The ECB’s fiscal policy

While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarizes the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe.     

Green Tax Reform and Competitiveness

This paper studies a revenue-neutral green tax reform that substitutes energy for wage taxes in an open economy with unemployment. As long as the labour tax rate exceeds the energy tax rate, such a reform will increase employment, reduce the domestic firms' unit cost of production and hence increase international competitiveness and output of the economy. The driving force behind these results is the technological substitution process that a green tax reform will bring about. The resulting reduction in unemployment is welfare increasing since energy, which the country has to buy at its true national opportunity cost, is replaced with labour, whose price is above its social opportunity cost.     

Austerity,Growth and Inflation: Remarks on the Eurozone's Unresolved Competitiveness Problem

While the financial protection measures enacted by the ECB and the community of Eurozone members have calmed financial markets, they have left the competitiveness problem of the Eurozone's southern countries and France unresolved. The paper compares price inflation before the crisis with the necessary and actual price cuts that have taken place since the outbreak of the crisis, predicting a decade of stagnation for the south and inflation for the north. Keynesian demand policy is counterproductive in the south and unnecessary in the north. The necessary realignment of relative goods prices and current account imbalances can be achieved if market forces are allowed to redirect capital flows to the north instead of being artificially steered to uses they are keen to avoid.     

The threat to the German welfare state

Germany is in a dilemma. Low wage competition via product and factor markets increases the demands on the welfare state, but increased systems competition in the context of international factor mobility reduces the possibilities of maintaining it. The welfare state has important allocative functions. It is an insurance against career risks and its stimulates risk taking and economic growth. However, it also has severe moral hazard effects by reducing work incentives. To help the welfare state survive and improve its performance, this paper advocates the home-country principle for the treatment of immigrants, the introduction of funded elements in the pension system, and employment subsidies at the expense of ordinary welfare payments. Distinguished Address presented at the Forty-Ninth International Atlantic Economic Conference, Munich, Germany, March 14–21, 2000. The author thanks Marcel Thum, Holger Feist, and Michael Reutter for their helpful comments. This paper is based on a lecture first given to the Verein für Socialpolitik in 1998.     

Unit root tests of the current account balance: implications for international capital mobility

The extent of international capital mobility is assessed in a time series context. The possibility that the current account balance of different 0ECD countries contains a unit root is explored. It is shown that if the ratio of the current account balance to GDP is found to be integrated of the order of one, the country is likely to be part of the world capital market. The results for the whole period 1950–1988 indicate that the current account balance of at least Germany, Japan and the United States contains a unit root. Considering the subperiods before and after 1972 it is shown that international capital mobility increased after the breakdown of the Bretton Woods System.     

Please bring me the New York Times

Richard Musgrave was one of 200 academic economists who emigrated from Germany when Fascism came to dominate the country. This memorial lecture traces the German and European roots of Richard Musgrave’s oeuvre, trying to shed light on his family background as well as on the political and scientific factors that influenced his education as an economist. Particular emphasis is given to the development of his notion of public goods.     

The taming of Leviathan: Competition among governments

This paper assesses the consequences of a high degree of international capital mobility for the behavior of governments. It is argued that countries can be seen as clubs where the government as club management acts as an entrepreneur attempting to attract internationally mobile resources. Within this stylized model it is shown that competition induces the government of a small democratic country to implement policy reforms that increase the welfare of domestic residents if it wants to be reelected. This result suggests that international openness may be a substitute for more overt attempts to contain a government's Leviathan tendencies such as constitutional amendments. Finally, the case against competition among governments is analyzed from the perspective of the club model developed in the paper. An earlier version of this paper appeared as Kiel Working Paper No. 458. The author would like to thank Hartmut Kliemt, Werner Pommerehne, Helmut Reisen, Pierre Salmon, Horst Siebert, Viktor Vanberg as well as seminar participants at the University of Munich, the Free University of Berlin, the OECD Development Centre in Paris and at the 1991 meeting of the European Public Choice Society in Beaune for helpful comments. All remaining errors are mine.