of these labour markets is depicted and itseffects on formal and informal labour markets. The most importantchallenges for employment policy as well as the effects of enlargementon the labour markets are analysed. The paper ends with a shortsummary. (JEL J21, J23, H26, H11, O17, O57)     

National Labor Market Institutions and the EU Integration Process

This paper outlines theoretical insights regarding the motivationand effects of labor market institutions, and reviews empiricalstudies of relevant evidence from European and other countries'historical experience. Institutional interference with laissezfaire labor market outcomes has both economic and distributionalimplications, which depend on the structure of markets and onthe details of policy implementation. The resulting conceptualframework is brought to bear on a discussion of possible reformsof European labor markets in the context of the Economic andMonetary Union process. (JEL F02, J00)     

Contracting out: The Importance of a Solution for the VAT Distortion

In member states of the European Union, the current VAT treatmentof activities of public authorities creates significant distortionsin their decision-making between public provision and contractingout of public services. In several EU-member states, a refundof VAT to local governments eliminates this effect. Therefore,these VAT refund schemes facilitate contracting out. In memberstates with a refund scheme for the VAT costs of local governmentsor another solution to this distortion, in general refuse collectionis contracted out to a relatively greater extent compared tomember states without. Despite these solutions, the VAT distortionis still relevant for private suppliers of tax-exempt activitiesand public suppliers in other member-states. This distortioncould be addressed by a change in the European VAT legislation.(JEL H25; H32)     

Educating Europe: Should Public Education be Financed with Graduate Taxes or Income-contingent Loans?

The mobility of labor reduces national incentives to investin internationally applicable education. The European Unioncould overcome this by allowing member states to institute graduatetaxes or income-contingent loans, collected also from migrants.Graduate taxes or income-contingent loans result in higher welfarethan financing education with employment-based taxes. (JEL H24,H52, I28, F22)     

Efficiency and Equality in the Labour Market

I review theoretical arguments suggesting that certain labourmarket institutions can be justified for economic efficiencyreasons. In models with intrinsic market failures, "rigidities"like employment protection legislation and institutional wagecompression may push the economy closer to the efficient frontier.I discuss recent empirical evidence on income inequality, povertyand income mobility in OECD countries, and I conclude that thewelfare states of Northern Europe score relatively well on allcounts. Finally, I discuss labour market reforms that may improveefficiency without violating European voters' preference forequality.(JEL H30, J30, J50)     

EU Enlargement, Migration and the New Constitution

The paper deals with the effects of migration resulting fromEU Eastern enlargement on the welfare states of Western Europe.Although migration is good in principle, as it yields gainsfrom trade and specialization for all countries involved, itdoes so only if it meets with flexible labour markets and ifit is not artificially induced by gifts of the welfare state.This is not the present state of affairs in Western Europe.In addition to measures that make labour markets more flexible,the introduction of delayed integration of working migrantsand the home country principle for nonworking migrants is arational reaction of the state. The proposed new EU constitution,which contains far-reaching rules for a European social union,should be amended accordingly. (JEL E2, F2, H0, J3, J6)     

Risk sharing through capital gains

Abstract We estimate channels of international risk sharing between European Monetary Union (EMU), European Union, and other OECD countries, 1992–2007. We focus on risk sharing through savings, factor income flows, and capital gains. Risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then. Risk sharing from capital gains, at about 6%, is higher than risk sharing from factor income flows for European Union countries and OECD countries. Risk sharing from factor income flows is higher for euro zone countries, at 14%, reflecting increased international asset and liability holdings in the euro area.     

The domestic politics of financial regulation: Informal ratification games and the EU capital requirement negotiations

This paper contributes to our understanding of post-crisis financial regulation by reasserting the centrality of domestic politics in defining government preferences and explaining regulatory outcomes. It draws on Robert Putnam's two-level game approach and Foreign Policy Analysis to develop a model of a three-level informal ratification game. This adds value to existing approaches by capturing the contested nature of government preferences and delineating the causal mechanisms through which domestic groups shape international negotiations. The model is used to explain the UK's pivotal role in the reform of bank capital requirements in the European Union (EU). It demonstrates that governments are able to take advantage of a narrowing domestic ‘win-set’ by marginalising the influence of industry and building political momentum for regulatory reform. In particular, the paper shows how UK negotiators were able to exploit the increased domestic costs of agreement and synergistic strategies between negotiations to successfully oppose the maximum harmonisation of capital rules across the EU.     

The Endogeneity of Optimum Currency Areas Criteria: Some Evidence from the European Union and Portugal

Observing the statistical relationship between business cycles correlation and trade intensity in the European Union, euro zone, and the Portuguese economy, we conclude that there is, in general, a positive effect that supports the endogeneity argument proposed by Frankel and Rose (The Economic Journal 108(449):pp. 1009–1025, 1998). However, if we analyse this relationship in sub-periods – 1967–1975, 1976–1985, 1986–1992, and 1993–2003 – we conclude that endogeneity hypothesis just hold in the first two, although the correlations are increasing. This could mean that, after the Single European Act in 1986, other forces beyond trade are contributing to business cycle synchronization. The Portuguese business cycle correlation with the European Union and the Euro zone had also increased in these four decades, despite the fact that endogeneity hypothesis is at a 90 percent confidence level. We also analyse the bilateral relationships between the Portuguese economy and the other European Union countries and find that the endogeneity is confirmed in just four cases: Spain, Ireland, Netherlands, and UK.     

The Monetary Transmission Mechanism: Evidence from Eight Economies in Transition

Abstract

We examine in this paper the importance of banks’ behavior in the transmission of the monetary policy to the real economy. Monthly data from eight economies in transition that recently became members of the European Union and the techniques of cointegration and Error Correction models are used, in order to investigate the relationship between intermediation margin spread (IMS, official lending rate minus deposit rate) and industrial production. Given the low development of corporate bond market and the dependence of non-financial agents on banking credits, we find that in many countries the IMS is an important leading indicator of industrial production. However, in countries characterized by credit access constraints (Estonia and Latvia) evidence for the traditional money channel is found. Evidence for both money and credit channels is found in Poland and Hungary. These results imply that a common monetary policy implemented by the European Central Bank may be transmitted in different ways across the new members of the enlarged European Union with different effects on real output in each country.     

Monetary and fiscal policy interactions in the EMU when cyclical conditions are uncertain

This paper examines economic policy interactions in the Economic and Monetary Union when the assessment of cyclical conditions in real time is surrounded by uncertainty. On the basis of a simple stylised model it shows that with a Nash-type of interaction different views about the output gap on the side of the policy players—the Council of the European Union, the European Commission and the European Central Bank—can give rise to excessive activism with policy players pushing economic variables into opposite directions. It argues that the costs of such policy conflicts can be reduced by agreeing on a common assessment of the cycle, by constraining policy variables, and/or by increasing the weight of fiscally conservative institutions. An alternative option to sidestep policy conflicts ensuing from diverging views of the cycle is to take policy decisions sequentially, as is the case in a Stackelberg-type of interaction. The paper shows that for a given misperception of the cycle, the impact on the policy instruments and on output and inflation are generally smaller in the Stackelberg equilibrium as compared to a Nash outcome. Alternative allocations of roles—that is leader versus follower—are discussed and assessed.

Automatic Fiscal Stabilisers in EMU: A Conflict between Efficiency and Stabilisation?

It is often claimed that tax and welfare reforms that aim atenhancing efficiency may come at the cost of cyclical stabilisation.Reducing the generosity of welfare systems and lowering taxesmay boost efficiency and output, and improve market adjustmentto shocks. But, by reducing the size of automatic stabilisers,it may also imply less cyclical smoothing. This would be unwelcomein EMU given the loss of national monetary autonomy and thewell-known pitfalls of active fiscal management. This paperargues that the alleged trade-off between efficiency/flexibilityand stabilisation may not exist. We show that, if the initiallevel of the tax burden is high, reducing it may lead to higheroutput stabilisation in the event of a supply shock and higherinflation stabilisation in the event of a demand shock. Simulationsshow that European countries - especially small ones - mighthave a tax burden close to or even higher than the thresholdlevel. (JEL E52, E61, F42)     

Restrictive Macroeconomic Policies and Unemployment in the European Union

This paper looks at the impact the European integration process has had on the unemployment level of European Union member countries. While the persistence of relatively high unemployment in Europe is often attributed to supply-side factors, such as the rigidities of the labour market, this study contends that the major cause for the rise of unemployment in the EU has been the very macroeconomic policies of the EU itself. The paper argues that the continuous pursuit of deflationary policies and the macroeconomic constraint imposed first by the membership of the European Monetary System and, secondly, by the convergence criteria of the Maastricht Treaty, have been the real impediments to reducing unemployment.     

Law enforcement and transition

We present a simple model to analyze law enforcement problems in transition economies. Law enforcement implies coordination problems and multiplicity of equilibria due to a law abidance and a fiscal externality. We analyze two institutional mechanisms for solving the coordination problem. A first mechanism, which we call “dualism”, follows the scenario of Chinese transition where the government keeps direct control over economic resources and where a liberalized non-state sector follows market rules. The second mechanism we put forward is accession to the European Union. We show that accession to the European Union, even without external borrowing, provides a mechanism to eliminate the “bad” equilibrium, provided the “accessing” country is small enough relative to the European Union. Interestingly, we show that accession without conditionality is better than with conditionality because conditionality creates a coordination problem of its own that partly annihilates the positive effects of expected accession.     

The impact of population on CO<Subscript>2</Subscript> emissions: evidence from European countries

This paper analyses the impact of population growth on CO₂ emissions in European Union countries. Traditionally, researchers have assumed a unitary elasticity of emissions with respect to population growth. In this study population is treated as a predictor in the model, instead of being included as part of the dependent variable (per capita emissions), thus relaxing the above-mentioned assumption of unitary elasticity. We also contribute to the existing literature by taking into account the presence of heterogeneity in the sample and considering a dynamic specification. The sample covers the period 1975–1999 for the current European Union members. Our results show that the impact of population growth on emissions is more than proportional for recent accession countries whereas for old EU members, the elasticity is lower than unity and non significant when the properties of the time series and the dynamics are correctly specified. The different impact of population change on CO₂ emissions for the current EU members should therefore be taken into account in future discussions of climate change policies within the EU.      

Euro introduction: Has there been a structural change? Study on 10 European Union countries

The introduction of the Euro in January 1999 consecrated the achievement of a single currency system within most of the European Union. Despite the dramatic change in the macroeconomic dynamics that this event is likely to have caused, the literature has paid little attention to testing for the existence of such a break and establishing its qualitative characteristics.This empirical study, based on the Blanchard and Quah (1989) methodology for seven countries having adopted the Euro currency and three members of the European Union which have preserved their own currencies reveals:

• i)very significant breaks for the Euro countries around 1992 – the year of adoption of the Maastricht Treaty – and 2000, not shared by the three non-Euro countries.
• ii)an increase in the influence of supply shocks on the dynamics of output, unemployment and the interest rate after the breaks for the Euro countries, along with an increase of the part played by monetary disturbances within total demand at long horizons. These conclusions do not generally hold for the three non-Euro countries.

     

Transitional Progress and Business Challenges

Eight Central European and Baltic countries have joined the European Union in May 2004. Transitioning economies need to develop a business environment with a healthy financial sector to realize economic growth. This paper uses two classification methods, the discriminant analysis and taxonomic measure, to investigate the possibility of the South Eastern European and Commonwealth of Independent transitional countries to develop an enterprise and business environment that is compatible with the newest European Union (EU8) members. This paper found that the EU8 countries are correctly classified as having transitioned successfully in their business development. Bulgaria and Croatia have transitioned closely to the EU8. However, Romania, Ukraine, and the Commonwealth of Independent countries are not close to the EU8 in achieving a compatible business environment.      

U.S. Welfare Reform: What's Relevant for Europe?

This paper reviews the U.S. welfare reform efforts over the1990s and the effects of these reforms to date. Seven "lessons"of potential interest to European observers are discussed, withparticular attention to the conclusions of more recent research.Such research indicates, for example, that more effective programscontain both positive and negative incentives, utilise work-firstas well as job training programs, and provide some importantsupports beyond just job and work skills. The paper ends withsome speculations about why European policy-makers are becomingmore interested in U.S. welfare reform experiments than theyhave been in the past. (JEL I3, J2, H1)     

Introduction to “Economic and Financial Governance in the European Union after a decade of Economic and Political Crises.”

ABSTRACT

This paper offers the Introduction to the Special Issue “Economic and Financial Governance in the European Union after a decade of Economic and Political Crises.” We introduce the five papers. We distill three important lessons they offer for EU integration.     

Is eco-efficiency in greenhouse gas emissions converging among European Union countries?

Eco-efficiency refers to the ability to produce more goods and services with less impact on the environment and less consumption of natural resources. This issue has become a matter of concern that is receiving increasing attention from politicians, scientists and researchers. Furthermore, greenhouse gases emitted as a result of production processes have a marked impact on the environment and are also the foremost culprit of global warming and climate change. This paper assesses convergence in eco-efficiency in greenhouse gas emissions in the European Union. Eco-efficiency is assessed at both country and greenhouse-gas-specific levels using Data Envelopment Analysis techniques and directional distance functions, as recently proposed by Picazo-Tadeo et al. (Eur J Oper Res, 220:798–809, 2012). Convergence is then evaluated using the Phillips and Sul (Econometrica, 75:1771–1855, 2007) approach that allows testing for the existence of convergence groups. Although the results point to the existence of different convergence clubs depending on the specific pollutant considered, they signal the existence of at least four clear groups of countries. The first two groups are core European Union high-income countries (Benelux, Germany, Italy, Austria, the United Kingdom and Scandinavian countries). A third club is made up of peripheral countries (Spain, Ireland, Portugal and Greece) together with some Eastern countries (Latvia and Slovenia), while the remaining clubs consist of groups containing Eastern European countries.