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Economic Polarisation in Europe Causes and Policy Options
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Economic Polarisation in Europe Causes and,Policy Options. JAKOB KAPELLER,CLAUDIUS GR BNER,PHILIPP HEIMBERGER. Jakob Kapeller is Professor of Socioeconomics at the University of Duisburg Essen Institute for. Socio Economics and Johannes Kepler University Linz Institute for the Comprehensive Analysis. of the Economy ICAE Claudius Gr bner is Research Associate at the University of Duisburg. Essen Institute for Socio Economics and Johannes Kepler University Linz Institute for the. Comprehensive Analysis of the Economy ICAE Philipp Heimberger is Economist at The Vienna. Institute for International Economic Studies wiiw and Johannes Kepler University Linz Institute. for the Comprehensive Analysis of the Economy ICAE. The study was first published by the Friedrich Ebert Stiftung in German language Wirtschaftliche. Polarisierung in Europa Ursachen und Handlungsoptionen by Jakob Kapeller Claudius Gr bner. Philipp Heimberger ISBN 978 3 96250 376 5 Bonn 2019 The German version of this study was. financed by the FES under the project F r ein Besseres Morgen. We thank Eva Strobl and Clive Liddiard for excellent editorial work. This study discusses the challenges that economic policy makers in Europe have to cope with in order. to ensure an economically prosperous and institutionally stable community of Member States of the. European Union EU At the analytical level we not only document a process of multi dimensional. polarisation of EU countries but also link the existing economic divergences with a central long term. problem namely structural polarisation differences in the institutional and legal embedding e g in the. areas of tax and corporate law the labour market or the financial sector and in technological capabilities. are a major driver of divergence in living standards between some Member States This polarisation. which started even before the financial crisis but has intensified over the last ten years is due largely to. the global and the European race for the best location. Without coordinated and cooperative intervention by economic policy makers a further drifting apart of. economic development paths seems unavoidable The large differences in the production structures of. the EU countries and the resulting highly unequal distribution of technological capabilities are self. reinforcing in nature and will further intensify polarisation. The present study provides proposals for a coherent European overall strategy that not only addresses. existing problems and renders possible the often promised upward convergence between EU countries. but also provides a potential basis for dealing with key future challenges such as digitisation ageing. society climate change or global trade on the basis of common European objectives The focus is on. safeguarding and expanding European values and institutions in order to deepen European integration. at key points and thus also to contribute in the medium to long run to a transformation of the global. economic order from the European side A central argument is that coordinated measures in various. policy areas especially in wage monetary fiscal and industrial policy are of central importance in. creating a long term successful economic basis for the common European economic and monetary. Keywords Europe European integration economic openness competitiveness. JEL classification B5 F6 F45, 1 Introduction economic convergence or disintegration in Europe 1. 2 Macroeconomic polarisation in the EU 3, 2 1 Convergence as a political promise of the economic integration process in Europe 4. 2 2 Diverging growth models in the EU 8, 2 3 Convergence and divergence in the EU key macroeconomic indicators 12.
3 Uneven distribution of production capabilities in Europe impact on. macroeconomic polarisation 17, 3 1 Technological development and economic prosperity 17. 3 2 Wage costs or technology what determines the international competitiveness of EU countries 20. 3 3 Technology export performance and structural change in the EU 23. 4 Economic policy stimulus for a prosperous Europe 28. 4 1 Securing European values 29,4 2 Thinking the eurozone through 31. 4 3 Stemming the competition between European countries for the best location 34. 4 4 Rethinking the economy a question of progress 37. 5 Concluding remarks 39,6 Bibliography 41,TABLES AND FIGURES. Table 1 A summary of potential reactions to a decrease in effective demand 9. Figure 1 Economic growth and migration in the EU 3. Figure 2 Dimensions of polarisation in Europe 7, Figure 3 Decreasing wage share and increasing personal income inequality 8. Figure 4 Debt dynamics in Europe pre crisis period 11. Figure 5 Macroeconomic indicators in the eurozone 13. Figure 6 Debt dynamics in Europe post crisis period 15. Figure 7 Economic development dynamics in Europe 16. Figure 8 The relationship between technological capabilities and income 18. Figure 9 Dynamics of value added and employment in the industrial sector 20. Figure 10 Distribution of export capabilities and import propensities according to product. complexity in eurozone countries 23, Figure 11 Product complexity and export dynamics Germany and Greece.
1979 2000 vs 2001 2016 24, Figure 12 Product complexity and export dynamics EU wide sample 2001 2008 vs 2009 2016 25. Figure 13 Technological path dependency in Europe 26. Figure 14 Elements of a new economic policy strategy 29. INTRODUCTION ECONOMIC CONVERGENCE OR DISINTEGRATION IN EUROPE 1. Research Report 440,1 Introduction economic convergence or. disintegration in Europe, The temporary economic upswing in 2017 and 2018 created optimism in large parts of Europe After. years of recession and stagnation in several European countries stronger economic growth and. declining unemployment were reported e g European Commission 2017 IMF 2018 European. Commission 2018 OECD 2018 Even Nobel laureate in economics Paul Krugman of the USA a. critical observer of economic developments in Europe expressed his optimism It s important to be. aware that Europe 2018 looks very different from Europe 2013 For now at least Europe is back as a. functioning economic system Krugman 2018, The present study argues that the temporarily positive economic development in 2017 2018 only. masked the deeper structural polarisation in large parts of the EU This polarisation results on the one. hand from structural differences i e differences in the sectoral structure of the economy in the. production structures and the associated technological capabilities and on the other hand from the. different institutional and legal embedding e g in the areas of tax and corporate law the labour market. or the financial sector between the EU countries Polarisation remains the greatest threat to long term. European cohesion as it causes macroeconomic divergence in the current political framework. Despite the short term economic recovery over recent years the structural differences between most. EU economies are either relatively stable or are even increasing Gr bner et al 2017 Gr bner et al. 2018 However the establishment of the eurozone as a common customs and currency area in 1999. was linked to the central political promise of an economic convergence process the euro member. countries would integrate further the countries with lower levels of prosperity would orient themselves. upwards and join countries such as Germany the Netherlands and Austria e g Gill and Raiser 2012. However the crisis and the subsequent economic experiences have shown that the convergence trend. of the pre crisis years was only superficial in nature because economic growth driven by rising private. indebtedness especially in the southern eurozone countries came to a juddering halt with the outbreak. of the crisis e g Lane 2012 Stockhammer 2016 Regan 2017 Mody 2018. Behind the fa ade however a polarisation process could already be observed in the pre crisis period. This was particularly evident at the level of current account balances on the one hand countries such. as Germany and Austria showed stable or even rising current account surpluses on the other hand. countries such as Italy Spain and Greece accumulated deficits in the course of the pre crisis years This. points to the existence of different growth models in the pre crisis phase which enabled the Southern. European eurozone countries to catch up in the short term but which ultimately turned out to be. unsustainable, However whether the promise of economic convergence between the eurozone countries can be.
fulfilled by catching up growth in comparatively poorer countries upward convergence is a question. not only of political credibility but also of the future viability of the single currency as such After all it. has become clear in the years of the euro crisis that major economic disparities between the eurozone. 2 INTRODUCTION ECONOMIC CONVERGENCE OR DISINTEGRATION IN EUROPE. Research Report 440, countries also lead to conflicts that have the potential to contribute to a political failure of the EU e g. Eichengreen 2015 Frieden and Walter 2017 Tooze 2018. The present study not only documents the process of macroeconomic polarisation of the EU countries in. various relevant dimensions see Section 2 but also links the existing economic divergences with a. central long term problem facing Europe structural polarisation between the EU countries Differences. in the institutional and legal embedding such as in the areas of tax and corporate law the labour. market and the financial sector as well as in technological capabilities are a major driver of divergence. in living standards between the Member States The resulting political conflicts counter existing efforts to. embed the European Economic and Monetary Union EMU in a consistent common institutional. framework in critical areas such as fiscal policy and banking regulation Lehner and Wasserfallen. Technological capabilities which play a decisive role in the individual countries long term economic. development continue to be very unevenly distributed among the eurozone countries Section 3 As a. result companies in some countries in particular Germany have been able to extend the market lead. over international competitors that they already enjoyed at the time of joining the eurozone while. technologically less advanced countries have continued to fall behind These are self reinforcing. processes past successes are the basis for future successes Kaldor 1978 Gr bner et al 2017. Gr bner et al 2018 for which there are currently no compensating counterforces in the institutional. set up within the EU because of the existing structural polarisation EU Member States are on different. and at times sharply diverging development paths At the same time important traditional. compensation mechanisms are not available due to the eurozone wide harmonisation of monetary. policy the limitation of fiscal policy measures by the Stability and Growth Pact and the impossibility of. exchange rate adjustments in the monetary union e g De Grauwe 2018a Heimberger and Kapeller. Thus a further widening of these already diverging paths is likely although it contradicts the political. goal of an economically stable EU which should be characterised by upward convergence of its. Member States The process underlying this polarisation will continue regardless of short and medium. term economic development in Europe unless coordinated countermeasures are taken in the areas of. fiscal financial market wage and industrial policy Section 4 therefore provides the starting points for a. comprehensive discussion on appropriate economic policy measures to achieve upward convergence. and create an economic basis for all Member States that will be successful in the long term. MACROECONOMIC POLARISATION IN THE EU 3,Research Report 440. 2 Macroeconomic polarisation in the EU, Some 20 years after the official introduction of the euro and more than 10 years after the outbreak of. the financial crisis in 2007 2008 socio economic developments within the EU remain remarkably uneven. see Figure 1 Real economic output measured by price adjusted gross domestic product in Germany. the economically and politically most important country in Europe rose by 32 8 between 1999 and. 2018 Germany thus stands in stark contrast to the southern eurozone countries which are gradually. falling behind economically in 2018 real GDP in Italy the third largest European economy was only. 9 6 higher than in 1999 In the same period GDP growth in Portugal was only 18 9 while the Greek. economy grew by just 7 7 due to its deep crisis 1 Although the level of GDP per capita as a key. indicator of an economy s level of development at the time of euro introduction was significantly lower in. Southern Europe than in Germany the countries concerned especially Italy Portugal and Greece. have continued to lose ground over the past 20 years. Figure 1 Economic growth and migration in the EU,Cumulated growth between 2009 and 2018. Cumulated growth rate,Luxembourg,Netherlands,Cumulated net migration between 2009 and 2018.
Cumulated net migration per 1000 inhabitants,Luxembourg. Netherlands, Note The upper panel shows cumulated growth rates of real GDP Ireland represents a statistical outlier the very high. growth rates are mainly due to statistical problems directly related to problems in the national accounting framework. stemming from Ireland s special role as an international tax haven e g Linsi and M gge 2019. Source AMECO database Eurostat own calculations, Source AMECO database update November 2018 own calculations. 4 MACROECONOMIC POLARISATION IN THE EU,Research Report 440. As Figure 1 shows the past ten years represent a lost decade for the southern countries of the euro. area as they experienced a devastating growth trend owing to the crisis In terms of real economic. growth Germany and Austria were outperformed in the period 2009 2018 only by catching up Eastern. European economies and by relatively small countries such as Malta and Ireland which are anyway. special cases due to their role as financial centres in the European competition between locations see. the Sections 2 2 and 3 And while Germany s unemployment rate has recently reached an all time low. unemployment in large parts of the southern eurozone countries remains well above pre crisis levels In. short the last ten years have been characterised by large parts of the EU drifting further apart. economically, Divergences within the EU are also manifest at the level of migration movements in particular Eastern.
European countries with low income levels and Southern European countries with weak or negative. growth dynamics are experiencing a corresponding decline in population In the long term the net. migration movements shown in Figure 1 also cause a widening of existing performance gaps and. potentials between the European economies since it is primarily people of working age and with higher. education who prove to be internationally mobile Galgoczi et al 2016. 2 1 CONVERGENCE AS A POLITICAL PROMISE OF THE ECONOMIC. INTEGRATION PROCESS IN EUROPE, Historically the process of European economic integration has taken place in several stages e g. Baldwin and Wyplosz 2015 The establishment of the eurozone can be seen as the temporary. culmination of this economic integration process at the time of the introduction of the euro there had. already been several decades of political efforts with the goal of creating a single European market in. which goods capital and people could move as freely as possible across borders Mody 2018 With the. euro as the common currency this tendency towards greater economic integration in Europe was further. reinforced in certain areas To date 19 EU countries have become members of the eurozone but the. introduction of the euro has also been important for some non eurozone countries as they have pegged. their currencies to the euro Denmark and Bulgaria The implementation of the eurozone at the end of. the 1990s therefore serves as a central starting point for the analysis in this study since the introduction. of the euro can be understood as a selective deepening of European integration and thus as an. openness shock for the European economies In addition we will generally focus on a macroeconomic. analysis of the member countries of the eurozone although we will also take into account. developments in those Eastern European EU countries that are currently not members of the eurozone. There are three reasons for this specific focus First the eurozone now accounts for almost three. quarters of EU economic output 2 Second the establishment of the eurozone was a key institutional step. towards integration Third the establishment of the eurozone was linked to the political promise of. economic convergence This was based on the hypothesis that the common customs and monetary. union would trigger a process of catching up convergence for its Member States i e the countries that. were less rich at the time of entry would relatively quickly approach the higher levels of material living. standards in the richest EU countries e g Dauderst dt 2014 However this political promise has been. fundamentally called into question by the reality of continued economic polarisation as will be shown. below So long as there is no real convergence defined as a catching up in living standards and so. long as the institutional architecture of the eurozone is politically and economically incomplete the. 2 The share of the euro area in the real GDP of the EU was about 73 in 2018 AMECO database own calculations. MACROECONOMIC POLARISATION IN THE EU 5,Research Report 440. eurozone and thus also the community of EU Member States will be susceptible to crises raising. doubts about the sustainability of Europe s institutional architecture. Currently the eurozone is a customs and monetary union but not a political or fiscal union e g Iversen. et al 2016 De Grauwe 2018a There is therefore a lack of important economic policy compensation. mechanisms to curb or correct imbalances and inequalities among the eurozone countries likewise the. European economic architecture is only able to a limited extent to respond adequately to global. challenges or locally occurring crises in individual countries or regions This becomes particularly clear in. the area of monetary policy if there is a nationally independent monetary policy a country can respond. to falling demand in the private sector by making an interest rate cut in order to boost regional economic. activity again By contrast the European Central Bank ECB is guided by an overall evaluation of the. countries in the eurozone and this arrangement can also lead to interest rates being too high in member. countries with rising unemployment and too low in those with falling unemployment This means that the. ECB policy for the euro area as a whole often has a pro cyclical effect from a local perspective the. ECB s interest rate policy may aggravate the economic cycles of boom and bust at the national level. and can thus contribute to undesirable deviations in the inflation rate in cross country comparisons or to. the emergence of significant trade imbalances between European countries as the pre crisis period. showed e g Enderlein et al 2012 Vermeiren 2017 Moreover because exchange rates between. eurozone members are fixed e g H pner and Lutter 2018 these countries can no longer devalue their. currencies in order to improve their exports or current account balances Finally the eurozone members. de facto have no control over the currency in which they borrow because the ECB is responsible for the. monetary policy throughout the common currency area In addition to the already mentioned restrictions. on the classic monetary policy options at the national level this also means that national fiscal policy. interventions cannot be supported by the central bank and that eurozone countries tend to be more. exposed to speculative attacks such as panic sales on government bond markets De Grauwe and Ji. Finally Europe s range of fiscal policy choices is very limited in essential respects by the lack of a. budget instrument at the eurozone level for example with a view to the possibilities of short term. stabilisation policy e g Andor 2016 At the eurozone level there are only inadequate fiscal. compensation mechanisms available to stabilise economic growth and employment in individual. eurozone countries e g Farhi and Werning 2017 Dullien 2018 Furthermore the space for fiscal. manoeuvre at the national level is so limited by EU fiscal regulations that the member countries have too. little leeway for economic stimulus measures in time of crisis while they tend to be given more room to. manoeuvre in boom times This characteristic contradicts the standard tenets of anti cyclical economic. policy Benetrix and Lane 2013 Heimberger and Kapeller 2017. The eurozone is thus not only placed in a political straitjacket but it is also vulnerable to speculative. attacks e g Saka et al 2015 As a consequence eurozone countries that come under pressure from. panic sales on government bond markets are dependent on the goodwill of other eurozone countries to. provide financial aid e g Sapir et al 2014 Frieden and Walter 2017 3 This is illustrated by the. experience of Italy and Spain which in 2011 and 2012 came under so much pressure on the. 3 The vulnerability to panic selling of government bonds is not present for EU countries with an independent monetary. policy as it is in the eurozone countries because the national central bank in stand alone countries such as the UK can. credibly assure financial investors that in emergencies it will prevent defaults by the state as lender of last resort De. Grauwe 2012,6 MACROECONOMIC POLARISATION IN THE EU. Research Report 440, government bond markets due to sharply rising panic induced interest premiums that a self reinforcing. liquidity crisis threatened to arise Italy and Spain were thus directly dependent on support from the other. eurozone countries Only after ECB President Mario Draghi with the subsequent approval of the. German government had announced portentously whatever it takes that the ECB would do. everything in its power to ensure the cohesion of the eurozone including emergency purchases of. government bonds already issued by crisis ridden countries did the pressure from financial investors. on Italy and Spain subside rapidly and sustainably Mody 2018 Tooze 2018. A further intensification of their economic and political dependence was experienced by countries such. as Greece Ireland and Portugal which temporarily lost all access to the financial markets after the onset. of the euro crisis and were thus dependent on the economically and politically more powerful eurozone. countries which were subsequently able to determine the conditions for financing support For the crisis. countries affected this constellation implied further cuts in their national economic policy autonomy. which was largely subordinated to the fiscal austerity and structural reform conditions of the creditor. institutions e g Sapir et al 2014 Featherstone 2015. Against this background the absence of economic convergence within the eurozone also consolidates. the economic and political power position of the financial donor countries and translates economic. instability into political conflict potential that strengthens the centrifugal forces of disintegration The. disintegrative potential of such political conflicts between countries with unequal economic and political. power positions has been demonstrated in recent years not least by the intra European disputes. surrounding the crisis in the southern eurozone countries e g Copelovitch et al 2016 Frieden and. Walter 2017, The various dimensions of socio economic polarisation from polarisation at the level of institutional.
legal and technological prerequisites for production through polarisation with a view to rising growth and. current account differentials to political shifts in power are all connected and can be understood as the. common result of a European and global competition between locations see Figure 2 In this race for. the best location for international investors some countries such as the German speaking countries. succeed primarily because of their unique characteristics in the area of technological capabilities which. for example make it possible to produce also machinery and industrial goods for which there is high. international demand while other countries try to achieve success in international competition by. creating particularly favourable institutional location factors for example in the areas of corporate. taxation e g Ireland labour market policy Eastern Europe or financial services Luxembourg the. Netherlands Cyprus and Malta By contrast other EU Member States particularly in Southern Europe. can only compete to a limited extent in this contest for the best location and are therefore gradually. falling behind in terms of both international competitiveness and material living standards. This possibility of an increasing polarisation of Europe was fully recognised from the outset by some key. players in European integration In particular the insight that convergence in the eurozone was. necessary but would not happen automatically was already taken up by the Delors Committee in 1989. in a report on the economic and monetary union It was postulated for example that greater. convergence of economic performance is needed because monetary union without a sufficient degree. of convergence is unlikely to be durable and could be damaging to the Community Delors 1989. MACROECONOMIC POLARISATION IN THE EU 7,Research Report 440. Figure 2 Dimensions of polarisation in Europe,Race for the best location. Structural polarisation Regulatory polarisation,Growing gaps in. competitiveness,Polarisation between,Migration flows Growth differentials. creditors and debitors,Political polarisation,Source own illustration.
Reflections on economic and economic policy convergence between the eurozone countries were. accordingly also incorporated into the Maastricht Treaty and the Stability and Growth Pact two essential. elements of the legal foundations for economic policy coordination in the European Union e g. Soukiazis and Castro 2005 Larch and Jonung 2014 More recently the widely acclaimed Report of. the Five Presidents of the EU stated that the notion of convergence is at the heart of our Economic. Union convergence between Member States towards the highest levels of prosperity and convergence. within European societies to nurture our unique European model Juncker et al 2015 p 7 However. the suitability of European fiscal rules for achieving convergence remains questionable it is precisely. those countries that would need more economic policy leeway especially for public investment in. infrastructure research or education in order to bring about economic change that are deprived of this. leeway by the existing regulatory framework e g Fitoussi and Saraceno 2008 Barbiero and Darvas. 2014 Heimberger and Kapeller 2017, In the following we will examine in more detail the economic dynamics in Europe since the creation of. the euro area focusing on a number of indicators that play an important role in the economic policy.

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