Fritz Breuss

How Reliable Are Estimations of East-West Trade Potentials Based on Cross-Section Gravity Analyses?

Gravity equations have been used repeatedly to predict the East-West trade potential since the opening-up of Eastern Europe in 1989. Most of the research in the field was done by means of cross-section data. While earlier studies indicated huge unexhausted bilateral trading potentials for the East and for the West, more recent studies have demonstrated that most of the East-West trading potential has already been consumed. In this paper, we provide insights into the prediction performance of cross section gravity equations (applied for level projections). We found rather large forecast interval spans around the predicted values. The intervals are of a size that makes any conclusions about absolute trade potentials questionable. Thus we think that cross-section gravity analysis does not permit any definite judgment as to whether actual East-West trade has already reached its potential level.

Benefits and Dangers of EU Enlargement

A new macroeconomic evaluation of EU enlargement is undertaken with a world macroeconomic model taking into account all possible integration effects: trade effects, Single Market effects, factor movements (FDI, migration) and the costs of enlargement. Due to the differences in size of the regions involved, on average the CEEC – measured in terms of real GDP – will gain around 10 times more from enlargement than the EU. Hungary and Poland can increase their real GDP by around 8 to 9 percent over a 10-year period, the Czech Republic gains a little bit less (5 to 6 percent). The EU on average would gain around 0.5 percent of real GDP over a 6-year period. Although, on average enlargement is a win-win game, the impact is quite different in the separate EU member states, with Austria, Germany and Italy gaining the most and losses for Spain, Portugal and Denmark. Hence, EU enlargement may not only be beneficial but might be a risky undertaking. Due to the regional different impact, enlargement acts like an exogenous shock leading to asymmetric disturbances in the EU. This could pause the process of business cycle synchronisation and might impair monetary policy in Euroland at the beginning of the enlargement process. A two-step integration of the CEEC into the EU – first the participation in the Single Market and only later into the EMU – is therefore preferable under the aspect of macroeconomic stability in Euroland.

What has determined the rapid post-war growth of intra-EU trade?

Based on the gravity model by Baier and Bergstrand (2001), we use a static and dynamic panel approach to estimate the determinants of the growth of intra-EU trade from 1960 to 2000. The results suggest that income growth was the major force, accounting for approximately two-thirds of total growth. Trade liberalization still had a sizeable effect, while other factors had only a little impact (income convergence, real effective exchange rate changes) or played no role (trade costs). Our estimation results for intra-EU trade, using a variety of extensions, underline the robustness of the Baier-Bergstrand cross-section findings for world trade. JEL no. C23, F12, F14, F15

Was ECB's Monetary Policy Optimal?

Overall, the ECB managed monetary policy quite satisfactorily in the first phase of EMU. Nevertheless, this paper asks whether monetary policy could not have been improved. In the last three years, Euroland was confronted with the first external shock. Oil prices increased considerably, leading to an increase of headline inflation of over one percentage point in 2000–01. With a specific Taylor rule one can very well understand, how the ECB sets interest rates, but it turns out that monetary policy based on the estimated Taylor reaction function was rather backward than forward looking. While it reacted with a lag to the actions of the U.S. Fed, it was overly cautious by targeting total HICP inflation. Here it is strongly argued and also demonstrated with model simulations that a monetary policy oriented towards core inflation would have resulted in a much better economic performance. The business cycle downturn could have been mitigated with no additional inflation risks.

The Optimal Decentralisation of Government Activity: Normative Recommendations for the European Constitution

This article surveys the research on the efficient assignment of policy tasks to different levels of government and applies the results on the delimitation of competencies within the EU. A precise derivation of an optimal degree of decentralisation is not possible on purely theoretical grounds, it has to be determined case-by-case. Systematic evidence on direct relationships between economic performance and fiscal decentralisation is both scarce and ambiguous. Comparing the actual and prospective delimitation of EU-competencies with the normative recommendations, remarkable discrepancies arise in the fields of agriculture and defence. The establishment of a flexible assignment scheme is an undeniable necessity in order to guarantee reversibility and to cope efficiently with changing conditions. In this respect, the European Convention has delivered insufficient results in its final draft Treaty as of July 2003.

The impact of Agenda 2000's structural policy reform on FDI in the EU

This paper analyses the effects of Agenda 2000s policy reform on the stocks of outward FDI to the European Union member countries. In a three-factors proximity-concentration New Trade Theory model we indentify the channels of influence on the FDI decision. In the empirical part, we estimate a dynamic panel data model and find that structural expenditures exert a significant positive impact on real stocks of outward FDI to EU countries. We simulate the Agenda 2000 program and obtain short-term and long-term effects of the EU country-specific changes in structural budgets on FDI to these countries.

Efficiency and Federalism in the European Union - the Optimal Assignment of Policy Tasks to Different Levels of Government

This paper surveys the theoretical and empirical research on the efficient assignment of policy tasks to different levels of government and applies the results on the delimitation of competences within the European Union. The main results are: (i) A precise derivation of an optimal degree of decentralisation is not possible because of mixed theoretical suggestions. the adequate degree of decentralisation has to be detected case-by-case. (ii) Systematic evidence on direct relationships between economic performance and fiscal decentralisation is ambiguous and scarce. (iii) Comparing the de facto delimitation of EU-competences with the normative recommendations, remarkable discrepancies arise in the fields of agriculture and defence. (iv) The establishment of a flexible assignment-scheme by the European Convention is an undeniable necessity in order to guarantee reversibility and to cope efficiently with changing general conditions.

Biomass Energy Use to Reduce Climate Change: A General Equilibrium Analysis for Austria

Abstract A further increase in biomass energy supply is a crucial future option for reducing the Austrian contribution to climate change. Analysis of it has so far focused mainly on supply potentials and costs of production. Increased biomass energy supply, however, is also connected to economy-wide effects and to feedback effects on its own demand. This paper quantifies such effects in a general equilibrium framework of the Austrian economy for different supply scenarios. Increases in biomass energy are shown, for example, to cause substantial changes in the necessary CO 2 tax rate to reach a given emission objective level.

An evaluation of the EU's Fifth Enlargement With special focus on Bulgaria and Romania

This paper analyses the impact of the EU accession of Bulgaria and Romania. The fifth EU enlargement in 2004 and 2007 did not only extend the Single European Market. Since 2009, the euro zone encompasses 16 out of 27 EU member states. Additionally the Schengen area has been expanded to include 25 European countries (22 EU member states). A first evaluation shows that the new member countries have already been able to benefit noticeably from their participation in the single market, despite not yet fully integrated labour markets. However, the international financial crisis also shadows onto the economies of the new member states. After an ex post evaluation the possible future integration effects of EUs 2007 enlargement by Bulgaria and Romania are simulated with a simple macro-economic integration model able to encompass as many of the theoretically predicted integration effects possible. The direct integration effects of Bulgaria and Romania spill-over to EU15, including Austria and the 10 new member states of the 2004 EU enlargement. The pattern of the integration effects is qualitatively similar to those of EUs 2004 enlargement by 10 new member states. Bulgaria and Romania gain much more from EU accession than the incumbents in the proportion of 20:1. In the medium-run up to 2020, Bulgaria and Romania can expect a sizable overall integration gain, amounting to an additional ½ percentage point real GDP growth per annum. Within the incumbent EU member states Austria will gain somewhat more (+0.05%) than the average of EU15 (+0.02%) and the 10 new EU member states (+0.01%), which joined the EU in 2004.Â

Hungary in transition: a computable general equilibrium model comparison with Austria

Abstract We approach the problem of Hungarys transformation from a partially centrally planned to a market-oriented economy with a cross-country comparison using two computable general equilibrium (CGE) models of Hungary, 1977 and 1986, and one of Austria, 1976. These three models represent a continuum of small open economies and allow a “quasidynamic” analysis using static CGE models. We examine two types of transformation issues: external (trade liberalization, import price reductions, and redirection of foreign trade; “Dutch Disease reversal”) and internal (decreases in subsidy levels). Overall, it is clear that with Hungarys borrowing constraints, liberalization should not be pursued in isolation; a change in the tax structure is necessary at the same time. The results for Austria indicate that liberalization brings smaller welfare improvements accompanied by smaller increases in the current account and government deficits.