EU enlargement and its impacts on East Asia

Ten countries—most completing their transition from socialist-based economies to market economies—are slated to join the European Union (EU) in 2004 and four additional countries are expected to become members at some future dates. Despite the relatively small economic size of the accession countries, this type of deep integration can have non-negligible effects on countries outside of the preferential zone as the reduction in barriers across partners leads to a re-orientation of trade. In this paper, we evaluate the extent of trade adjustments and the economic impacts it will have on the East Asian economies using a dynamic computable general equilibrium (CGE) model. The overall macroeconomic effects on East Asia are small. There is some trade diversion, but there may be an opportunity to increase market penetration in some sectors of the expanding EU for which East Asia has a marked comparative advantage. The paper also assesses the relative importance of linking trade openness to productivity and lowering trade costs between the accession countries and the EU-15.     

Economic Costs and Benefits of EMU Membership from the Perspective of a Non-member

The result of the decision whether to join the European Monetary Union, an irreversible policy choice for several European Union members, presents potentially significant costs and benefits. With a focus on the largest EU economy outside of the euro, Sweden, this paper applies the novel synthetic control method of estimation to evaluate whether there are costs or benefits associated with EMU membership in terms of various aspects of economic performance and how these have developed from 1999 to 2015. Findings indicate that Sweden would have borne non-negligible costs from currency union membership, exemplified by around 10% lower productivity, exports, investment, and consumption, and 8% greater government expenditure and imports on a yearly basis since the introduction of the euro, leading to significant cumulative reductions in potential economic activity. The robust results suggest costs may be persisting and in some cases growing in magnitude.     

Stability and Growth Pact: issues and lessons from political economy

The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. Following a literature survey, the paper stresses the importance of appropriate incentives for rule compliance in an environment where national fiscal sovereignty precludes the option of centralised enforcement. In addition, the paper stresses the importance of clear and simple rules and in particular the 3% deficit limit in anchoring expectations of fiscal discipline and facilitating public and market monitoring of public finances. This, in turn, strengthens incentive for rule compliance. Moreover, the paper discusses the interests of the most important players in European fiscal rule formation and the importance of choosing the appropriate time for initiating a reform debate.Non-technical summary The EU fiscal framework as laid down in the Maastricht Treaty and the Stability and Growth Pact (SGP, the Pact) aims to preserve fiscal sustainability while allowing room for automatic fiscal stabilisation. These two objectives are also at the heart of the ECB’s interest in the EU fiscal framework because their attainment facilitates monetary policy making in the short and long run.The paper analyses the EU fiscal rules from a political economy perspective and derives some policy lessons. The literature review of the first part reveals that fiscal rules can help solve deficit/debt biases and time inconsistency problems by constraining the behavior of policy makers. But rules can also mitigate biases if they facilitate financial market and public scrutiny of fiscal policies.Thereafter, the paper analyses the institutional environment in which EU fiscal rules are applied. It argues that EU rules reflect a “contract” amongst countries that retain sovereignty on fiscal policies. Enforcement, therefore, ultimately has to be undertaken by the contracting parties. Due to this constraint, the rules can also be characterised as “soft” law (with the 3% limit being nevertheless a much “harder” constraint than the other elements). But this does not necessarily imply that the rules are ineffective (or “dead”). Soft law reduces political transaction costs (by improving transparency and providing a forum for peer pressure). Moreover, if well-designed, such law can boost incentives towards making the rules “self-enforcing”. Evidence speaks in favour of this view: while EU fiscal rules were bent in a number of cases and compliance is undeniably of concern, major and rapid fiscal balance deteriorations have been largely prevented since the start of EMU.The paper also looks at potential trade-offs between “complex” rules where a “fine-tuned” economic rationale may boost acceptance of the rules versus simple and clear rules that allow easy monitoring. It is argued that clarity and simplicity of rules are important especially when formal enforcement is limited (“soft law”) and public monitoring becomes more important. By facilitating public and market monitoring of compliance, clear and simple rules are also more costly to breach.The benefits of “complexity”, and in particular the use of administrative discretion to fine tune the rules to country situations have limits, in particular when it comes to the excessive deficit procedure (EDP). It is argued that the 3% deficit limit and the time frame for correcting excessive deficits already provide some room to accommodate economic circumstances. The 3% limit must be clear, simple and strictly implemented to anchor expectations of fiscal discipline and to facilitate public and market monitoring. Further discretion and relaxation would conflict with this need. From this angle, other risks (e.g., efforts not materializing, structural reforms producing surprise costs etc) are hard to justify as a reason for extending deadlines to correct excessive deficits.The preventive arm of the Pact with its requirement of close-to-balance-or-in-surplus budgetary positions defines sound medium term budget positions and adjustment paths. This may be appropriately fine-tuned to address concerns about the Pact’s underlying economic rationale. For example, a symmetric application in good and bad times and less time inconsistency would be desirable.Finally, the timing of a debate on fiscal rules needs to be carefully chosen. In the EU context (and perhaps in other contexts as well), there seems to be much inherent pressure to make the rules more “complex”. Moreover, for the debate initiated in summer 2004, there was also no willingness by countries to give up sovereignty nor was there a sense of urgency to strengthen public finances via tighter rule implementation and enforcement. In such an environment, it is likely that changes to fiscal rules make them more complicated, discretionary and, thereby, potentially less enforceable.The views expressed are those of the author and not of the ECB. Comments by Vitor Gaspar, Mark Hallerberg, Steven Keuning, Jose Marin, Richard Morris, Gilles Noblet, Hedwig Ongena, Luca Onorante, Rolf Strauch, Juergen von Hagen, an anonymous referee and valuable assistance by Anna Foden are much appreciated.     

Preference erosion and the developing countries exports to the EU: a dynamic panel gravity approach

The erosion of preferences due to multilateral tariff reductions is a long-standing concern for many developing countries. This paper focuses on the erosion of the preferences granted by the EU in the rice industry. Since 2004 there has been a sharp decrease in border protection for the EU rice industry. Because the EU grants trade preferences to a considerable number of rice exporting developing countries, the reform implied preference erosion as well. By addressing the impact of preference erosion on developing countries rice exports to the EU, this paper contributes two original insights to the literature: first, by proposing a new empirical approach to compute the preference margin when tariff rate quotas are in force which is based on the assumption of the existence of fixed costs and economies of scale in international trade; second, by estimating the trade elasticities of preferences by means of a dynamic panel gravity equation to deal with the issues of endogeneity of preferences and persistency in bilateral trade flows. The results show that the way preference margins are calculated matters significantly when assessing the existence and extent of their erosion and the values of trade elasticities. Finally, the estimations highlight the fact that the impact of preferences is still very strong for some of the countries concerned.     

The potential trade effects of an FTA between the EU and Russia

The Potential Trade Effects of an FTA between the EU and Russia.- This paper analyzes some of the potential economic effects of free trade agreements between the EU and Russia and the other European CIS countries using standard indicators of trade patterns. It confirms that it would not be feasible for the EU to conclude such an agreement with Russia alone. It is also shown that, if the current high tariff levels are maintained in the CIS countries, they may not benefit from an agreement with the EU. More generally, the authors question the economic motivation for countries such as Russia in seeking free trade agreements with industrial countries which already have low levels of external protection.     

Innovations, technological specialisation and economic growth in the EU

The paper analyses the effects of innovations, technological specialisation and technology diffusion on economic growth and convergence of the EU countries from 1969 to 1998. The empirical analysis is based on a panel data model, which enables us to assess the impacts of these three factors as well as of the usual production factors on long-term economic growth, and to calculate their partial contributions to - and -convergence of labour productivities within the EU. The results show that besides capital accumulation, transferable technical knowledge is a driving force of growth for catching-up EU countries, while it is the level of Ricardian technological specialisation for advanced EU countries.A previous version of the paper was prepared while the author was a Visiting Fellow at the Directorate General for Economic and Financial Affairs, EU Commission. I gratefully acknowledge the stimulating research atmosphere at DG ECFIN and would like to thank Werner Röger and Klaus Wälde for helpful comments. Furthermore, I would like to thank Jürgen Wolters, FU Berlin, for further helpful comments at the workshop for the special issue of this journal in Brussels, February 6–8, 2004.     

为什么要救欧洲?

中国应该救助欧洲:欧盟作为最大的经济体,如果它出问题,其他国家包括中国都不可能独善其身;欧盟是多极世界中的重要一极,如果没有它,世界将更不平衡;中欧有长久的历史关系,有很多相同的价值观,在全球治理方面有很好的合作基础。在欧盟首先自救的情况下,中国可采取积极的措施。     

Europe,Germany and “The German Model”: Economic Links and Implications for China

Abstract

In this paper, I examine the economic links first between the European Union (EU) and China and then I focus on the economic relationships between Germany and China. The links I will consider include international trade and direct investment. Lastly I highlight some elements of the so-called “German Model” or the “Berlin Way” and examine if they can be of policy relevance to China. There are four main results: first, EU-China trade and investment relationships are strong, deepening rapidly but they are somewhat unbalanced and asymmetric. Second, the economic relationships between Europe and China are focused on manufacturing. Third, the EU-China relationships are primarily Deutschland-centric. Lastly, elements of the “German Model” such as Mitbestimmung, Mittelstand and the German apprenticeship system can have important structural and policy implications as China continues to grow and experiment with reforms aiming at combining stability, harmony and competitiveness.     

Enlargement, the Lisbon Agenda, and the Economic Development of Member States

The issues of enlargement, the Lisbon Agenda, and economic development are important not only to new European Union (EU) member states but impact all 25 countries. EU membership may help the new members to foster long-term economic growth through increased credibility, effective use of structural funds, a better framework for economic growth, and entry into the European Monetary Union (EMU). The economic growth of all member states can be strengthened if the reforms related to the main goals of the Lisbon Agenda are completed. Action must be taken both at the member-state level and at the Community level. At the member-state level it is necessary to assure fiscal consolidation and deregulation. At the Community level the preservation of the Stability and Growth Pact, completion of the single market, especially in the service sector, and enforcement of limits on public aid are of the greatest importance.The 2006 Robert A. Mundell Distinguished Address presented at the Sixty-First International Atlantic Economic Conference. Berlin, Germany, 15–19 March 2006. In preparing this paper, I was assisted by Pawel Opala and Andrzej Rzońca. The usual caveats apply.     

Measuring Global and Regional Trade Integration in Terms of Concentration of Access

I apply concentration measures from the inequality literature—the Lorenz curve and Gini coefficient—to the measurement of global and regional integration, and show that these can be derived from the theoretical gravity model in the presence of unequal costs of access for firms from different locations to aparticular market. Overall, comparing nine economies, I find that the United States is the most globalized on these measures, and India and China are the least globalized. The smaller EU economies, which are very open on standard measures, should probably be viewed as regionalized rather than globalized. JEL no. F10, F15, C49     

Belt and road: The China dream?

This paper explores the impact of the Belt and Road Initiative (BRI), in terms of changes in trade costs on trade and consumer welfare in China, the EU, and the rest of the World. We employ a general equilibrium structural gravity approach and conduct a counterfactual analysis. Our key findings are as follows: (i) China and the EU are expected to make substantial gains from the BRI due to reductions in transport costs; (ii) signing and implementing a deep FTA between China and the EU is equivalent to transport cost reductions of 15–20%; (iii) the joint policy of the BRI and FTA is super-additive, magnifying the gains from the separate policies; and (iv) where transport cost reductions are 20% or more, the potential negative effect of the China-US trade war on China is more than compensated for by the BRI initiative. Our results provide evidence that the BRI has the potential to deliver significant welfare gains, particularly if combined with other trade integration schemes, and to counterbalance aggressive trade policies.     

US Safeguards on Steel and the Markups of European Producers

This paper is among the first to explore the microeconomic impacts of a trade policy on foreign firms. We empirically investigate the effects of the US safeguard protection of steel imports in 2002 on the markups of EU steel firms. Using a large panel of affected EU steel firms between 1995 and 2005, we find that the protection they faced abroad significantly reduced their markups. Our results indicate smaller adverse effects on multi-product EU firms. Our study has wider implications as it quantifies the cost that trade protection imposes on trading partners, an externality currently not considered in any trade regulation. The US safeguard protection also resulted in some diversion of EU steel especially towards China, aggravating the situation on the Chinese steel market and ultimately resulting in the Chinese trade protection of steel imports. JEL no.  F13, L13, L61     

Assessing the economic impacts of the EU-Singapore FTA with a dynamic general equilibrium model

Negotiations for the EU-Singapore FTA were concluded on December 6, 2012. Given that this is the EU’s first FTA with an ASEAN member country and the second one with a major Asian trading partner after the conclusion of the EU-Korea FTA, this agreement paves the way for future FTAs with countries in the region. The goal of this paper is to quantify the economic impacts of the EU-Singapore FTA using a dynamic computable general equilibrium model. The resutls estimated in this paper suggest that the bilateral reduction of tariff and non-tariff barriers brings benefits for both sides: Singapore GDP is expected to increase by € 2.7 billion whereas the EU gains are assessed at € 550 million. In addition, EU exports to Singapore would rise by some € 1.4 billion and Singapore’s exports to the EU by some € 3.5 billion. In a complementary scenario, the current paper also assesses the value of this FTA as an insurance policy against any hypothetical tariffs hikes in Singapore to WTO bound levels. In such a “worst case” scenario, the EU-Singapore FTA will protect EU GDP from a decrease of € 350 million and prevents a loss of € 3.7 billion EU exports to Singapore.     

Europe in the midst of China–US strategic economic competition: what are the European Union’s options?

ABSTRACT

Despite President Trump’s announcement of a partial deal on October 11, the prolonged economic competition between the two superpowers does not bode well for the future. Within this context, the European Union faces an urgent question: how to position itself in the US–China competition. This paper aims at addressing this question after reviewing the milestones of the trade war and the consequences for China, the US and EU. This paper concludes that European companies are to suffer from the trade war but some sectors could experience gains. Also, a trade deal which pushes China to reform and open up would also be beneficial. Against this background, this paper reviews the EU’s options in dealing with the two hegemons in the light of their growing strategic confrontation. These options are safeguarding multilateralism, relying on the Transatlantic Alliance and remaining neutral which implies relative more engagement with China on economic matters.     

中国产业界所应了解的欧盟对华反倾销的不合理因素

欧盟对华反倾销是长期困扰中欧贸易健康发展的重要问题。饱受反倾销之苦的中国企业在面对欧盟反倾销的许多不公正的待遇时,经常是愤愤不平。但因为不熟知其法律和实践,对其司法问题的公正性缺少深入的研判,而错失许多可能的胜诉的机会。揭示欧盟反倾销法和对华反倾销实践的不公正性,提供对抗这些不公正因素的理由和依据,应该是当前反倾销研究的当务之急。本文的写作正是从这一基点出发,而对欧盟对华反倾销实践的不合理、不公正的问题所进行的揭示,作者期待通过该文的分析,有助于中国企业界了解欧盟对华反倾销法的实体和程序规定中的不合理因素,并根据每案的具体案情,进行有理有据的抗辩。这既是促使这些消极方面发生转变的积极的努力,也是中国企业维护自己尊严和利益、改变自己被动地位的重要的突破口。     

Real Impacts of Intra-European Exchange Rate Variability: A Case for EMU?

Intra-European exchange rate variability has significant economic costs. VAR causality tests show that higher short-run variability of exchange rates against other EU currencies was associated with higher unemployment, less employment, and lower investment for most EU member countries. Robustness tests show that this result holds up in the presence of both policy instruments that might have had an impact on exchange rate variability and cyclical variables that might have influenced labor demand. A model that incorporates the option value of waiting suggests that even short-term spikes in volatility exert a strong impact on investment and labor markets.     

Do Multinational Enterprises Relocate Employment to Low-Wage Regions? Evidence from European Multinationals

This paper analyzes the employment behavior of home multinational enterprises (MNEs) in Europe. To this end we use a unique firm-level panel data set of more than 1,000 European multinational parent enterprises and their European affiliates. We find for parent firms operating in the manufacturing sector that the labor cost elasticity of parent employment with respect to North EU affiliates’ labor costs is positive and statistically significant. This implies employment substitution between parents and their North EU based affiliates takes place in response to wage cost differentials between the parent and its North EU based affiliates. In contrast, we find no evidence for such substitution effects between parent employment and its affiliates that are located in low-wage regions in the EU and in Central and Eastern Europe. JEL no. F23, J23     

What Happened to European Unemployment?

Summary  Many academic papers were still being written on mass unemployment in Europe. While, unemployment in the EU15 was falling dramatically. Not only academics, but also European workers at large did not seem to appreciate these labour market developments. I offer two explanations for this puzzling deterioration of workers perceptions of the labour market in spite of disappearing unemployment: (i) labour market risk increased, and (ii) employment growth occurred at the cost of stagnating labour productivity. This means that the new labour market offers a worse risk-return combination. Strategies to address these issues are discussed in the final section of the paper. This paper provides an extended version of the first Willem F. Duisenberg Lecture, held at the University of Amsterdam on February 28, 2008. I am particularly grateful to NIAS for this opportunity and to Petry Kievit for having greatly improved my English.     

The Use of Cheques in the European Union: A Cross-Country Analysis

The use of cheques has been declining in the European Union (EU), along increased integration in the payments field. This trend is not uniform across the EU, and some countries have implemented policies to discourage the use of cheques due to its considerable social costs and risks. This paper provides a cross-country analysis for the period 2000–2012 of the determinants of cheque usage, measured both as per capita number and share of payments. Special attention is given to the effects of the application of fees in a framework where unfunded cheques are considered as an autonomous type of crime in some EU countries. Our results suggest that the existence of fees influences negatively cheque usage, even when there are legal elements that increase its security.     

Growth Effects of Economic Integration: Evidence from the EU Member States

After compiling an index of economic integration that accounts for global (GATT) as well as regional (European) integration of the EU member states we test for permanent and temporary growth effects in a growth accounting framework, using a panel of fifteen EU member states over the period 1950–2000. While the hypothesis of permanent growth effects is rejected, the results—though not completely robust to controlling for time-specific effects—suggest sizeable level effects: GDP per capita of the EU would be approximately one-fifth lower today if no integration had taken place since 1950. JEL no. C33, F15, F43, O52