Horst Tomann

The Role of Social Policy during the Transformation in Central Europe

More than five years after the collapse of communism, voters throughout central Europe have registered their discontent with the course of economic reform policies. Many observers believe that the lack of an adequate social policy has played a crucial role in voting behaviour. This underscores the role of social policy during transition.

Die Rolle der Geldpolitik

Auch wenn weitgehend Konsens daruber besteht, das die Geldpolitik die Fuhrungsrolle in der Stabilitatspolitik spielen soll, so bleiben doch ihre Aufgaben und ihre Ausgestaltung kontrovers. Unbestritten ist, das es Aufgabe der Geldpolitik ist, auf lange Sicht die Wahrung zu sichern und kurzfristig Liquiditatskrisen abzuwenden. Es ist aber eine offene Frage, welche Rolle ihr daruber hinaus zufallt. Zur Debatte steht vor allem, wie die Geldpolitik auf Angebotschocks reagieren soll und ob sie monetare Storungen, die uber den internationalen Verbund der Finanzmarkte wirksam werden, auffangen soll. Die Antwort auf diese Fragen wird vordergrundig durch unterschiedliche Prioritaten hinsichtlich der wirtschaftspolitischen Ziele bestimmt. Es geht hier insbesondere um die Frage, ob die geldpolitische Steuerung Beschaftigungseffekte ins Kalkul zu nehmen hat. Dahinter verbergen sich aber unterschiedliche theoretische Vorstellungen daruber, wie sich geldpolitische Impulse auf den realen Sektor der Wirtschaft ubertragen.

The Debate on Reform Options

The financial crisis not only challenged European economic policies but also revealed deficiencies in the institutional design of the European Union. Recognizing these shortcomings, the President of the European Commission, Jean-Claude Juncker, presented a report on the completion of Europe’s economic and monetary union (‘Five Presidents’ Report’, 2015). This report proposes new initiatives, particularly towards a fiscal union and a political union. Chapter 12 analyses whether these proposals are adequate to tackle institutional deficiencies and respond to future crises. In particular, it takes up two suggestions and discusses concrete concepts of implementing them, a European unemployment insurance and a European treasury.

The Banking Union and Financial Stability

The financial crisis has dramatically revealed the contagion effects resulting from the interconnectedness of financial institutions and the need for political action to re-establish financial stability. The problem is how to end the dysfunctional refinancing of banks and to revitalize the economic functions of the financial sector. The European Union responded to these problems by establishing a banking union. Chapter 9 presents the scope and structure of this new European institution and discusses the arguments brought forth in its favour. To begin with, the author briefly introduces the two main risks in the banking business, default risk and interest rate risk.

The Burden of Public Debt and the European Stability Mechanism

Chapter 8 draws on an early, tentative analysis of John Maynard Keynes, his famous ‘Economic Consequences of the Peace’ of 1920 which focuses on two distinct deficiencies of the time, excessive external government debt and external (macroeconomic) imbalances. With reference to Keynes, the chapter analyses the specific stock-flow inconsistency of monetary relations in the euro area and, taking Greece as an example, discusses solvency conditions for governments. Turning to the rescue measures taken by the European Council, these are assessed as short-term solutions compared to the measures Keynes had proposed. The focus on austerity has as a consequence that stock-flow inconsistency continues to exist.

The ECB’s Unconventional Monetary Policy

Chapter 7 begins by briefly describing the emergence of the financial crisis in Europe, highlighting the typical patterns. Then, the ECB’s non-standard monetary policy measures in response to the financial crisis and the sovereign debt crisis are reviewed with a special focus on asset purchase programmes. The ECB, in implementing unconventional monetary policy measures, was confronted with specific problems which can be traced back to shortcomings in the basic relationship between (European) monetary policy and (national) fiscal policies in the European monetary union. Against this background, the chapter assesses the ECB’s unconventional monetary policy based on the concept of ‘stock-flow consistency’ in monetary economics and discusses different options for resolving these deficiencies.

Conventional Monetary Policy of the ECB

Chapter 4 analyses how European monetary policy works. Firstly, it briefly looks at theory to understand how monetary impulses are transmitted and how they affect the economy. Secondly, it discusses different monetary policy concepts that are derived from theory and that provide indicators for orientation. Finally, against this background, the conventional monetary policy strategy of the European Central Bank is evaluated. Five phases of main refinancing operations have to be distinguished that formed the core of conventional monetary policy until 2008.

The ‘Bad-Asset Problem’

The bad-asset problem of transition economies had its origin in the system change. Though moral hazard problems were a concern when credible rules and structures had yet to be established, a strong case can be made for a thorough debt cancellation and balance sheet repair in the transition. This chapter reviews different strategies of how to distribute the burden and their impact on investment activity and growth, price stability, the future tax burden, and social security, respectively. It briefly describes how the bad-asset problem has been tackled in Europe, highlighting the role of the banks. Finally, an outlook is given on the recent financial crisis which led to an excessive inter-government lending. This new European ‘bad-asset problem’ calls for shared responsibility in fiscal policy.

The New European Monetary System

When the European Economic and Monetary Union was founded, the established European Monetary System (EMS) was not completely abandoned. Still, demand for stable monetary relations between the member states of the monetary union and other EU members who had not joined the EMU required an institutional setting. The European Council decided to provide a mechanism of exchange rate interventions to respond to this demand. In a resolution of 1997, the rules of the EMS were adapted to the changed task and the system continued to exist as Exchange Rate Mechanism II (ERM II) with a changed structure and a changed scope.

Real Convergence in a Monetary Union

When the European Economic and Monetary Union was established in 1999, the entry ticket consisted of a set of criteria requiring monetary convergence of accession countries. Since there was no demand for ‘real convergence’ in the set. the EMU had from its very beginning to live up to the critique that from an economic point of view it was ‘a bad idea’. That critique has been continued until recently, pointing at the lack of ‘a substantial measure of homogeneity in the economic structure of its member states’ (OECD 2005), increasing asymmetries (Portes 2001) and the lack of resilience (OECD 2006).