John Kay

Fiscal Policy and Macroeconomic Stabilisation in the Euro Area: Possible Reforms of the Stability and Growth Pact and National Decision-Making-Processes

The recent economic-policy debate in the EU has largely focused on fiscal policy and the Stability and Growth Pact. The reason is the current budgetary problems of some member states. Portugal breached the three-per cent-of-GDP deficit ceiling in 2001 and 2002. Germany breached it in 2002, and may also do so in 2003. France and Italy have abandoned their commitments to earlier agreed budget objectives and there is a clear threat that they may violate the deficit ceiling, too. These events have contributed to a revival of the debate on the fiscal policy framework in the EU. The European Commission has recently proposed a number of changes in the Stability and Growth Pact (European Commission 2002b). There have also been calls for more fundamental revisions of the EU fiscal policy framework including proposals to scrap the Stability and Growth Pact altogether (see, for example, Financial Times 2002a, b, c; The Economist 2002; De Grauwe 2002; or Walton 2002).

Pay-setting Systems in Europe: On-going Development and Possible Reforms

During the last twenty years, Western Europe has been characterised by both high unemployment and low growth as compared to the United States. However, in the last decade, experiences have been diverse among European countries. Several smaller countries have managed to reduce unemployment substantially, whereas the large EU countries (France, Germany, Italy and Spain) have been less successful (see EEAG 2004, Chapters 1 and 2 of this book). As discussed at length in 2003 EEAG report (EEAG 2003), Germany is the EU country that has suffered the worst stagnation.

Labour Market Reform in Europe

To solve the European unemployment problem, economists have usually advocated reforms that reduce labour market rigidities, which to increase the cost of labour: such reforms include less generous unemployment benefits, reductions in minimum wages and more flexible employment protection provisions. These recommendations are based on a cornerstone of modern economic theory: the notion of an “equilibrium rate of unemployment” to which the labour market converges in the absence of shocks, once all prices and wages have adjusted. This view holds that the equilibrium rate is entirely determined by real frictions at the microeconomic level, such as the workers’ bargaining power, information and incentive problems at the firm level, the efficiency of job search, etc. While these parameters themselves depend on the above-mentioned institutions, they do not depend on short-run fiscal and monetary policies, which only have a transitory effect on employment.

Rethinking Subsidiarity in the EU: Economic Principles

The European Union (EU) is currently facing major challenges, since the enlargement to East Central European and some other countries necessitates considerable changes in the structure of decision-making and the operation of the union. The establishment of the Economic and Monetary Union (EMU) and the introduction of the euro as the common currency in EMU countries testify to a stride towards deeper political integration. These developments suggest that a reconsideration of the principles of public decision-making is timely and they have led to the establishment of the European Convention, which will submit its proposals to the European Council sometime in 2003. The tasks of the Convention concern the division of competence between member states and the Union, better definitions of tasks for EU institutions, coherence and efficiency of EU external action and democratic legitimacy of the Union.1

Acceding Countries: The Road to the Euro

This chapter discusses the challenge to macroeconomic stabilisation in the ten new members of the EU during the convergence process posed by liberalised capital markets.The focus is on financial and currency fragility created by dangerously high volatility of capital flows and possible policies to reduce macroeconomic vulnerability to a crisis.

Economic growth in the European Union

Sluggish economic growth in many EU countries has been a major concern in Europe in the past ten to fifteen years. In the post-war period up to the 1990s European countries appeared to be catching up with the United States as the gap between GDP per capita in the US and West European countries gradually narrowed. This tendency was dramatically reversed in the 1990s. The catching-up process appears to have come to an end and several EU countries, in particular France, Germany and Italy, have started to fall further behind the US.1

Prospects for education policy in Europe

Does education matter or is it just a consumption good like other goods? There is a large consensus among economists that education is an important productive input into the wealth of a nation. For years, people have consistently shown that education enhances individual productivity, which shows up in higher wages by 5 to 10 per cent per extra year of education.1 And, when one tries to explain why some countries are richer than others, the rate of secondary enrolment comes out as one of the most robust determinants.2 Education is an investment: by increasing the total labour input that individuals supply to the market, it boosts GDP per capita and living standards. Furthermore, it is also widely considered that an educated workforce is a valuable asset at times of rapid technological change, because educated workers are better at adopting new technologies.3

Mergers and Competition Policy in Europe

Merger activity is gathering pace in Europe. 2005 saw large value mergers or acquisitions such as Italy’s Unicredito of Germany’s HVB in the banking industry and France’s Pernod Ricard of the UK’s Allied Domecq in the food and drink sector. The pace of activity in utilities has been especially hectic: France’s Suez acquired Belgium’s Electrabel, France Telecom bought Spain’s Amena and Telefonica (Spain) has launched a bid for O2 (UK). Within Spain, Gas Natural has also announced its intention to take over Endesa. Private equity firms (mostly British and American) have been active, especially in the profitable restructuring of conglomerates. Not so long ago mergers were basically an Anglo-Saxon phenomenon, but now they are a European phenomenon. Cross-border mergers are an increasing proportion of the total, and activity within the EU-15 is now the most important component of this trend.