A sequential approach to regional integration: The European Union and Central and Eastern Europe

This paper develops a theory of optimal sequencing of regional integration and applies it to the specific question of Central and Eastern European countries (CEECs) and the EU. We show that the timing of transition and integration has implications for the long-term trade structure of Europe. In this model the interest to integrate the CEECs comes from harmonization of policies to attract industries. Without integration, European countries will try to inefficiently protect their industries. Because of the transfers implied by the CAP and the Structural Policies, the EU delays enlargement until the CEECs have sufficiently converged. CEECs might at this point prefer to stay outside the EU and attract industries by offering them more generous protection than the EU. Such timing may be inefficient ex ante for all countries because it may prevent full European integration in the long run, inducing firms to relocate outside of the EU and governments in the EU and the CEECs to inefficiently protect industry. During the transition, all countries benefit from regional integration among the CEECs.     

Performance of European insurance firms in the single insurance market

The deregulation and liberalization process towards establishing a single European financial market has some important implications for the insurance industries. Due to the increased competition, insurance firms have to adjust their costs and operate efficiently to survive in this new environment. This paper attempts to analyze the cost efficiency and scale economies in the single European insurance market. Considering the ongoing enlargement process of the EU, our sample includes the insurance industries of the major EU‐15, four new members and a candidate country, Turkey, over the period 1995–2005. We use the firm‐level financial data and estimate a stochastic cost frontier that controls for differences in environmental conditions. All insurance systems display significant levels of cost inefficiency. The results further indicate that there are significant economies of scale, particularly for small‐ and medium‐size insurance firms. Finally, the analyses suggest similar results for major EU countries, new members and the candidate.     

Testing for the effects of credit crunch on agriculture investment in the EU

There are several research papers focusing on the detrimental effects of the credit crunch on the economic performance. A sector of the economy where the implications of the credit crunch have not been thoroughly studied is the agriculture. This is surprising given the importance of agriculture for the European economy. We focus on agriculture in fourteen European Union (EU) Member States in the aftermath of the credit crunch. To this end, we employ the micro-econometric data set of Farm Accountancy Data Network (FADN) of EU at NUTS 2 level. From a methodological point of view, we model agriculture investment based on a flexible panel Vector Autoregressive (VAR) model that provides impulse response functions (IRFs) and variance decompositions (VDCs). The empirical estimates indicate that agriculture investment has been constrained by negative shocks in interest paid and total liabilities. Unless those financial constraints are eased, agriculture investment in EU would remain rather sluggish at best.     

The Enlargement of the European Union and the Behavior of Real Exchange Rates

The authors further investigate the conditional variance and the persistence of real exchange rate (RER) shocks between Germany and some core European Union (EU) members from January, 1973 through 2004. Using data for all EU15 countries, they test whether the enlargement of the Union has reduced the variability and the persistence of RER shocks between Germany and the rest of the members during the 1990s. They also examine the impact of the introduction of the euro on the variance and persistence of real exchange rate shocks. Finally, the authors extend the analysis to the new members who joined in May, 2004. The results have implications for the economic cost of joining the Union, as well as assessing the timing of the newest members to enter the eurozone.     

Trade liberalization in the presence of domestic regulations: public policies applied to EU and U.S. wine markets

Wine is the highest valued product in the agricultural, food, and beverage sector traded between the United States and the European Union (EU) and wine faces a range of tariffs that are differentiated by country and product category. In addition, the production of wine grapes is heavily regulated within the EU and there are complicated state-level policies in the United States designed to limit the retail availability of wine. There continues to be economic and political pressure for reform to the tariffs between the United States and the EU, and to the domestic regulations in each region. We carefully develop parameters to characterize the effects of tariffs and domestic regulations that affect production and consumption of wine in the two regions. Simulation results show that reductions in tariffs would have relatively small effects in EU and U.S. wine markets, whereas reductions in EU domestic policies that affect wine grape production would have much larger trade and welfare implications.     

On the Growth Implications of Foreign Aid for Public Investment Co-Financing

In this paper we present an endogenous growth model with foreign transfers for public capital formation in order to analyze the implications for growth maximization when the public sector in recipient countries co‐finances investment projects. Our main innovation is to show that, first, there is a unique growth‐maximizing absorption rate of funds that decreases with the co‐financing ratio and, second, that high amounts of assistance may be an impediment to growth due to the excess domestic taxation required to co‐finance investment projects. We then derive a policy rule for designing the growth‐maximizing co‐financing share under a given level of assistance. Finally, we also highlight some implications for EU regional policies, which aim at fostering growth in poorer EU countries by co‐financing public capital formation.     

The Political Economy of Brexit and the Future of British Capitalism First Symposium

The political economy of Brexit generates new challenges for the UK’s national business model and for European capitalism more broadly. Two symposia examine the implications of the UK’s withdrawal from the EU in key economic policy areas. These symposia contribute to two main bodies of academic literature: the political economy literature on varieties of capitalism, with a specific focus on the UK, and the political economy literature on key economic policy areas of the EU. This short introduction to the first symposium first outlines the key features of the British variety of capitalism and highlight the main questions raised by Brexit in that respect. It then summarises the main findings of the papers of the first symposium and tease out some common themes.     

Patching up the Pact

The paper considers the implications for the EU accession candidates of Central and Eastern Europe of the fiscal‐financial constraints imposed by the Stability and Growth Pact and the Maastricht Treaty. Our findings apply also to those current EU members whose initial conditions (e.g., infrastructure and progress in state pension reform) or other structural characteristics (e.g., demographic structure, growth potential, Balassa‐Samuelson equilibrium real exchange rate appreciation) differ significantly from the EU average. We find the existing criteria to be seriously flawed and propose an alternative rule, the Permanent Balance Rule, based on a strong form of tax smoothing.     

The effects and policy implications of state aids to industry: an economic analysis

The use of state aids to industry is a poorly understood part of competition policy. Currently, the EU Commission presumes that state aids distort competition, yet it approves 98% of applications, often for social or distributional reasons. We argue that proper regulation of state aids should focus on two issues, the externalities generated and the inefficiencies arising from failures in competition between governments. We thus develop a new framework for EU policy and compare its implications with the existing practice of the EU Commission.     

East–West European Integration: A General-Equilibrium Analysis of Alternative Agricultural Policies

This paper studies the budgetary and trade implications of European Union (EU) membership of Eastern European countries under various agricultural policy scenarios. The author uses a six-region, 13-sector general-equilibrium model with many explicitly modeled agricultural and trade policies. It is found that EU membership of Eastern European countries, including their adoption of the EU's Common Agricultural Policy (CAP), leads to a surge in Eastern Europe's agricultural exports. Moreover, the EU's agricultural expenditure increases by 26%. A reform of the CAP following the Agenda 2000 proposal does not reduce the cost of enlargement if Eastern European farmers receive compensation payments.     

The quality and variety of exports from the new EU member states

The goal of this article is to evaluate the variety and quality of exports from the new EU member states (NMSs) in the period 1999–2009. The practical relevance of such an analysis is threefold: recent studies underline the importance of export variety for economic growth; empirical results show that export variety was influenced by the EU membership; and looking separately at export quality permits a better understanding of price competitiveness. Our results show that all NMSs significantly increased the average number of brands exported to the EU market, the largest increases being observed in 2004 and after. This indicates that integration into the EU market occurs in the extensive as well as the intensive dimension. We also find that all NMSs increased the average quality of their exports during the decade studied although there are differences between countries. Thus, a large part of the increase in the prices of exports from NMSs resulted from improving quality and did not result in a loss of competitiveness. Finally, estimates of relative quality are much more stable than relative prices, suggesting that our measure of relative quality is better than the traditional proxy.     

Convergence in Per Capita Income Levels, Productivity Dynamics and Real Exchange Rates in the EU Acceding Countries

During a catch up process – such as the one that thecountries acceding to the EU are undergoing – there emergesa fundamental economic link between nominal and realvariables which surfaces in the dynamics of the realexchange rate (the ``Balassa–Samuelson effect'). Thisarticle analyzes some of the implications of this process forthe acceding countries addressing three main issues.First it focuses on the empirical measurement of convergencebetween acceding countries and EU-member states. Thenit analyzes the economic fundamentals of a catch up processarguing that for this process to be self-sustained, it must bebased on differential productivity growth whereby productivityin the acceding countries grows faster than that in the incumbents.Thirdly, an attempt is made to test empirically theBalassa–Samuelson effect in the EU acceding countries. Finally the article discusses some of the policy implications of thedichotomy ``real-cum-nominal convergence' on the way to EUand EMU accession.     

The J-curve in the emerging economies of Eastern Europe

Devaluation or depreciation of a currency worsens the trade balance before improving it, resulting in a J-curve pattern. A new definition of the hypothesis implies a short-run deterioration combined with the long-run improvement. By using monthly data over the January 1990–June 2005 period from 11 east European emerging economies, most of which are the new European Union (EU) members or the EU candidate countries, this article uses the bounds testing approach to cointegration and error-correction modelling and finds empirical support for the J-curve hypothesis in three countries of Bulgaria, Croatia and Russia. The results have important implications for policymakers involved in economics in terms of using exchange rate policy as a policy device to achieve real convergence toward EU standards.     

Cap and trade to solve environmental problems ——an analysis of approach in the EU

Environmental problem is a global problem, which has been emphasized by many countries all over the world. To handle the climate change, international community has tried many means. This paper will focus on the approach called "cap and trade", and analyze its application in the EU—the EU Emissions Trading System (EU ETS). The effectiveness of the EU ETS in different phases will be analyzed in detail, as well as the benefits of the EU ETS comparing with other means of reducing greenhouse gas. It can be found that "cap and trade" is a successful mechanism to reduce the greenhouse gas s and other countries are supposed to learn from the experience of the EU ETS.     

Supranational integration and national reorganization: On the Maastricht treaty’s impact on fiscal decentralization in EU countries

We explore the implications of European integration for fiscal decentralization in EU member states with a dataset on 21 OECD countries over the 1975–2000 period. The difference-in-difference methodology is used to establish causality. EU member states are classified as the treatment and non-EU OECD countries as the control group. The Maastricht treaty is interpreted as a quasi-experimental policy intervention that substantially advanced European integration. Our results suggest that tax decentralization has increased in EU countries after the signing of the Maastricht treaty. The treaty’s effect on expenditure decentralization also seems to be positive, but is less clear-cut.     

Turkish trade unionists and Turkey’s membership of the European Union

In all the discussions regarding Turkey’s accession to the EU, little attention has been paid to the views of workers. This paper provides a statistical analysis of the views of over 6000 Turkish trade union members on Turkey’s EU membership. Parameters are estimated using multilevel probit models where the nested structures of workers into trade unions and federations were taken into account since they shared some joint characteristics because of belonging to these organisations. It confirms the extensive disillusion with the EU found elsewhere in Turkish society but more interestingly it disconfirms an idea that those inside the EU may too easily assume to be the case: that it is those with what might be considered modernist characteristics among the Turkish population who are most likely to be in favour of EU entry. The idea seems to chime well with assumptions that the EU is a progressive, modern force. But whatever the validity of such a view, EU entry is not in fact found to be the favoured goal of the young and the best educated: it is older workers who are the most likely to support entry and those who are educated to the highest level the most likely to oppose it. Amongst the main three trade union federations there is also a greater propensity of members of trade unions affiliated to Hak Is (the Islamic federation) to support entry than those in Turk Is (centre right) or DISK (historically the most militant).     

The enlargement of the euro area: differences in relative inflation

This paper investigates the structural determinants of relative inflation (i.e. the inflation of non‐tradables vs tradables) in the context of overall inflation differentials in the EU. The analysis is based on the Bergstrand theoretical model. This framework incorporates three alternative hypotheses of relative inflation (Harrod–Balassa–Samuelson, relative factors endowment, and demand effects). Due to the lack of reliable data on capital stocks only a curtailed version of the model is tested here empirically. The various specifications of the model are estimated for the majority of EU countries, using the Pedroni panel group mean FMOLS estimator. In general, relative labour productivity and demand factors turn out to be significant and correctly signed, though evidence in favour of the latter effect seems to be less robust. In addition, differences in the determination of relative prices between the new and old EU Member States are found. They seem to be consistent with theoretical considerations and the transition phenomenon. The estimation results are very sensitive to the definition of non‐tradables. The paper also discusses policy implications for overall inflation, stemming from relative price models. It questions the usefulness of relative inflation models for the analysis of overall inflation differentials and practical policy decisions.     

Languages in the European Union: The quest for equality and its cost

The European Union has recently expanded from 15 to 25 countries, bringing the number of official languages to 20. Currently, the EU extends equal treatment to all member countries’ official languages. This, however, is costly, especially since many Europeans speak one of the procedural languages, English, French or German, either as a native or a foreign language. We develop a simple theoretical model of linguistic-regime choice in a multilingual society and apply the model's insights to the case of the EU: we compute disenfranchisement rates that would result from using only the three procedural languages for all EU business and then proceed to quantify the average cost per person and cost per disenfranchised person associated with providing translations and interpreting into the remaining languages. Both the disenfranchisement rates and costs are shown to vary substantially across the different languages, raising important questions about the economic efficiency of equal treatment for all languages. We argue that an efficient solution would be to decentralize the provision of translations.     

Capital structure,asset utilization,profitability and growth in the Greek manufacturing sector

Greece's accession to the European Union (EU) has affected its economy and its manufacturing sector. Large-size enterprises (LSEs) form a small but vital part of Greek manufacturing and constitute a major component of the country's stock market. According to finance theory, the capital structure of a firm affects its capital cost and market value. This paper, by using dynamic panel data techniques, investigates the determinants of capital structure of LSEs in the Greek manufacturing sector. The findings suggest that asset utilization, gross and net profitability and total assets growth have a significant effect on the capital structure of LSEs. This has straightforward policy implications. Following recent economic developments, Greek firms are exposed to a stronger competition in the EU and global markets, but also to new opportunities. In order to improve their capital structure, Greek manufacturing LSEs need to achieve higher asset utilization and profit margins through economies of scale attained mainly by higher exports. Moreover, governmental measures aiming to support LSEs' efforts should focus their impact on alleviating taxation, reducing bureaucratic burdens, minimizing market imperfections and subsidizing applications of new technology.     

Asymmetry and the Problem of Aggregation in the Euro Area

This paper highlights the implications for a single monetary policy when key economic relationships are nonlinear or asymmetric at a disaggregate level. Using data for the EU and OECD countries we show that there are considerable non-linearities and asymmetries in the Phillips and Okun curves. High unemployment has relatively limited effect in pulling inflation down while low unemployment can be much more effective in driving it up. Downturns in the economy are both more rapid and sustained in driving unemployment up than recoveries are in bringing it down. There is considerable variety in these relationships and IS curves across not just countries but also sectors and regions.