1) Public wages account for a substantial portion of government spending in the euro area, averaging nearly a quarter, though there is significant cross-country variation.
2) The share of the labor force employed by the public sector also varies widely across countries, from under 10% in Germany to over 20% in France and Finland.
3) Compared to the early 1990s, the public wage bill has generally increased as a percentage of total government spending in most euro area countries.
This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank's decisions.
At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.
Authored by: Lucjan T. Orlowski
Published in 2005
This document provides a summary of a report on recent trends in monetary and fiscal policies in the EU and accession countries in light of the eastward expansion of the eurozone. It discusses challenges for both groups of countries. For EU countries, key issues are absorbing new members and adjusting decision-making. For accession countries, priorities are meeting euro convergence criteria through disinflation and coordination of policies to ensure stability. Risks to the single monetary policy from expansion are seen as quantitative rather than qualitative if preparations are successful and timing is optimal.
This document analyzes the nature and causes of the Euro crisis through a review of the historical background of the Euro and exchange rate theory. It classifies the Euro crisis as a debt deflation crisis. The main causes identified are financial integration and the under-assessment of risks, local imbalances within the Eurozone, and the Great Recession. Understanding the accurate diagnosis of the origins and dynamics of the crisis is important for defining the appropriate economic policies to solve it.
1) This document is a bachelor thesis that examines how China's foreign direct investment behavior in the European Union changed after the 2009 European sovereign debt crisis.
2) It develops hypotheses about whether China diversified its FDI destinations within the EU to include more peripheral, crisis-stricken countries and whether it shifted industries to support China's economic realignment.
3) The theoretical framework draws on Dunning's OLI paradigm and concepts of 'leapfrogging' to explain Chinese motivations for investing abroad such as seeking new markets and improving efficiency across borders.
Chief Assistant Professor Dr. Ivan Krumov Todorov holds several degrees related to finance and economics. He currently works as a Chief Assistant Professor of Finance at the South-West University "Neofit Rilski" in Blagoevgrad, Bulgaria where he teaches various courses. His research focuses on macroeconomics, European economic integration, and convergence between EU member states and the euro area. He has published extensively in Bulgarian and international journals and participated in several research projects.
The dispersion in current account balances among countries in the euro area has widened markedly over the past decade-and-a-half, and especially since 1999. The authors decompose current account positions for euro area countries into intra-euro-area balances and extra-euroarea balances and examine the determinants of these balances. Regarding intra-euro-area balances, they present evidence that capital tends to flow from high-income euro area economies to low-income euro area economies. These flows have increased since the creation of the single currency in Europe.
Authored by: Alan Ahearne, Brigit Schmitz, Jürgen von Hagen
Published in 2007
Public expenditure policies during the EMU period by Jesús Sánchez Fuentes, S...Círculo de Empresarios
This document analyzes public expenditure policies during the Eurozone period and provides lessons for the future. It reviews long-term public expenditure trends in industrialized countries over the past 30 years, finding that average spending ratios were broadly unchanged from 1980 to 2007. Section 3 will assess public expenditure policies during the first decade of the Eurozone and their implications. The experience of expenditure reform in the 1980s suggests that ambitious, high-quality reforms as part of comprehensive economic programs are most likely to succeed.
An attempt is made to explore the basic implications of differences in productivity growth rates in countries within a monetary union and tailor them to the case of the EU new member countries running up to the EMU. By using the mathematical model of Harrod-Balassa-Samuelson effect and linking productivity and relative price dynamics with monetary policy, it is shown that: 1) productivity growth in faster-growing countries (FGC) leads to either inflation there, or union-wide exchange rate appreciation, or both in certain proportions, depending on the monetary policy stance taken by the union, but does not cause increase in inflation in slower-growing countries (SGC) by itself, unless the union’s monetary authorities take pro-inflationary policy; 2) because of presence of FGC, the SGC do not become less competitive in the world, and can benefit from increased export of their goods to FGC, provided their labour markets are flexible enough; 3) the real challenge for SGC posed by FGC is not inflation, but rather loss of jobs and export revenues, if their labour markets are not flexible enough to adjust under tight union-wide monetary policy aimed at keeping the union-wide overall price level unchanged, or the labour productivity increase in FGC is not met by adequate improvement in labour productivity in SGC. It should be noted, however, that this ‘adequate improvement’ is enough to constitute only a fraction of the productivity growth in FGC.
Authored by: Nikolai Zoubanov
Published in 2003
This study reviews monetary policy options that are seemingly viable for adopting the euro by the new Member States of the European Union. A fully autonomous direct inflation targeting is believed to be suboptimal for convergence to the euro as it does not incorporate convergence parameters into the central bank reaction function and instrument rules. In an attempt to correct for such deficiency, this study advocates adopting a framework of relative inflation forecast targeting where a differential between the domestic and the eurozone inflation forecasts becomes the main objective of the central bank's decisions.
At the same time, some attention to the exchange rate stability objective becomes necessary for facilitating the monetary convergence process. Foreign exchange market interventions, rather than interest rate adjustments, are viewed as a preferred way of achieving this objective.
Authored by: Lucjan T. Orlowski
Published in 2005
This document provides a summary of a report on recent trends in monetary and fiscal policies in the EU and accession countries in light of the eastward expansion of the eurozone. It discusses challenges for both groups of countries. For EU countries, key issues are absorbing new members and adjusting decision-making. For accession countries, priorities are meeting euro convergence criteria through disinflation and coordination of policies to ensure stability. Risks to the single monetary policy from expansion are seen as quantitative rather than qualitative if preparations are successful and timing is optimal.
This document analyzes the nature and causes of the Euro crisis through a review of the historical background of the Euro and exchange rate theory. It classifies the Euro crisis as a debt deflation crisis. The main causes identified are financial integration and the under-assessment of risks, local imbalances within the Eurozone, and the Great Recession. Understanding the accurate diagnosis of the origins and dynamics of the crisis is important for defining the appropriate economic policies to solve it.
1) This document is a bachelor thesis that examines how China's foreign direct investment behavior in the European Union changed after the 2009 European sovereign debt crisis.
2) It develops hypotheses about whether China diversified its FDI destinations within the EU to include more peripheral, crisis-stricken countries and whether it shifted industries to support China's economic realignment.
3) The theoretical framework draws on Dunning's OLI paradigm and concepts of 'leapfrogging' to explain Chinese motivations for investing abroad such as seeking new markets and improving efficiency across borders.
Chief Assistant Professor Dr. Ivan Krumov Todorov holds several degrees related to finance and economics. He currently works as a Chief Assistant Professor of Finance at the South-West University "Neofit Rilski" in Blagoevgrad, Bulgaria where he teaches various courses. His research focuses on macroeconomics, European economic integration, and convergence between EU member states and the euro area. He has published extensively in Bulgarian and international journals and participated in several research projects.
The dispersion in current account balances among countries in the euro area has widened markedly over the past decade-and-a-half, and especially since 1999. The authors decompose current account positions for euro area countries into intra-euro-area balances and extra-euroarea balances and examine the determinants of these balances. Regarding intra-euro-area balances, they present evidence that capital tends to flow from high-income euro area economies to low-income euro area economies. These flows have increased since the creation of the single currency in Europe.
Authored by: Alan Ahearne, Brigit Schmitz, Jürgen von Hagen
Published in 2007
Public expenditure policies during the EMU period by Jesús Sánchez Fuentes, S...Círculo de Empresarios
This document analyzes public expenditure policies during the Eurozone period and provides lessons for the future. It reviews long-term public expenditure trends in industrialized countries over the past 30 years, finding that average spending ratios were broadly unchanged from 1980 to 2007. Section 3 will assess public expenditure policies during the first decade of the Eurozone and their implications. The experience of expenditure reform in the 1980s suggests that ambitious, high-quality reforms as part of comprehensive economic programs are most likely to succeed.
An attempt is made to explore the basic implications of differences in productivity growth rates in countries within a monetary union and tailor them to the case of the EU new member countries running up to the EMU. By using the mathematical model of Harrod-Balassa-Samuelson effect and linking productivity and relative price dynamics with monetary policy, it is shown that: 1) productivity growth in faster-growing countries (FGC) leads to either inflation there, or union-wide exchange rate appreciation, or both in certain proportions, depending on the monetary policy stance taken by the union, but does not cause increase in inflation in slower-growing countries (SGC) by itself, unless the union’s monetary authorities take pro-inflationary policy; 2) because of presence of FGC, the SGC do not become less competitive in the world, and can benefit from increased export of their goods to FGC, provided their labour markets are flexible enough; 3) the real challenge for SGC posed by FGC is not inflation, but rather loss of jobs and export revenues, if their labour markets are not flexible enough to adjust under tight union-wide monetary policy aimed at keeping the union-wide overall price level unchanged, or the labour productivity increase in FGC is not met by adequate improvement in labour productivity in SGC. It should be noted, however, that this ‘adequate improvement’ is enough to constitute only a fraction of the productivity growth in FGC.
Authored by: Nikolai Zoubanov
Published in 2003
This document provides an overview of key indicators related to the business environment in Hungary. It begins with background on Hungary's transition to a market economy in the late 1980s and early 1990s. It then lists 20 indicators that will be analyzed, including agriculture, education, employment, population, environment, energy, finance, government, health, innovation and technology, and more. Tables of economic statistics for Hungary are also provided. The document appears to be a research paper comparing Hungary's performance on various business environment indicators.
Fiscal Spillovers in Europe - Size, Sign and DeterminantsLatvijas Banka
A presentation by Josef Hollmayr (Deutsche Bundesbank) and Georgios Georgiadis (European Central Bank) at the Workshop on Public Finances in Riga on 21 June 2016
This paper analyses the effect of the EU enlargement process on income convergence among regions in the EU and in the Eastern neighbourhood of the EU. The data used is NUTS II regions in the EU and Oblasts' of Russia over the period 1996-2004. The estimation techniques used take into account both regional and spatial heterogeneity. The main findings are that the regional income differences are reduced within EU15. The income convergence within the EU is mainly driven by reductions in the differences across countries rather than by a reduction in regional differences within countries. When differences in initial conditions in the regions are controlled for by fixed regional effects there are strong evidences of convergence among regions in all studied country groups.
Authored by: Fredrik Wilhelmsson
Published in 2009
This document is a paper analyzing inflation and monetary policy in Russia between 1992-2001. It seeks to identify the main factors driving inflation in Russia during this period through empirical testing and econometric analysis. The paper finds that money expansion and exchange rate depreciation fueled inflation, though the underlying trends changed over time. Until 1999, fiscal policy posed the biggest obstacle to disinflation, while later, attempts to target both money supply and exchange rate simultaneously through monetary policy caused inflationary pressures.
This document discusses the link between the Economic and Monetary Union (EMU) and the Stability and Growth Pact (SGP) in the European Union. It provides background on the establishment of the EMU, including the convergence criteria laid out in the Maastricht Treaty. It then explains that the SGP was created to ensure fiscal discipline among EU member states after adopting the euro, as monetary policy was now centralized but fiscal policy remained at the national level. The SGP requires members to keep their budget deficit below 3% of GDP and debt below 60% of GDP in order to support monetary stability within the eurozone.
This document discusses the vulnerability of regions within the Eurozone (European single currency area) to economic shocks since the establishment of the monetary union in 1999. It analyzes how a common contractionary shock impacted different regions, finding that the most geographically isolated regions were hit hardest. These peripheral regions experiencing the most severe sovereign debt crises are among the EU's lowest productivity regions. The implications of these findings for debates around European monetary and fiscal integration are considered.
The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency’s demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries’ inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times.
Europe consists of nation states that constitute the major axes of national identity and major sources of government’s legitimisation. Staying within the euro zone may sentence some countries – which, for whatever reason, have lost or may lose competitiveness – to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone,
threatening the future of the whole EU and Single European Market.
In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market.
This paper has been also published in "German Economic Review" (Volume 14, Issue 1, pages 31–49, February 2013)
Authored by: Stefan Kawalec and Ernest Pytlarczyk
Russia’s dependence on oil and other natural resources is well known, but what does it actually mean for policy makers’ ability to control the economic fate of the country? This brief provides a more precise analysis of the depth of Russia’s oil dependence. This is based on a careful statistical analysis of the immediate correlation between international oil prices — that Russia does not control — and Russian GDP, which policy makers would like to control. I then look at how IMF’s forecast errors in oil prices spillover to forecast errors of Russian GDP. These numerical exercises are striking; over the last 25 years oil price changes explain on average two thirds of the variation in Russian GDP growth and in the last 15 years up to 80 percent of the one-year ahead forecast errors. Instead of controlling the economic fate of the country, the best policy makers can hope for is to dampen the short-run impact of oil price shocks. A flexible exchange rate and fiscal reserves are key volatility dampers, but not sufficient to protect long-term growth. The latter will always require serious structural reforms and the question is what needs to happen for policy makers to take action to get control over the long-term fate of the economy.
This year's SITE Energy Day was devoted to discussing the consequences of oil price fluctuations for markets and actors of the economy. The half-day conference engaged policy-oriented scholars and experts from the business community to discuss the impact of oil price fluctuations on macro fundamentals, international trade, strategies of oil cartels, strategic risk management, and opportunities for change in energy systems.
Natalya Volchkova, Policy Director of CEFIR, presented a topic "Oil price fluctuations and international trade".
For more information and research analysis please visit: www.hhs.se/site
Ecb working paper 242 public sector efficiency an international comparisonPiet De Pauw
This paper compares the efficiency of the different states. This comparison is relative. States with the highest degree of freedom seem to have the highest efficiency.
This paper estimates responses to monetary policy shocks in several euro area countries and Central and Eastern European countries using a Bayesian structural vector autoregression (SVAR) model. The estimates suggest that while responses are broadly similar across regions, prices may respond more strongly in the CEE countries, though after a longer lag. This could be due to structural differences, in which case early euro adoption could cause problems for CEE countries. However, if due to credibility issues, euro adoption could help by providing credibility to monetary policy. With longer lags in the CEE, domestic monetary policy may be difficult to conduct, so relinquishing it may not entail significant costs.
Oil has for decades been perceived as a necessary and highly addictive energy commodity, fueling the world economy. It is a crucial input good for most of the net-oil consumer countries, and it is an important source of revenue for the net-oil supplier countries. This means that any changes in the oil price will affect the entire world economy. Chloé Le Coq and Zorica Trkulja from Stockholm Institute of Transition Economics have written a policy brief that explains to what extent the oil-price fluctuations matter for the economy.
Read more: https://www.hhs.se/site
Both the economic and the political economy arguments point to fast EMU accession of NMS. Looking at the 'classical' optimum currency area criteria, i.e. trade integration, co-movement of business cycles and actual factor mobility, NMS' record is not worse, on average, than that of the current Eurozone members, and should further improve before Eurozone entry, decreasing risk of their exposure to idiosyncratic shocks. After joining the EMU, the common currency should help NMS to develop additional intra- EMU trade links, further synchronize business cycle and increase factor mobility. Both theoretical arguments and empirical experience demonstrates that so-called real convergence accompanies nominal convergence, and that there is synergy rather than a trade-off between the two.
Authored by: Marek Dąbrowski
Published in 2005
Ex-post impact assessment of EU Cohesion Policy 2007-2013Latvijas Banka
A presentation by Francesco Di Comite, Olga Diukanova, d'Artis Kancs, Patrizio Lecca, Montserrat Lopez-Cobo, Damiaan Persyn (European Commission, Joint Research Centre, IPTS Institute (Seville, Spain)) at the Workshop on Public Finances in Riga on 21 June 2016
Upward Social Convergence in the EU: definition and measurement - Massimilia...Massimiliano Mascherini
This presentation was given at the seminar co-organized by Eurofound and the Italian Permanent Representation to the European Union on 6/11/2019
It is based on the report
“Upward Convergence in the EU:
Concepts measurements and Indicators”
Which is available here:
https://goo.gl/ttS8wY
background document of the seminar:
The European Union was defined by the World Bank as the “modern world’s greatest convergence Machine” for its capacity of propelling least performing Member States towards best performing countries in both the economic and social dimension.
The economic crisis halted upward convergence trends especially in employment and living conditions. While since 2013 convergence trends are coming back, the gravity of the crisis heightened the need to address social asymmetries besides the economic ones. The idea that “economic and social convergence should go hand in hand” is now central to the policy debate. The recently proclaimed European Pillar of Social Rights aims at being a compass to upward convergence towards better working and living conditions.
However, what is social convergence? And what is upward convergence? And how do we measure it? While these two concepts are now more and more popular in the European policy debate, scientific literature around them is scarce. According to Scopus, among the 30,000 scientific articles in economy or social science discussing convergence, only 55 discuss social convergence and even fewer upward convergence of which not a real definition exists.
For this reason, the aim of the seminar is to:
• Discuss the definition of upward convergence,
• Measure upward convergence, differences and caveats of the various measurements,
• Assess where Europe is in terms of upward convergence and the latest trends the social dimension of the European Union,
• See how Italy behaved in terms of upward convergence in comparison to other countries.
As one hint of what Eurofound will present on 6 November, our first results show that over the period 2008-2016, while the employment and activity rate as well as social exclusion index and AROPE reveal an upward convergence trends, some other indicators exhibit a pattern of either downward convergence (material deprivation and in-work poverty as well as long-term unemployment rate and average weekly hours worked) or downward divergence (Inequality, NEET rate, unemployment rate, involuntary temporary work and part time) with greater differences at the regional level.
Financial market stability Final SubmissionPieter Roux
This document provides a summary of the anatomy and dynamics of the global financial crisis that began in 2007-2008. It describes how a crisis in the US subprime mortgage market multiplied into a crisis of staggering global proportions, with initial subprime losses of $250 billion resulting in estimated global GDP losses of $4,700 billion and a decrease in global stock market capitalization of $26,400 billion. The document then analyzes the dynamics of the crisis, tracing how unsustainable trade imbalances and the bursting of the US housing bubble contaminated the global financial system through complex financial instruments. It divides the crisis into two phases: the initial subprime mortgage crisis and run on the shadow banking system, followed by the collapse of Lehman Brothers
This document is a newsletter from the Centre For European Studies providing updates on actions taken in response to the financial crisis by EU member states and worldwide. It includes a foreword discussing the downsides of stimulus packages, including hidden protectionism. It then provides brief summaries of recent financial crisis-related news and actions in several EU member states, including Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Estonia, and France. Upcoming events are also listed.
The IMF document discusses Spain's economic situation following the global financial crisis. Key points:
1) Spain accumulated large imbalances during a housing boom that ended in recession, with unemployment tripling to 27% and fiscal deficits rising sharply.
2) More recently, imbalances have begun correcting as exports recover and domestic demand weakens, reducing twin fiscal and current account deficits. However, unemployment remains very high at 27% and private sector debt reduction continues weighing on growth.
3) The outlook is difficult with a protracted period of weak growth expected as fiscal consolidation and private sector deleveraging drag on the economy despite strong net exports. Unemployment is forecast to remain elevated for many years.
Sundays and festivals with the Fathers of the Churchrafael-brodbeck
This document provides an introduction and table of contents for a book containing summaries of Gospel readings from Sundays and feast days along with homilies on those Gospels written by early Church fathers and doctors of the Church. The summaries and homilies cover the liturgical year from Advent through Pentecost. Notable authors included are St. Gregory the Great, St. Jerome, St. Augustine, St. Ambrose, the Venerable Bede, and Pope St. Leo the Great. The homilies aim to provide spiritual guidance and commentary on the Gospels from these influential early Christian thinkers.
I. Employees want different things at different stages of employment. Factors attracting employees are not the same as retaining or engaging them.
II. Employees are more likely to stay with companies perceived as "talent friendly" with progressive HR practices and work environments.
III. Learning and development opportunities are highly valued and impact engagement levels the most. Employees want to continuously improve skills.
This document provides an overview of key indicators related to the business environment in Hungary. It begins with background on Hungary's transition to a market economy in the late 1980s and early 1990s. It then lists 20 indicators that will be analyzed, including agriculture, education, employment, population, environment, energy, finance, government, health, innovation and technology, and more. Tables of economic statistics for Hungary are also provided. The document appears to be a research paper comparing Hungary's performance on various business environment indicators.
Fiscal Spillovers in Europe - Size, Sign and DeterminantsLatvijas Banka
A presentation by Josef Hollmayr (Deutsche Bundesbank) and Georgios Georgiadis (European Central Bank) at the Workshop on Public Finances in Riga on 21 June 2016
This paper analyses the effect of the EU enlargement process on income convergence among regions in the EU and in the Eastern neighbourhood of the EU. The data used is NUTS II regions in the EU and Oblasts' of Russia over the period 1996-2004. The estimation techniques used take into account both regional and spatial heterogeneity. The main findings are that the regional income differences are reduced within EU15. The income convergence within the EU is mainly driven by reductions in the differences across countries rather than by a reduction in regional differences within countries. When differences in initial conditions in the regions are controlled for by fixed regional effects there are strong evidences of convergence among regions in all studied country groups.
Authored by: Fredrik Wilhelmsson
Published in 2009
This document is a paper analyzing inflation and monetary policy in Russia between 1992-2001. It seeks to identify the main factors driving inflation in Russia during this period through empirical testing and econometric analysis. The paper finds that money expansion and exchange rate depreciation fueled inflation, though the underlying trends changed over time. Until 1999, fiscal policy posed the biggest obstacle to disinflation, while later, attempts to target both money supply and exchange rate simultaneously through monetary policy caused inflationary pressures.
This document discusses the link between the Economic and Monetary Union (EMU) and the Stability and Growth Pact (SGP) in the European Union. It provides background on the establishment of the EMU, including the convergence criteria laid out in the Maastricht Treaty. It then explains that the SGP was created to ensure fiscal discipline among EU member states after adopting the euro, as monetary policy was now centralized but fiscal policy remained at the national level. The SGP requires members to keep their budget deficit below 3% of GDP and debt below 60% of GDP in order to support monetary stability within the eurozone.
This document discusses the vulnerability of regions within the Eurozone (European single currency area) to economic shocks since the establishment of the monetary union in 1999. It analyzes how a common contractionary shock impacted different regions, finding that the most geographically isolated regions were hit hardest. These peripheral regions experiencing the most severe sovereign debt crises are among the EU's lowest productivity regions. The implications of these findings for debates around European monetary and fiscal integration are considered.
The Eurozone crisis mobilises an appreciable amount of the attention of politicians and the public, with calls for a decisive defence of the euro, because the single currency’s demise is said to be the beginning of the end of the EU and Single European Market. In our view, preserving the euro may result in something completely different than expected: the disintegration of the EU and the Single European Market rather than their further strengthening. The fundamental problem with the common currency is individual countries’ inability to correct their external exchange rates, which normally constitutes a fast and efficient adjustment instrument, especially in crisis times.
Europe consists of nation states that constitute the major axes of national identity and major sources of government’s legitimisation. Staying within the euro zone may sentence some countries – which, for whatever reason, have lost or may lose competitiveness – to economic, social and civilizational degradation, and with no way out of this situation. This may disturb social and political cohesion in member countries, give birth to populist tendencies that endanger the democratic order, and hamper peaceful cooperation in Europe. The situation may get out of control and trigger a chaotic break-up of the euro zone,
threatening the future of the whole EU and Single European Market.
In order to return to the origins of European integration and avoid the chaotic break-up of the euro zone, the euro zone should be dismantled in a controlled manner. If a weak country were to leave the euro zone, it would entail panic and a banking system collapse. Therefore we opt for a different scenario, in which the euro area is slowly dismantled in such a way that the most competitive countries or group of such countries leave the euro zone. Such a step would create a new European currency regime based on national currencies or currencies serving groups of homogenous countries, and save EU institutions along with the Single European Market.
This paper has been also published in "German Economic Review" (Volume 14, Issue 1, pages 31–49, February 2013)
Authored by: Stefan Kawalec and Ernest Pytlarczyk
Russia’s dependence on oil and other natural resources is well known, but what does it actually mean for policy makers’ ability to control the economic fate of the country? This brief provides a more precise analysis of the depth of Russia’s oil dependence. This is based on a careful statistical analysis of the immediate correlation between international oil prices — that Russia does not control — and Russian GDP, which policy makers would like to control. I then look at how IMF’s forecast errors in oil prices spillover to forecast errors of Russian GDP. These numerical exercises are striking; over the last 25 years oil price changes explain on average two thirds of the variation in Russian GDP growth and in the last 15 years up to 80 percent of the one-year ahead forecast errors. Instead of controlling the economic fate of the country, the best policy makers can hope for is to dampen the short-run impact of oil price shocks. A flexible exchange rate and fiscal reserves are key volatility dampers, but not sufficient to protect long-term growth. The latter will always require serious structural reforms and the question is what needs to happen for policy makers to take action to get control over the long-term fate of the economy.
This year's SITE Energy Day was devoted to discussing the consequences of oil price fluctuations for markets and actors of the economy. The half-day conference engaged policy-oriented scholars and experts from the business community to discuss the impact of oil price fluctuations on macro fundamentals, international trade, strategies of oil cartels, strategic risk management, and opportunities for change in energy systems.
Natalya Volchkova, Policy Director of CEFIR, presented a topic "Oil price fluctuations and international trade".
For more information and research analysis please visit: www.hhs.se/site
Ecb working paper 242 public sector efficiency an international comparisonPiet De Pauw
This paper compares the efficiency of the different states. This comparison is relative. States with the highest degree of freedom seem to have the highest efficiency.
This paper estimates responses to monetary policy shocks in several euro area countries and Central and Eastern European countries using a Bayesian structural vector autoregression (SVAR) model. The estimates suggest that while responses are broadly similar across regions, prices may respond more strongly in the CEE countries, though after a longer lag. This could be due to structural differences, in which case early euro adoption could cause problems for CEE countries. However, if due to credibility issues, euro adoption could help by providing credibility to monetary policy. With longer lags in the CEE, domestic monetary policy may be difficult to conduct, so relinquishing it may not entail significant costs.
Oil has for decades been perceived as a necessary and highly addictive energy commodity, fueling the world economy. It is a crucial input good for most of the net-oil consumer countries, and it is an important source of revenue for the net-oil supplier countries. This means that any changes in the oil price will affect the entire world economy. Chloé Le Coq and Zorica Trkulja from Stockholm Institute of Transition Economics have written a policy brief that explains to what extent the oil-price fluctuations matter for the economy.
Read more: https://www.hhs.se/site
Both the economic and the political economy arguments point to fast EMU accession of NMS. Looking at the 'classical' optimum currency area criteria, i.e. trade integration, co-movement of business cycles and actual factor mobility, NMS' record is not worse, on average, than that of the current Eurozone members, and should further improve before Eurozone entry, decreasing risk of their exposure to idiosyncratic shocks. After joining the EMU, the common currency should help NMS to develop additional intra- EMU trade links, further synchronize business cycle and increase factor mobility. Both theoretical arguments and empirical experience demonstrates that so-called real convergence accompanies nominal convergence, and that there is synergy rather than a trade-off between the two.
Authored by: Marek Dąbrowski
Published in 2005
Ex-post impact assessment of EU Cohesion Policy 2007-2013Latvijas Banka
A presentation by Francesco Di Comite, Olga Diukanova, d'Artis Kancs, Patrizio Lecca, Montserrat Lopez-Cobo, Damiaan Persyn (European Commission, Joint Research Centre, IPTS Institute (Seville, Spain)) at the Workshop on Public Finances in Riga on 21 June 2016
Upward Social Convergence in the EU: definition and measurement - Massimilia...Massimiliano Mascherini
This presentation was given at the seminar co-organized by Eurofound and the Italian Permanent Representation to the European Union on 6/11/2019
It is based on the report
“Upward Convergence in the EU:
Concepts measurements and Indicators”
Which is available here:
https://goo.gl/ttS8wY
background document of the seminar:
The European Union was defined by the World Bank as the “modern world’s greatest convergence Machine” for its capacity of propelling least performing Member States towards best performing countries in both the economic and social dimension.
The economic crisis halted upward convergence trends especially in employment and living conditions. While since 2013 convergence trends are coming back, the gravity of the crisis heightened the need to address social asymmetries besides the economic ones. The idea that “economic and social convergence should go hand in hand” is now central to the policy debate. The recently proclaimed European Pillar of Social Rights aims at being a compass to upward convergence towards better working and living conditions.
However, what is social convergence? And what is upward convergence? And how do we measure it? While these two concepts are now more and more popular in the European policy debate, scientific literature around them is scarce. According to Scopus, among the 30,000 scientific articles in economy or social science discussing convergence, only 55 discuss social convergence and even fewer upward convergence of which not a real definition exists.
For this reason, the aim of the seminar is to:
• Discuss the definition of upward convergence,
• Measure upward convergence, differences and caveats of the various measurements,
• Assess where Europe is in terms of upward convergence and the latest trends the social dimension of the European Union,
• See how Italy behaved in terms of upward convergence in comparison to other countries.
As one hint of what Eurofound will present on 6 November, our first results show that over the period 2008-2016, while the employment and activity rate as well as social exclusion index and AROPE reveal an upward convergence trends, some other indicators exhibit a pattern of either downward convergence (material deprivation and in-work poverty as well as long-term unemployment rate and average weekly hours worked) or downward divergence (Inequality, NEET rate, unemployment rate, involuntary temporary work and part time) with greater differences at the regional level.
Financial market stability Final SubmissionPieter Roux
This document provides a summary of the anatomy and dynamics of the global financial crisis that began in 2007-2008. It describes how a crisis in the US subprime mortgage market multiplied into a crisis of staggering global proportions, with initial subprime losses of $250 billion resulting in estimated global GDP losses of $4,700 billion and a decrease in global stock market capitalization of $26,400 billion. The document then analyzes the dynamics of the crisis, tracing how unsustainable trade imbalances and the bursting of the US housing bubble contaminated the global financial system through complex financial instruments. It divides the crisis into two phases: the initial subprime mortgage crisis and run on the shadow banking system, followed by the collapse of Lehman Brothers
This document is a newsletter from the Centre For European Studies providing updates on actions taken in response to the financial crisis by EU member states and worldwide. It includes a foreword discussing the downsides of stimulus packages, including hidden protectionism. It then provides brief summaries of recent financial crisis-related news and actions in several EU member states, including Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Estonia, and France. Upcoming events are also listed.
The IMF document discusses Spain's economic situation following the global financial crisis. Key points:
1) Spain accumulated large imbalances during a housing boom that ended in recession, with unemployment tripling to 27% and fiscal deficits rising sharply.
2) More recently, imbalances have begun correcting as exports recover and domestic demand weakens, reducing twin fiscal and current account deficits. However, unemployment remains very high at 27% and private sector debt reduction continues weighing on growth.
3) The outlook is difficult with a protracted period of weak growth expected as fiscal consolidation and private sector deleveraging drag on the economy despite strong net exports. Unemployment is forecast to remain elevated for many years.
Sundays and festivals with the Fathers of the Churchrafael-brodbeck
This document provides an introduction and table of contents for a book containing summaries of Gospel readings from Sundays and feast days along with homilies on those Gospels written by early Church fathers and doctors of the Church. The summaries and homilies cover the liturgical year from Advent through Pentecost. Notable authors included are St. Gregory the Great, St. Jerome, St. Augustine, St. Ambrose, the Venerable Bede, and Pope St. Leo the Great. The homilies aim to provide spiritual guidance and commentary on the Gospels from these influential early Christian thinkers.
I. Employees want different things at different stages of employment. Factors attracting employees are not the same as retaining or engaging them.
II. Employees are more likely to stay with companies perceived as "talent friendly" with progressive HR practices and work environments.
III. Learning and development opportunities are highly valued and impact engagement levels the most. Employees want to continuously improve skills.
This document provides an overview of some basic business foundations for physician group practices, including costs and revenues. It discusses fixed and variable costs, how costs are allocated and billed through charge descriptions and codes. Diagnosis and procedure codes are used to document medical necessity and services provided, and different payment systems like DRGs and RVUs are used to determine reimbursement levels. Exceptions for situations without medical necessity or due to external causes are also noted.
The document provides information on health entitlements and taxation in Ireland for 2012. It outlines eligibility guidelines for medical cards based on income levels. It also discusses hospital charges, nursing home support, home care packages, and carers allowance. Regarding taxation, it details income tax credits and rates, mortgage interest and pension relief, DIRT tax rates, and capital acquisitions tax thresholds.
In its first year in government, the coalition worked to stabilize the economy, public finances, and jobs market. Over 20,000 new training and jobs placements were created. The economy is improving with exports up 12% and private investment in banks showing renewed confidence. Reforms were also implemented, like exempting many from the Universal Social Charge and plans to reduce the number of TDs.
This document provides instructions and examples for journalizing cash payments using a cash payments journal. It explains how to record payments of expenses, purchases of supplies, merchandise purchases, and payments on account. Examples show recording the date, account title, check number, debit amount, and credit amount for each transaction. Key terms covered are the cash payments journal, cash discounts, purchase discounts, and contra accounts.
Our God shall come, and shall not keep si- lence: a fire shall de- vour be- fore him, and it shall be very tem- pestu- ous round a- bout him.
ALLELUIA Alleluia, alleluia. V. Lo, he cometh, leaping upon the mountains: behold, he shall come flying swiftly like a bird. Alleluia.
OFFERTORY In virtue et patientia sancta Wisd. 10:10,12
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This paper reports the progress of nominal and real convergence of Spain, Portugal and Greece during their accession to the Economic and Monetary Union (EMU). When the EMU was designed, it was hoped that it would induce nominal convergence (convergence of interest rates and inflation rates) and stimulate investments and economic growth through its positive microeconomic effects. As had been expected, nominal interest rates have converged quite early during the accession, output has been growing fast, and the countries experienced an inflow of foreign direct investments (FDI) and an increase of domestic investment rates. However, once within the EMU, all three countries experienced persistently higher inflation rates, which may be consistent with the convergence of price levels, instead of inflation. While all the above phenomena can be related to the EMU accession, in an econometric estimation for Spain in which we control for macroeconomic policies, we are unable to detect significant microeconomic effects of the EMU. Therefore, we conclude that it is the policies induced by the necessity to satisfy the Maastricht criteria that matter primarily for the macroeconomic performance soon after accession. In any case, the experience of the SPG is encouraging for the new member states facing accession to the EMU in the future.
Authored by: Marek Jarocinski
Published in 2003
Twenty years of euro history confirms the euro’s stability and position as the second global currency. It also enjoys the support of majority of the euro area population and is seen as a good thing for the European Union. The European Central Bank has been successful in keeping inflation at a low level. However, the European debt and financial crisis in the 2010s created a need for deep institutional reform and this task remains unfinished.
This document provides a 3-paragraph summary of a policy brief on the current state of the European Union. It begins by outlining the economic advantages of adopting a single currency, such as reduced transaction costs and exchange rate uncertainty. However, it notes that more economic and fiscal integration is needed to ensure long-term success. The document then presents an action plan to strengthen economic governance and establish a European Debt Agency. It argues that growth is also important to overcoming the crisis. In conclusion, the policy brief advocates bold action to take advantage of the crisis and overcome current challenges facing the European Union.
This document provides a 3-paragraph summary of a policy brief on the current state of the European Union. It begins by outlining the economic advantages of adopting a single currency, such as reduced transaction costs and exchange rate uncertainty. However, it notes that more economic and fiscal integration is needed to ensure long-term success. The document then presents an action plan to strengthen economic governance and establish a European Debt Agency. It argues that growth is also important to overcoming the crisis. In conclusion, the policy brief advocates bold action to take advantage of the crisis and overcome current challenges facing the European Union.
The document discusses Europe's fragmented bond markets, which have become more divided during the euro crisis. Government bond yields have varied widely between member states, making fiscal adjustment difficult for countries with high borrowing costs and slowing economic growth. While market differentiation pressures fiscal discipline, the current level of variance is unsustainable. Integrating Europe's bond markets into a large, unified market could help overcome difficulties by creating more liquidity and lowering interest rates, but this cannot undermine budget constraints for highly indebted countries.
This paper discusses the processes of nominal and real convergence and their dependence on exchange rate regimes adopted in Central and Eastern European countries (CEECs) in thecontext of their future EMU accession. We focus our argument on the possibility of trade-off between the pace of disinflation and the maintenance of competitiveness and growth. Fixednominal exchange rate shifts the burden of adjustment on to the tradable sector but whether this pressure results in faster restructuring and faster productivity growth or becomes a straightjacket for the economy is an open question. The paper implements a simple empirical assessment of convergence of inflation to EU levels and economic growth of 7 CEE economies which had adopted different exchange rate regimes in period 1993-2002. Results indicate that fixed exchange rates seem to have been a better tool of fighting inflation as compared to floating exchange rates or intermediate regimes. The presence of a fixed exchange rate has also been characterised byhigher real GDP growth rates implying an absence of trade-off between nominal and real convergence in the investigated sample. Qualifications attached to these results are discussed.
Authored by: Przemyslaw Kowalski
Published in 2003
This paper focuses on roots of strain in the European Monetary Union (EMU). It argues that there is need for a thorough reform of the governance structure of the Union in conjunction with radical changes in the regulation and supervision of financial markets. Financial intermediation has gone astray in recent decades and entailed a big bubble in the industrialized world. Waves of financial deregulation have enhanced systemic risks, via speculative behavior and growing inter-connectedness. Moreover, the EMU was sub-optimal from its debut and competitiveness gaps did not diminish against the backdrop of its inadequate policy and institutional design. The euro zone crisis is not related to fiscal negligence only; over-borrowing by the private sector and poor lending by banks, as well as a one-sided monetary policy, also explain this debacle. The EMU needs to complement its common monetary policy with solid fiscal/budget underpinnings. Fiscal rules and sanctions are necessary, but not sufficient. A common treasury (a federal budget) is needed in order to help the EMU absorb shocks and forestall confidence crises. A joint system of regulation and supervision of financial markets should operate. Emergency measures have to be comprehensive and acknowledge the necessity of a lender of last resort; they have to combat vicious circles. Structural reforms and EMU level policies are needed to enhance competitiveness in various countries and foster convergence. The EU has to work closely with the US and other G20 members in order to achieve a less unstable global financial system.
Authored by: Daniel Daianu
Published in 2012
The economic characteristics of the COVID-19 crisis differ from those of previous crises. It is a combination of demand- and supply-side constraints which led to the formation of a monetary overhang that will be unfrozen once the pandemic ends. Monetary policy must take this effect into consideration, along with other pro-inflationary factors, in the post-pandemic era. It must also think in advance about how to avoid a policy trap coming from fiscal dominance.
This paper is organized as follows: Chapter 2 deals with the economic characteristics of the COVID-19 pandemic and its impact on the effectiveness of the monetary policy response measures undertaken. In Chapter 3, we analyse the monetary policy decisions of the ECB (and other major CBs for comparison) and their effectiveness in achieving the declared policy goals in the short term. Chapter 4 is devoted to an analysis of the policy challenges which may be faced by the ECB and other major CBs once the pandemic emergency comes to its end. Chapter 5 contains a summary and the conclusions of our analysis.
This paper uses a multi region DSGE model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy stimulus measures in a credit crisis. The paper explores alternative scenarios which differ by the type of budgetary measure, its length, the degree of monetary accommodation and the level of international coordination. In particular we provide estimates for New EU Member States where we take into account two aspects. First, debt denomination in foreign currency and second, higher nominal interest rates, which makes it less likely that the Central Bank is restricted by the zero bound and will consequently not accommodate a fiscal stimulus. We also compare our results to other recent results obtained in the literature on fiscal policy which generally do not consider credit constrained households.
Authored by: Jan in't Veld, Werner Roeger, István P. Székely
Published in 2011
This document summarizes key findings from the first wave of the Eurosystem Household Finance and Consumption Survey (HFCS) regarding household finances in 15 euro area countries. Some key points:
- Households own their main residence, deposits, and private pensions most commonly, while ownership of other assets varies substantially across countries. Real estate makes up most of household assets.
- Over half of households have no debt, but mortgage and non-mortgage debt prevalence differs across countries. Median mortgage debt exceeds median non-mortgage debt.
- Median net wealth of euro area households is €109,200, but there is wide cross-country variation. Wealth is concentrated among older households while younger households tend
Unlike the crisis years of 2007-2009 (when the insolvency of large banks was a major problem), the current round of the global financial crisis has fiscal origins. Almost all developed countries suffer from an excessive public debt burden that has been built up over the last two decades or more. The financial crisis caused a further deterioration of government accounts as a result of ill-tailored countercyclical fiscal response and, in some cases, a costly financial sector rescue. All excessively indebted countries must conduct fiscal adjustment, even if this involves economic and political costs in terms of lower output and higher unemployment. Central banks can reduce these costs through accommodative monetary policies but without compromising their anti-inflationary missions and institutional independence. The ECB is additionally constrained by its institutional status which is based on a delicate cross-country political consensus. Excessive ECB involvement in quasi-fiscal rescue operations can undermine this consensus and lead to a disintegration of the Eurozone. There are also strong arguments in favor of strengthening fiscal and banking integration within the EU, especially the fiscal discipline mechanism at national levels, and building the EU rescue capacity in respect to sovereigns and banks based on strong policy conditionality.
Authored by: Marek Dabrowski
Published in 2012
Harvard Kennedy School: Eurozone Study Jan. 2017 chaganomics
This document summarizes a paper that examines the resilience of the Eurozone in the face of crises. Deep financial integration created interdependence among Eurozone members, providing mechanisms to reallocate resources and absorb economic shocks. Global market pressures forced political leaders to reinforce the monetary union through fiscal and monetary backstops. Ongoing progress on banking supervision and regulation has further strengthened the currency union. While the Eurozone still falls short as an optimal currency area, financial integration may drive further integration through banking reforms, even amid populist opposition to other reforms.
The Eurosystem Household Finance and Consumption Survey (HFCS) provides household-level data on assets, liabilities, income, and consumption from 15 euro area countries. Some key findings from the survey include:
- Median net wealth of euro area households is €109,200, though it varies substantially across countries.
- Over half of households have no debt, but 43.7% have some form of debt. Mortgage debt is more prevalent than non-mortgage debt.
- The main residence is the most common asset, owned by 60.1% of households. Financial assets are less common, with deposits being the most prevalent.
- Income is more evenly distributed than wealth,
This document summarizes a dissertation that examines the extent to which government bailouts during the 2008 financial crisis distorted competition in the European banking sector. It begins with an introduction that provides background on the crisis and vast state aid provided to banks. It then outlines the methodology, literature review, theoretical framework, and analysis that will be used to assess if bailed out banks gained competitive advantages through lower funding costs. The dissertation aims to determine if bailouts undermined competition by benefiting some banks over others.
This document discusses concepts of liquidity and liquidity risk within the financial system. It distinguishes between three types of liquidity: central bank liquidity, funding liquidity, and market liquidity. It analyzes linkages between these liquidity types in normal and turbulent times. In turbulent times, increased funding liquidity risk can contaminate market liquidity and necessitate central bank intervention. However, central bank liquidity alone cannot address the root causes of liquidity risk, which stem from information asymmetries and incomplete markets. Supervision and regulation are needed to minimize these issues and distinguish between solvent and insolvent institutions.
The financial crisis of 2007-2009 led to a renewed increase in government deficits and debts in many EU countries, causing a full-fledged fiscal crisis in Greece and severe fiscal pressures in other euro-area countries. This has prompted a series of proposals for improving the fiscal framework of the European Monetary Union, the Excessive Deficit Procedure and the Stability and Growth Pact. The first part of this paper reviews the main properties and developments of that framework until 2007. On that basis, it discusses the recent proposals for reform, which range from marginal improvements of the existing framework to the introduction of an explicit framework for managing fiscal crises in the member states, and the expansion of the scope of policy coordination to address macro economic imbalances and the competitiveness of the member states. We find the proposal of a mechanism for dealing with government default most useful. Attempts to suppress current account imbalances and to target national competitiveness positions would most likely result in serious economic losses and do damage to the internal market of the EU. This would increase the wedge between members and non-members of the euro area.
Authored by: Jurgen von Hagen
Published in 2010
This document discusses issues of commodity price volatility in the European Union. It analyzes price developments on both EU and international markets to determine if volatility has increased over time. While long-term data does not show significant increases in volatility, prices have been more volatile in recent decades compared to previous periods. The paper also outlines policy instruments currently used in the EU to address volatility, along with their advantages and disadvantages. It suggests that policies need to be adjusted to stabilize markets and provide income support for farmers in light of changing market conditions.
1) If the EU did not exist, European countries would face greater economic instability without the euro as a common currency. There would be more volatility in exchange rates and prices, exacerbating the crisis in weaker economies.
2) Without EU coordination of responses, countries would be less willing to help troubled banks and firms for fear of revealing weaknesses. This could prolong and deepen the crisis.
3) A lack of cooperation could also increase protectionism as countries act solely in their own interests rather than working together.
This document investigates changes in the marginal predictive power of the yield spread for output growth in various countries and time periods. It discusses two main explanations for why the yield spread may contain information about future output growth: 1) a monetary policy-based explanation where changes in monetary policy affect both the yield spread and future output, and 2) an explanation based on the relationship between inflation persistence and the real yield curve. The document uses time-varying parameter models to analyze data from the US, UK, Eurozone, Canada, and Australia. It finds the evidence does not strongly support either explanation. The predictive power of the yield spread appears to vary over time and does not consistently track changes in inflation persistence or monetary policy settings.
This document discusses the background and state of play regarding the introduction of a Financial Transaction Tax (FTT) in the European Union. It notes that while the Banking Union aims to prevent future crises, an FTT could provide EU countries more fiscal flexibility in the short-term by generating estimated annual revenues of 30-35 billion euros. Eleven eurozone countries have proposed introducing harmonized FTT regimes through an enhanced cooperation procedure. The tax is intended to discourage harmful financial transactions and have the financial sector help address the crisis burden. However, some oppose an FTT due to concerns around reduced liquidity and its potential effects.
In its first year in government, the coalition worked to stabilize the economy, public finances, and jobs market. Over 20,000 new training and jobs placements were created. The economy is improving with exports up 12% and private investment in banks showing renewed confidence. Reforms were also implemented, such as exempting some from the Universal Social Charge and plans to reduce the number of TDs.
This document summarizes upcoming reforms to the EU agriculture policy and their implications for Irish agriculture. Key points include:
- The EU agriculture budget for 2014-2020 will remain at 2013 levels despite economic crisis. Ireland receives €1.8 billion, with €1.3 billion for direct payments and €350 million for rural development.
- Direct payments will be redistributed across EU members to reduce disparities, with Ireland's payments per hectare expected to decrease significantly under the new system.
- 30% of the budget will be dedicated to "greening" incentives to protect the environment and climate. This brings new requirements around crop diversification, grasslands, and ecological focus areas.
- Definitions of an "
The document discusses the Common Agricultural Policy (CAP) post-2014 from local, national, and European perspectives. It includes perspectives from Peter Young of the Irish Farmers Journal, Eimear Ní Bhroin of the European Commission, and Denis Naughten TD. The document outlines proposals for the CAP budget post-2014, redistribution of funds between and within member states, a transition to a flat-rate direct payment system, capping of direct payments, greening requirements, a small farmer scheme, and a young farmers scheme.
Presentation to forum delegation to ed 19.10.2011ExSite
The document summarizes the Louth Meath Hospital Group Reconfiguration Programme from 2009-2011. It outlines several key initiatives including the establishment of an Acute Medicine Programme to standardize patient care, the opening of new acute stroke and critical care units at Our Lady of Lourdes Hospital, and expansion of services at Louth County Hospital including palliative care beds and a minor injuries unit. The overall aim is to improve quality, access, and cost-effectiveness of healthcare services across the hospital group.
Greystones Harbour in Ireland has a long history of silting and wall collapses dating back to 1888. Studies were conducted from the 1980s to 1999 to determine how to repair the harbour. In 2005, plans were approved to build a new harbour that would serve as a focal point for the expanding town. Construction began in 2008 and faced challenges from storms, but the new harbour opened in November 2011. It includes 230 berths, a boardwalk, beach, homes, shops and other facilities, and was completed with little government funding.
The document summarizes proposed changes to bus routes in the North West area of Dublin. Key points include:
- Routes will be redesigned based on customer demand to provide more direct services and consistent frequencies.
- Some routes will be amalgamated and extended to improve connectivity and efficiency. For example, routes 83 and 19 will be combined into a single route with a 10 minute peak frequency.
- Real-time passenger information and integrated ticketing systems will be implemented to improve the customer experience.
- Marketing campaigns will promote the revised network and encourage ridership.
Derek Mitchell provides updates on several development projects in Greystones, Co. Wicklow, Ireland. The new harbour has opened, providing boat access and parking. Construction is underway on a new primary healthcare center. Irish Rail is installing fencing along the coastal walk for safety but will work to keep pedestrian access open at Breeches Bridge. A new secondary school will be built for 2014 in response to population growth.
Derek Mitchell provides updates on several development projects in Greystones, Co. Wicklow, Ireland. The new harbour has opened, providing boat access and parking. Construction is underway on a new primary healthcare center. Irish Rail is installing fencing along the coastal walk for safety but will work to keep pedestrian access open at Breeches Bridge. A new secondary school will be built for 2014 in response to population growth.
Derek Mitchell provides updates on several infrastructure projects and issues in Greystones and the surrounding areas:
1) The Greystones Harbour development has unveiled new boat access facilities including slipways and parking, with more areas scheduled to open later.
2) A new secondary school will be built in Greystones by 2014 to address growing demand. Mitchell advocates for an Educate Together model.
3) Traffic congestion at the M11/N11 junction is a serious problem, and Mitchell discusses short and long term plans to improve capacity and merging lanes. However, local opposition has delayed the short term solution.
The document summarizes the history of Greystones Harbour from its construction in 1888 to plans for its redevelopment in 2013. It details periods of silting, storms that damaged the harbor, and various plans proposed from the 1960s onwards to redevelop the harbor. It provides updates on construction of the new harbor from 2008 to 2011, highlighting the harbor's completion without government funding and its role as a focal point and leisure attraction for the expanding town.
The document outlines legal procedures for dealing with noise pollution from neighbors or local businesses in Ireland, including initially explaining the problem and potentially taking formal action in District Court. It explains the types of noise covered, actions that can be taken, and penalties the Court can impose if it finds the noise is causing unreasonable annoyance.
The Whitehall Framework Plan outlines a proposed development for a neighborhood in November 2008. The plan shows existing features like schools, parks, and churches. It also includes lot numbers and proposed roads to divide up land for future construction. The framework provides a high-level overview of the envisioned layout and infrastructure for the developing neighborhood.
The document provides background information and context for developing a framework plan for a 6.28 hectare site located at the junction of Swords Road and Collins Avenue in Dublin. It describes the site's history, demographics of the area, existing open spaces and neighborhood facilities. An analysis of the site and surrounding area will inform the creation of a vision, structuring concept and strategies to guide future development of the lands.
Governor honohan's address to the iiea restoring ireland's credit by reduci...ExSite
The document discusses reducing uncertainty in Ireland's economy by addressing uncertainty around banks and other factors. It notes that projections of growth, budgets, and bank loan losses have often lacked acknowledgment of uncertainty. Reducing uncertainty facing the Irish economy is a priority. While EU/IMF support provides funding, it does not directly address "tail risk" or uncertainty. Over the next few years, Ireland needs to demonstrate reduced debt levels and lower bank tail risk through continued fiscal reforms and further analysis of bank loan books to reduce perceived risk and uncertainty.
This newsletter wishes readers a happy Christmas and peaceful new year. It then provides updates on EU economic governance reforms, including strengthening fiscal policy frameworks, surveillance of member state finances, and potential sanctions for noncompliance. It also mentions treaty changes and the EU budget debate. In other news, it notes that an Irishman will head the new European External Action Service and that Herman Van Rompuy is the new permanent President of the European Council.
Faculty national clinical programme for pathologyExSite
The Royal College of Physicians of Ireland has received approval from the National Director of Quality and Clinical Care of the Health Service Executive to establish a National Clinical Programme in Pathology. This programme will be established jointly between the College and the HSE, following the agreed governance structure. It will require appointing a National Clinical Lead for Pathology and establishing a Clinical Advisory Group in the short term. The former Dean of the Faculty, Dr. Gerard Boran, played a key role in advancing this initiative.
John O'Mahony TD is committed to representing the people of Mayo and working to improve the difficult economic situation facing the county. He acknowledges the struggles people are facing with unemployment, business closures, and mortgage payments. However, he believes Mayo has a bright future and Fine Gael policies will create jobs and economic growth. He pledges to advocate on behalf of the people of Mayo and champion their issues locally and nationally.
This document is a newsletter from Fine Gael, an Irish political party, discussing various business and economic issues in Ireland. It summarizes that after 3 years, the government has only achieved 4% of its promised reduction in business red tape costs. It also notes that only 6% of promised new jobs under a government PRSI rebate scheme have materialized. Additionally, County Enterprise Board funding, which supports new startups, remains 10% lower than the previous year despite higher application numbers.
1. O c c a s i O n a l Pa P e r s e r i e s
n O 1 1 2 / j u n e 2 010
PuBlic WaGes in
THe eurO area
TOWarDs securinG
sTaBiliTY anD
cOMPeTiTiVeness
by Fédéric Holm-Hadulla,
Kishore Kamath,
Ana Lamo,
Javier J. Pérez
and Ludger Schuknecht
2. OCCASIONAL PAPER SERIES
NO 112 / JUNE 2010
PUBLIC WAGES IN THE EURO AREA
TOWARDS SECURING STABILITY
AND COMPETITIVENESS 1
by Fédéric Holm-Hadulla 2, Kishore Kamath 2,
Ana Lamo 3, Javier J. Pérez 4
and Ludger Schuknecht 2
NOTE: This Occasional Paper should not be reported as representing
the views of the European Central Bank (ECB).
The views expressed are those of the authors
and do not necessarily reflect those of the ECB.
In 2010 all ECB
publications
feature a motif
taken from the
€500 banknote.
This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science
Research Network electronic library at http://ssrn.com/abstract_id=1618226.
1 The authors would like to thank Daphne Momferatou, Julian Morgan, Philippe Moutot, Philipp Rother, Frank Smets, Christian Thimann,
Ad van Riet and an anonymous referee for helpful comments and suggestions.
2 European Central Bank, Directorate General Economics, e-mails: federic.holm-hadulla@ecb.europa.eu;
kishore.kamath@ecb.europa.eu and kishore.kamath@bankofengland.co.uk;
ludger.schuknecht@ecb.europa.eu.
3 European Central Bank, Directorate General Research, e-mail: ana.lamo@ecb.europa.eu.
4 Banco de España, Alcalá 50, E-28014 Madrid, Spain, e-mail: javierperez@bde.es.
4. CONTENTS CONTENTS
ABSTRACT 4
SUMMARY 5
1 INTRODUCTION 6
2 STYLISED FACTS ON PUBLIC WAGE
EXPENDITURE AND WAGE DYNAMICS
IN THE EURO AREA 8
2.1 The economic importance
of public wages 8
2.2 Public wage and employment
developments in the euro area 10
3 PUBLIC WAGE EXPENDITURE OVER THE
CYCLE: STABILISING OR PRO-CYCLICAL? 15
3.1 Theory and evidence from
the related literature 15
3.2 Evidence for the euro area 16
3.3 Remedies for pro-cyclicality 20
4 PUBLIC AND PRIVATE WAGE
INTERACTION: IMPLICATIONS
FOR COMPETITIVENESS? 22
4.1 Theory and evidence from
the related literature 22
4.2 Evidence for the euro area 25
4.2.1 Evidence using annual data 25
4.2.2 Evidence using
intra-annual data 28
4.2.3 Evidence using panel data 28
4.3 Remedies for spillovers
into competitiveness 29
5 CONCLUSIONS AND POLICY
IMPLICATIONS 31
ANNEX 32
REFERENCES 37
EUROPEAN CENTRAL BANK OCCASIONAL
PAPER SERIES SINCE 2009 42
ECB
Occasional Paper No 112
June 2010 3
5. ABSTRACT
This paper examines the role of government
wages in ensuring macroeconomic stability
and competitiveness in the euro area. Recent
empirical evidence suggests that government
wage expenditure is subject to a pro-cyclical bias
in most euro area countries and at the euro area
aggregate level. Moreover, the evidence points
to a strong positive correlation and co-movement
between public and private wages in the short to
medium term, both directly and indirectly via
the price level, in most euro area countries. In a
number of countries this interrelation between
public and private wages coincided with strong
public wage growth and competitiveness losses.
These findings underpin the need for prudent
public wage policies supported by strong
domestic fiscal frameworks and appropriate
wage-setting institutions in order to enhance
economic stability and competitiveness in
Economic and Monetary Union.
Keywords: government wage expenditure, fiscal
cyclicality, competitiveness
JEL Classification: E62; E63; J45; H11; H50
ECB
Occasional Paper No 112
4 June 2010
6. SUMMARY
SUMMARY further reduce the risk of adverse government
wage spillovers and also facilitate wage
This paper studies the role of government adjustment in the private sector.
wages as a determinant of macroeconomic
stability and competitiveness in the euro area. The implementation of such reforms may
Recent empirical evidence suggests that real well be associated with political opposition.
government wage expenditure is subject to a However, the “double dividend” of greater
pro-cyclical bias, i.e. it co-moves positively with economic stability and a lower risk of intra-euro
the business cycle in most euro area countries area competitiveness losses should encourage
and at the euro area aggregate level. Thus, it policy-makers to undertake the necessary
might reinforce rather than mitigate fluctuations adjustments.
in economic activity. Moreover, the evidence
points to a strong, positive correlation and
co-movement between public and private wages
in the short to medium term, both directly and
indirectly via the price level. In a number of
countries this interrelation has coincided with
strong public wage growth and intra-euro area
competitiveness losses.
These findings suggest that governments should
be cautious that wage-setting and employment
policies do not lead to negative repercussions
on fiscal and economic performance. First,
there appears to be a need to strengthen
fiscal discipline and to reduce the risk of
pro-cyclicality in government wage expenditure.
To this end, strict domestic fiscal rules and
medium-term budgetary frameworks could be
effective tools to constrain the volatility and
pro-cyclicality of this spending item. In addition,
reforms to labour market institutions may be
needed to avoid institutional biases towards
pro-cyclicality, e.g. originating from indexation,
which ties government wages to inflation.
Second, given the interrelation between
government and private sector wage
developments, policy-makers would be
well-advised to adopt a prudent approach to
government sector wage setting to mitigate the
risk of competitiveness losses in the private
sector. While the specific reform needs differ
across countries, a strengthening of fiscal
institutions is likely to facilitate such prudence.
Reforms in labour market institutions, for
instance towards less coordinated wage
bargaining and more decentralised wage setting,
as well as product market liberalisation, may
ECB
Occasional Paper No 112
June 2010 5
7. 1 INTRODUCTION These results underpin the need to strengthen
budgetary discipline by implementing strict
In view of the sharp deterioration in public domestic fiscal frameworks that effectively
finances triggered by the financial and economic constrain the volatility and cyclicality of
crisis, fiscal policy in EU Member States government expenditure, in general, and the
will encounter considerable challenges in the public wage bill, in particular. In addition,
years to come. Moreover, disequilibria within reforms in labour market institutions may be
the euro area, as manifest in unit labour cost needed to avoid institutional biases towards
divergence and current account imbalances, will pro-cyclicality, e.g. originating from indexation,
further complicate the economic environment which ties government wages to inflation.
policy-makers are facing. While these conclusions are of general interest
for economic policy, they are particularly
In this context, public wages 1 play an important relevant in a monetary union: the delegation of
role. First, the public wage bill typically monetary policy to a single central bank implies
accounts for a substantial fraction of overall that macroeconomic adjustment at the national
government spending. In the euro area, level can only be achieved in the fiscal domain
compensation of government employees on and via structural reform.
average amounted to almost a quarter of all
general government expenditure over the last As regards labour market interactions, the paper
decade. Owing to this quantitative prominence, reports evidence of a robust and significant
the public wage bill is a crucial determinant of inter-relation between public and private wages.
fiscal performance. Second, certain qualitative In particular, in most euro area countries and
features of public wage expenditure can exert at the euro area aggregate, public and private
important feedback effects on a country’s wages tend to co-move both in the short and
macroeconomic performance: the forces shaping the long run. Moreover, the empirical results
public wage setting and employment may provide some evidence of a direct causal
reinforce rather than stabilise fluctuations in relationship between these variables. While
output. Moreover, since the government private wages tend to lead public wages
competes with firms in the labour market, public in the very long run, for some countries
and private wage setting is likely to be bi-directional causality (i.e. running from public
interdependent. Thus, public wage setting may to private wages and vice versa) is found for the
affect a country’s cost competitiveness. medium and short run. In addition, the evidence
documents second-round effects, since public
Drawing on related research, this Occasional and private sector wages influence each other
Paper examines the implications of public indirectly via the price level in most countries.
wages for these two aspects of macroeconomic Cross-country differences in the degree of
performance in Economic and Monetary Union public wage spillovers may be partly explained
(EMU). Regarding the stabilising role of public by differences in domestic labour and product
spending, it reports evidence that government market institutions.
wage expenditure has typically been subject
to a pro-cyclical spending bias. In particular, This evidence on public-private wage
both real compensation of public employees interrelation suggests that generous public wage
and its subcomponents, real compensation per
public employee and (to a lesser extent) public 1 For expositional ease, the terms “government” and “public” are
employment, co-move with the business cycle in used interchangeably throughout the paper. In both cases the text
refers to the definition of the “government sector” adopted by the
a pro-cyclical manner at the euro area aggregate OECD as opposed to the broader concept of the “public sector”.
and in most euro area countries. For more information see the data appendix.
ECB
Occasional Paper No 112
6 June 2010
8. I INTRODUCTION
setting may put pressure on private wages, expenditure and public wage and employment
with potentially adverse effects on a country’s dynamics. Section 3 examines the cyclicality
intra-euro area competitiveness. In fact, several of government wage expenditure and discusses
countries with strong public-private wage implications for macroeconomic stabilisation.
interaction have been experiencing sharp unit Section 4 focuses on the interaction between
labour cost growth and public wage increases public and private sector wages and addresses
since the start of EMU. To mitigate the risk of implications for economic competitiveness.
competitiveness losses, public wage restraint Section 5 concludes.
emerges as one important policy implication.
While the specific reform needs differ across
countries, a strengthening of fiscal institutions
could generally facilitate the implementation
of such policies. Reforms of labour market
institutions leading to less coordinated wage
bargaining and more decentralised wage
setting, as well as product market liberalisation,
may reduce adverse public wage spillovers
and facilitate wage adjustment also in the
private sector.
Tackling these challenges is particularly crucial
in a monetary union: the single monetary policy
implies that it is even more difficult to respond
to wage spillovers across sectors of an economy,
which leads to wage costs growing faster than
warranted by fundamentals and adversely
affects intra-euro area cost competitiveness.
Moreover, evidence on the transmission of
wage increases via inflation confirms the risk
of second-round effects and wage-price spirals.
Therefore, generous public sector wage setting
may, notably, give rise to divergent price
developments across Member States but also
raise inflation in the area as a whole.
Countries adopting appropriate policies and
institutions to underpin public wage restraint,
especially in upturns, and to reduce undue
public-private wage spillovers could reap the
benefit of a more competitive private sector
and a more appropriate fiscal stance over the
business cycle. This “double dividend” of
greater economic stability and a lower risk of
intra-euro area competitiveness losses should
encourage policy-makers to undertake the
necessary adjustments.
The paper is structured as follows. Section 2
provides stylised facts on public wage
ECB
Occasional Paper No 112
June 2010 7
9. 2 STYLISED FACTS ON PUBLIC WAGE employed by the public sector (see Chart 2).
EXPENDITURE AND WAGE DYNAMICS While a relatively small public workforce can
IN THE EURO AREA be found in Germany, with less than 10% of the
overall labour force, in France and Finland this
2.1 THE ECONOMIC IMPORTANCE OF PUBLIC share is more than twice as high.3
WAGES
A comparison of public wage expenditure in the
The government wage bill accounts, on average, first half of the 1990s and in more recent years
for almost a quarter of total public spending in reveals some interesting patterns. The public
the euro area (see Chart 1).2 However, this figure wage bill has generally gained in importance
is subject to substantial cross-country variation. relative to overall government spending.
Some countries such as Austria and Germany In particular, only Germany and Austria
record ratios well below average, while others achieved a notable reduction in the ratio of
such as Portugal, Ireland and Finland almost the government wage bill to government
reach 30%. expenditure (see Chart 3). By contrast, most
countries, with the exceptions of Belgium,
Given that nearly half of GDP goes through
the hands of government, this also implies that
public wage expenditure plays an important 2 For data sources and variable definitions see the Appendix.
role in aggregate demand. In the euro area, the Cyprus, Luxembourg, Malta, Slovenia and Slovakia are not
included in the sample owing to a lack of data for these countries.
government wage bill accounts, on average, for It should be noted that the euro area average included in Charts 1
more than 10% of GDP. Here, too, substantial to 4 refers to the simple average (rather than a weighted average),
since this analysis is mainly concerned with the comparison
cross-country variation may be observed of a country’s policies to “typical” (i.e. average) behaviour of
(see Chart 1). For example, in Germany governments in the euro area. In Charts 6 to 12 and Tables 1 and
government wage expenditure of about 7% of 2 in Section 2.2, weighted averages are used because the focus is
on the overall development of the respective variable in the euro
GDP amounts to slightly more than one-half area as one economic entity.
of the corresponding ratio in France, Portugal 3 Public employment figures should be interpreted with caution.
First, the delineation of public and private employment is very
and Finland.
complex and, consequently, country figures are not always
fully comparable. Second, for some countries, data had to be
These figures also reflect the importance of the imputed due to a lack of data availability. Third, institutional
reclassification of certain organisations between the public
government as an employer: on average, almost and private sector can in some cases lead to marked variations
15% of the labour force in the euro area is between years. For a description see the appendix.
Chart 1 Government wage bill Chart 2 Government employment
as a percentage of the labour force
(average 2004 – 2008) (average 2004 – 2008)
as a percentage of government expenditure
as a percentage of GDP
30 30 25 25
25 25 20 20
20 20
15 15
15 15
10 10
10 10
5 5 5 5
0 0 0 0
euro BE DE IE GR ES FR IT NL AT PT FI euro BE DE IE GR ES FR IT NL AT PT FI
area area
Source: OECD. Source: OECD.
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Occasional Paper No 112
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10. 2 STYLISED FACTS
ON PUBLIC WAGE
Chart 3 Public sector wage bill as a percentage Chart 5 Annual growth in the public sector
of general government expenditure wage bill and cyclical conditions EXPENDITURE AND
in individual euro area countries WAGE DYNAMICS IN
(early 1990s and recent years) (1999-2008) THE EURO AREA
x-axis: average 1991-1995 x-axis: output gap
y-axis: average 2004-2008 y-axis: annual growth rate of public wage bill
31 31 20 20
PT
29 29
IE 15 15
FI
27 27
ES
GR 10 10
25 25
BE FR
23 IT euro 23 5 5
area
y = 0.84x + 4.55
21 NL 21 R2 = 0.09
0 0
19 19
AT
-5 -5
17 17
DE
15 15 -10 -10
15 17 19 21 23 25 27 29 -3 -2 -1 0 1 2 3 4 5
Source: OECD. Sources: OECD and own calculations.
Greece and Portugal, reduced government wage Given its size, the government wage bill is a key
expenditure relative to GDP (see Chart 4). Thus, ingredient in a country’s fiscal stance. As a first
while governments were generally able to scale step in exploring its cyclical patterns, Chart 5
down the public sector relative to the overall size plots annual growth in government wage
of the economy, the adjustment burden borne by expenditure against the output gap for the
public employees was often smaller than that period 1999-2008. A positive relationship
borne by other types of spending. between the change in the government wage bill
and the output gap can be detected. This implies
Chart 4 Public sector wage bill as a percentage that the growth in public wage expenditure
of GDP tended to be stronger in times of favourable
economic conditions.4 Of course, the causal
(early 1990s and recent years)
interpretation of this observation should not be
x-axis: average 1991-1995 over-emphasised. However, it may be viewed as
y-axis: average 2004-2008
suggestive evidence of a pro-cyclical, rather
17 17
than stabilising, role of public wage expenditure.
16 16
This finding will be discussed in more detail
15 15 in Section 3.
14 PT 14
FI
13 13
BE FR
12 12
GR euro
area 4 The relative scaling of the axes in Chart 5 may partly conceal the
11 IT 11 relationship between the two variables, since the range of values
IE ES on the y-axis greatly exceeds the range of values on the x-axis.
10 10
AT The slope of the regression line indicates that an increase of
NL
9 9 1 percentage point in the output gap was, on average, associated
with an increase of approximately 0.8 percentage point in the
8 8
DE growth rate of the public wage bill. However, as evident from
7 7 the low value of the R-squared statistic, the explanatory power
7 9 11 13 15 17 of the regression is rather limited, i.e. variation in the output gap
Source: OECD. only explains around 9% of the variation in the growth rate of the
public wage bill.
ECB
Occasional Paper No 112
June 2010 9
11. 2.2 PUBLIC WAGE AND EMPLOYMENT (see Chart 8a), and to a greater extent than for
DEVELOPMENTS IN THE EURO AREA the euro area aggregate. This goes some way
to explaining the rise in the euro area ratio.
A comparison of public and private sector Ireland has seen the largest increase since the
wages for the euro area as a whole reveals start of EMU (31%). By contrast, the second
that the average public wage has always been group, consisting of Belgium, Germany, France,
noticeably higher than the average private wage the Netherlands, Austria and Finland, has seen
(see Chart 6). This is consistent with the notion relatively little change in the ratio since 1999
of the public sector wage premium that is (see Chart 8b).
generally found in developed economies.5
The downward trends in public and private
The ratio of euro area public to private wages sector wage growth, as well as their volatility,
per employee fell during the 1970s and 1980s, are also striking (see Chart 7).6 These patterns
as nominal wages in the private sector tended are displayed for the euro area countries and
to grow at a faster pace than in the public different time periods in Table 1. The period
sector (see Chart 7). Public wages per employee after 1992 saw relatively low and stable wage
were one-third higher than private wages growth. This is likely to be due to the benign,
in 1970 (see Chart 6), but the ratio fell to just low-inflation economic environment following
above 1.1 by 1989. Since 1989, the downward
trend in this ratio has reversed decisively.
5 The two most common explanations for the public sector wage
premium are: a) differences in the productive characteristics of
Since the beginning of EMU, among the euro workers; b) economic rents accruing to government workers from
political and “vote producing” activities that are not relevant in
area countries included in the sample two
the private sector (see Bender (2003)).
groups can broadly be distinguished. The first 6 The trends in public and private sector wage growth broadly
group, comprising Ireland, Greece, Spain, follow trends in inflation, which are shown for the private
consumption deflator in Chart 7. In this case the deflator is used
Italy and Portugal, has seen significantly faster as a measure of inflation, but it is also used in Section 4 to deflate
public wage growth than private wage growth, nominal wages per employee.
Chart 6 Ratio of public to private wages Chart 7 Annual growth rates of nominal
per employee wages per employee
(euro area aggregate) (euro area aggregate)
growth in public sector wages per employee
growth in private sector wages per employee
growth in private consumption deflator
1.4 1.4 15 15
Maastricht treaty start of EMU
1.3 1.3
10 10
1.2 1.2
5 5
1.1 1.1
1.0 1.0 0 0
1970 1980 1990 2000 1970 1980 1990 2000
Source: OECD. Last observation: 2008. Source: OECD. Last observation: 2008.
ECB
Occasional Paper No 112
10 June 2010
12. 2 STYLISED FACTS
ON PUBLIC WAGE
Chart 8 Ratio of public to private wages per employee since the start of EMU
EXPENDITURE AND
(1998 = 100)
WAGE DYNAMICS IN
THE EURO AREA
euro area ES euro area NL
IE IT BE AT
GR PT DE FI
FR
135 135 110 110
130 130
125 125
105 105
120 120
115 115
110 110
100 100
105 105
100 100
95 95 95 95
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Source: OECD. Last observation: 2008.
the start of the convergence period leading stand out as having particularly volatile public
to EMU.7 wage growth relative to the private sector.
The standard deviation of public wage growth, 7 See, for example, Stock and Watson (2002), who show that
especially since the start of EMU, has been fluctuations in wages have moderated considerably in the United
larger than that of private wage growth in States since 1984. In fact, OECD data reveal that the reduction
in the average and standard deviation of wage growth in both the
several euro area countries. Ireland, Spain, public and private sectors in the United States has been much
Italy and Portugal (as well as Austria) again less pronounced than in the euro area.
Table 1 Average and standard deviation of annual growth in wages per employee
Whole sample 1971-2008 Post-Maastricht 1992-2008 EMU 1999-2008
Average St dev Average St dev Average St dev
Public Private Public Private Public Private Public Private Public Private Public Private
Euro area 5.8 5.8 3.2 3.8 3.4 2.6 1.0 1.4 3.0 2.2 0.5 0.4
Belgium 4.2 3.8 2.9 2.1 3.8 2.7 1.7 1.3 3.2 2.8 1.1 1.0
Germany 3.8 4.3 3.6 3.3 2.5 2.1 2.5 2.4 1.2 1.3 1.2 1.0
Ireland 10.8 9.4 6.5 6.9 7.1 4.7 2.8 1.7 7.8 4.8 3.1 1.6
Greece 14.2 13.8 7.1 7.4 9.1 7.2 4.5 4.0 7.7 5.0 3.1 3.2
Spain 8.7 10.0 6.7 7.4 4.2 3.7 3.4 2.4 4.4 2.7 2.2 0.8
France 6.9 6.7 5.4 5.2 3.1 2.4 0.7 0.9 2.8 2.9 0.6 0.6
Italy 9.8 9.5 7.4 7.6 3.6 2.9 2.6 1.6 3.6 2.2 1.1 0.5
Netherlands 4.4 5.0 4.0 4.9 3.6 3.1 1.4 1.3 3.3 3.4 0.8 1.2
Austria 5.4 5.4 3.1 3.7 3.2 2.6 2.4 1.1 2.6 2.4 1.8 0.5
Portugal 13.4 13.2 8.9 9.4 6.3 4.9 4.3 3.6 4.8 3.1 4.1 1.1
Finland 7.2 8.3 5.2 6.1 2.9 3.3 1.6 1.2 3.6 3.3 1.1 1.1
United Kingdom 9.7 8.4 6.7 6.1 5.0 4.0 2.0 1.4 5.2 4.0 1.0 1.2
United States 5.1 5.2 2.2 2.2 3.6 3.8 1.3 1.4 4.4 3.9 1.1 1.2
ECB
Occasional Paper No 112
June 2010 11
13. Chart 9 Ratio of public to private wages Chart 10 Annual growth rates of public and
per employee and the share of public private employment and the share of public
employment in 2008 employment in total employment
(euro area aggregate)
x-axis: ratio of public to private wages per employee growth in public employment (left-hand scale)
y-axis: public employment as a share of total employment growth in private sector employment (left-hand scale)
public employment as a share of total employment
(right-hand scale)
26 26 7 18
FI
24 24 6 16
22 FR 22 5 14
20 20 4 12
18 BE 18 3 10
R2 = 0.60
16 16 2 8
euro area IT
14 14 1 6
PT
AT
12 12 0 4
DE NL
10 10 -1 2
8 8 -2 0
0.8 1.0 1.2 1.4 1.6 1.8 1970 1980 1990 2000
Source: OECD. Source: OECD. Last observation: 2008.
Notes: Data for Ireland, Greece and Spain are not included due
to significant differences in the definition of public employment.
These differences affect the calculation of the level of public
employment, although they do not affect the calculation of
growth rates to the same extent.
Furthermore, despite overall lower wage growth, its relatively small and (relative to its private
a number of euro area countries have recorded sector) very well-paid public sector workforce.
public wage growth far in excess of both
domestic private wage growth and the average It is also worth briefly reviewing public
public wage growth in the euro area. Again, employment trends (see Chart 10).8 Public
Ireland, Greece, Spain, Italy and Portugal are employment grew strongly until the mid-1980s;
prominent examples. In most of these countries, by contrast, private employment was very
private wage growth has also been much higher volatile and grew much less overall. After 1987,
than the euro area average. Overall, public wage however, public employment grew more slowly
growth seems to have become more volatile and (and again in a less volatile manner) than private
dynamic compared with wage growth in the employment, with the exception of the years
private sector since the start of EMU, at the euro 1992-93 and 2002-03 (periods of economic
area level and notably in a few of its members. weakness, during which the private sector is,
While this is only illustrative evidence, a naturally, more affected).
more in-depth discussion will follow in the
coming sections.
8 Chart 10 shows public employment as a share of total
The public to private wage ratio tends to be employment, whereas Chart 2 expresses public employment as
greater in countries with a smaller share of their a fraction of the labour force (which also includes unemployed
persons). This distinction is made since the focus of each
workforce in the public sector (see Chart 9). chart differs: Chart 2 illustrates the portion of a country’s
At one extreme are the relatively large but labour input that is devoted to its public sector, which is more
(compared with their private sectors) low-paid accurately captured by the labour force. By contrast, Chart 10
compares employment and wage trends, and since wage data for
French and Finnish public sector workforces. unemployed persons are not available, total employment is the
At the other extreme lies the Netherlands, with more accurate point of reference.
ECB
Occasional Paper No 112
12 June 2010
14. 2 STYLISED FACTS
ON PUBLIC WAGE
Chart 11 Average annual growth in public Chart 12 Cumulative growth of public sector
and private wage bills, employment and wages per employee and whole economy EXPENDITURE AND
wages per employee unit labour costs WAGE DYNAMICS IN
(1999 – 2008) (1999 – 2008) THE EURO AREA
public employment x-axis: public sector wages per employee (percentage growth
private employment in nominal terms)
public wages per employee y-axis: ULC (percentage growth in nominal terms)
private wages per employee
public wage bill
private wage bill
12 12 45 45
R2 = 0.60
40 40
10 10 ES IE
35 35
8 8 PT
30 30
IT
6 6 NL GR*
25 25
FR
4 4 20 BE 20
euro area
FI
15 15
2 2
10 10
AT
0 0
5 5
DE
-2 -2 0 0
euro BE DE IE GR ES FR IT NL AT PT FI 0 20 40 60 80 100 120
area
Source: OECD. Sources: OECD and Eurostat.
*Data for Greece begin in 2001. Developments of labour
productivity in Greece are strongly affected by the structural
decline of self-employed persons in the agricultural sector.
Looking at dependent employment, the cumulated unit labour
cost growth between 1999 and 2008 amounted to 45.0%.
Chart 11 gives a country-by-country breakdown c) In Greece, Italy and Portugal, public wages
of the average annual growth in public and per employee also grew rapidly over the
private sector wage bills during the post-EMU decade. However, these countries saw
period into its “price” (compensation modest employment growth (a slight fall in
per employee) and “quantity” (employment) employment in the case of Portugal), limiting
components. It allows for a comparison of the increase in their public wage bill.
developments in the wage bill across component,
country and sector. Several messages can be d) Germany and Austria restricted growth in
taken from this chart: their public wage bill much more successfully
than all the other countries, in the dimension
a) In the euro area as a whole, public wages of both employment and wages per
per employee grew faster than those in the employee. Public employment fell in both
private sector in the post-EMU period. countries over this period;9 they also reported
However, the total public wage bill rose the smallest average increases in public
more slowly. This reflects more subdued wages per employee.
public (than private) employment growth.
b) Two out of the three countries with the
highest average growth in public sector
wages per employee (Spain and Ireland) also 9 The employment dynamics in the two countries are somewhat
different. German public employment shrank every year since the
experienced the strongest public employment start of EMU (indeed, since 1993), while Austrian employment
growth of all the euro area countries. developed more unevenly.
ECB
Occasional Paper No 112
June 2010 13
15. Table 2 Cumulative growth of public
and private sector wages per employee
(1999 – 2008)
Public sector Private sector
Euro area 34.9 24.2
Belgium 36.6 31.7
Germany 13.1 13.7
Ireland 110.8 60.3
Greece 108.7 62.0
Spain 53.1 29.9
France 31.3 32.9
Italy 42.5 24.8
Netherlands 38.5 40.0
Austria 29.3 26.2
Portugal 58.0 35.3
Finland 41.7 38.8
Source: OECD.
Public wage setting can potentially have
an important effect on a country’s cost
competitiveness through its effects on private
wage setting. A common method of assessing
competitiveness is to consider productivity-
adjusted wage growth in the whole economy,
i.e. unit labour costs. A first illustrative impression
of the relationship between public wage growth
and unit labour costs in the post-EMU period can
be seen in Chart 12, which indicates that there
was a reasonably strong association. In the decade
under review, Ireland, Greece, Spain, Italy and
Portugal posted strong unit labour cost growth
while wages in their public sectors grew rapidly.
Table 2 underlines the significant cross-country
divergence, with these five countries clearly
seeing a greater increase in public as opposed to
private wages.
Section 4 will examine the issue of
competitiveness and the role of public-private
wage interaction in more detail.
ECB
Occasional Paper No 112
14 June 2010
16. 3 PUBLIC WAGE
EXPENDITURE
3 PUBLIC WAGE EXPENDITURE OVER THE First, to adjust this spending item, changes
OVER THE CYCLE:
CYCLE: STABILISING OR PRO-CYCLICAL? in public employment and/or re-negotiations
STABILISING OR
of existing wage contracts are necessary,
PRO-CYCLICAL?
3.1 THEORY AND EVIDENCE FROM THE RELATED both of which are associated with lengthy
LITERATURE administrative processes that imply substantial
implementation lags. Second, and even more
There are two main views on how public importantly, temporary expansions of the
spending in general, and public wage expenditure public wage bill would be difficult to reverse
in particular, should behave over the business given the high degree of coordination among
cycle. The more extreme “demand management” public employees (e.g. through unionisation)
perspective suggests that the fiscal stance be which facilitates political opposition. Hence,
inversely related to the cyclical position of the policy-makers should not react to short-run
economy. Accordingly, increased government fluctuations in economic activity via public
expenditure should mitigate downturns by wage expenditure. Following a constant long-
partly compensating for falling private demand term path in line with a prudent forecast of
and investment during such periods. In upturns, economic trends, the public wage bill, as a
expenditure cuts could curb economic dynamics demand component that is unaffected by upturns
so as to prevent the economy from “overheating”. and downturns, would then automatically help
By contrast, the prescriptions from the tax to stabilise the economy.
smoothing literature suggest a more passive,
stabilising role for public spending: fiscal policy Given the size of public wage expenditure and
responses to changes in cyclical conditions employment, one would expect the cyclicality of
should mainly be confined to the free operation government wage expenditure to be addressed
of automatic stabilisers.10 By implication, most extensively in the related empirical literature.
spending items should not react to fluctuations Yet, while a lot of empirical research examines
in economic activity, except for unemployment cyclical patterns of broad government spending
and other social benefits, which, owing to an variables (as well as certain sub-items, such as
increase (decrease) in the number of recipients government investment), evidence on public
during downturns (upturns), display an in-built wage expenditure is sparse. With respect to
counter-cyclical reaction. broad definitions of government expenditure,
several studies support the notion of a pro-
Active demand management is subject to cyclical spending bias. In an early contribution
a number of problems. In particular, lags to this literature, Galí and Perotti (2003) find a
between the identification of a downturn and significant positive reaction of cyclically adjusted
the implementation of measures severely primary spending in several EU countries to
hamper their effectiveness and often result changes in the output gap for the period before
in de-stabilising policies.11 Moreover, while the adoption of the Maastricht Treaty.12
fiscal expansion might still be relatively easy to This result is further corroborated by recent
implement in the case of most spending items, literature. Turrini (2008), for example, documents
the phasing-out of the respective programmes
usually meets fierce political opposition. 10 For the classic argument underlying the former view, see Keynes
This may lead to a gradual increase in the (1936). The latter view is based on Barro (1979). While spending
is treated as exogenous in Barro’s analysis, Talvi and Végh (2005),
government sector after each expansionary as well as Büttner and Wildasin (2009), show that under standard
episode rather than symmetric expenditure assumptions governments should also choose a smooth expenditure
path over the cycle. For an overview of the main arguments, see
expansions and contractions over the cycle. ECB (2002) and European Commission (2004, 2006).
11 See, for example, Feldstein (2002), Fatás and Mihov (2003,
In view of these risks, public wage spending 2006), Lane (2003) and Cimadomo (2008). For an overview,
see ECB (2004).
does not emerge as a good candidate for 12 For recent reviews of the literature on the cyclicality of government
counter-cyclical macroeconomic policy. spending, see Turrini (2008) and Beetsma et al. (2009).
ECB
Occasional Paper No 112
June 2010 15
17. a significant pro-cyclical response in cyclically 3.2 EVIDENCE FOR THE EURO AREA
adjusted primary expenditure in euro area
countries for the period 1980-2005. Similarly, In a recent study, Lamo, Pérez and Schuknecht
for a panel of EU countries Holm-Hadulla et al. (2007) analyse the cyclical patterns of three
(2010) find that governments respond to positive variables that are of interest in the context of
surprises in cyclical conditions by exceeding the government wage expenditure: the public sector
spending targets laid out in their stability and wage bill, compensation per public employee
convergence programmes. The few studies that (both in real terms), and the number of public
do analyse public wage expenditure separately employees. The empirical analysis examines
reach different conclusions. Lane (2003) finds the co-movement of these variables with three
strong pro-cyclicality in a sample of OECD indicators of economic activity: real GDP, real
countries over the period 1960-1998. By contrast, GDP per capita and unemployment. Consistent
Hallerberg and Strauch (2002) detect weak with the related empirical literature, the study
counter-cyclical patterns of government wage uses statistical procedures that remove the long-
expenditure for a sample of EU Member States run trend from the variables to focus on their
over the period 1970-97. business cycle properties, defined as the recurrent
fluctuations of a time series around its long-run
This literature leaves a number of loose ends. trend (see Lucas, 1977). Moreover, the study
First, findings on overall expenditure cannot makes two further distinctions. First, it analyses
be translated directly to individual government co-movements between the above variables,
spending items since they are subject to different removing solely the long-term trend. These are
technical and political constraints. To capture co-movements of all the fluctuations around
systematic differences in the stabilising role trend, including both systematic responses of
of spending categories, a separate analysis of the fiscal variables to economic conditions
public wage expenditure is needed. While the and irregular fluctuations due to unpredictable
above literature contributes to this aim, further shocks. Second, it considers the co-movement
analysis that also takes into account more patterns of these variables, removing all the
recent developments in EU Member States is inertia of the series therefore isolating the pure
warranted. Second, the comparison of estimates “irregular component”. Co-movements, in this
across studies on fiscal cyclicality, in general, case, are between unpredictable fluctuations
indicates that results are highly sensitive to due to shocks. For simplicity, we call the
differences in econometric methodology. These former “cyclical co-movements” and the latter
robustness concerns suggest that the conclusions “co-movements of shocks”.
from existing empirical evidence should be
scrutinised carefully. Finally, in a monetary More intuitively, systematic relationships
union, policy-makers need to be aware of public between government wage expenditure
spending patterns and their demand effects, not and cyclical conditions might originate, for
only for single euro area countries but also for example, from indexation practices that tie
the euro area as a whole. Nevertheless, empirical government wages to inflation, so that demand
evidence on the euro area as a separate economic pressures in upswings are reflected in higher
region is scarce. growth in nominal wages per employee.
Furthermore, if governments display a
The next section reports results from a study tendency to allow for a higher (lower)
that addresses these three issues. In particular, growth in the number of public employees
it analyses the cyclicality of the public wage bill in upturns (downturns), this would also give
and its subcomponents, applying a large number rise to systematic co-movement patterns.
of different empirical methods to a panel for the The co-movement of shocks might result,
euro area aggregate and individual countries for example, from discretionary changes in
over the period 1960-2005. the government’s fiscal policy stance when
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18. 3 PUBLIC WAGE
EXPENDITURE
Table 3 Cyclicality of public wage and employment variables for the euro area aggregate
OVER THE CYCLE:
STABILISING OR
Cyclical co-movements Co-movements of shocks PRO-CYCLICAL?
Lags of wage/employment variable -2 -1 0 1 2 -2 -1 0 1 2
Entire sample period
Real compensation of public employees
Real GDP 0.31 0.21 0.52 0.74 0.60 -0.01 -0.20 0.09 0.35 0.16
Real GDP per capita 0.21 0.05 0.31 0.61 0.53 -0.02 -0.22 0.10 0.35 0.14
Unemployment rate 0.11 0.33 -0.07 -0.51 -0.27 0.10 0.26 -0.20 -0.42 0.12
Real compensation per public employee
Real GDP 0.34 0.12 0.36 0.59 0.39 0.05 -0.21 -0.01 0.36 0.08
Real GDP per capita 0.28 0.01 0.22 0.55 0.42 0.04 -0.25 0.01 0.37 0.07
Unemployment rate 0.01 0.40 -0.15 -0.63 -0.26 0.05 0.26 -0.19 -0.40 0.19
Public employment
Real GDP -0.04 0.07 0.14 0.27 0.45 -0.13 -0.10 0.18 0.09 0.27
Real GDP per capita -0.08 0.06 0.10 0.24 0.47 -0.12 -0.05 0.16 0.10 0.28
Unemployment rate 0.05 0.31 0.35 -0.22 -0.44 0.14 0.00 -0.12 -0.15 -0.14
Pre-Maastricht period
Real compensation of public employees
Real GDP 0.32 0.16 0.48 0.74 0.63 0.05 -0.29 0.11 0.42 0.07
Real GDP per capita 0.32 0.09 0.36 0.71 0.65 0.06 -0.28 0.11 0.44 0.06
Unemployment rate 0.16 0.51 -0.22 -0.70 -0.25 0.13 0.23 -0.33 -0.38 0.27
Real compensation per public employee
Real GDP 0.40 0.22 0.47 0.68 0.50 0.12 -0.27 -0.01 0.40 0.07
Real GDP per capita 0.39 0.13 0.36 0.67 0.54 0.10 -0.27 0.00 0.42 0.06
Unemployment rate 0.12 0.37 -0.28 -0.62 -0.22 0.06 0.25 -0.28 -0.40 0.26
Public employment
Real GDP 0.03 0.07 0.11 0.31 0.54 -0.10 -0.06 0.20 0.00 0.19
Real GDP per capita 0.09 0.06 0.02 0.25 0.56 -0.05 -0.03 0.17 0.01 0.17
Unemployment rate 0.12 0.33 0.19 -0.24 -0.28 0.10 -0.07 -0.07 0.01 -0.19
Sources: Lamo, Pérez and Schuknecht (2007).
Notes: Annual data. Sample period: 1960-2005 for upper panel; 1960-1992 for lower panel. Bold figures indicate dominant correlation,
i.e. the estimated correlation coefficient with the highest absolute value. A dominant correlation at a positive (negative) value for the lag in
the respective wage or employment variable indicates that it is lagging (leading) the business cycle.
unexpected changes in cyclical conditions the highest absolute value (see bold figures).13
(“shocks”) occur. For instance, a “pro-cyclical” A fiscal variable is considered as lagging
co-movement of shocks takes place when (leading) if the dominant correlation occurs
the hiring of additional civil servants or an between its current value and a value of the
unusually high wage increase coincides with economic indicators from a preceding
higher than expected growth. (subsequent) year.
The results from Lamo, Pérez and Schuknecht
(2007) for the euro area aggregate are shown 13 A large number of statistical procedures (“filters”) are used
in Lamo, Pérez and Schuknecht (2007) to both extract the
in Table 3. The first five columns refer to the overall cyclical fluctuations from time series data and to
overall cyclical co-movements and the isolate the shock or discretionary fluctuations. Empirical
findings may differ substantially depending on which specific
remaining columns to those attributed to set-up is chosen. Thus, instead of choosing one preferred
shocks and discretionary policies. For each empirical set-up, the results reported here synthesise a large
year, correlations of the public wage and number of different methods into one estimate for the cyclical
co-movements and the co-movements of shocks respectively.
employment variables with contemporaneous For a motivation and detailed description of all procedures
values of the economic indicators and with the applied in this context, see Lamo, Pérez and Schuknecht
(2007) pp. 11-18. By convention, co-movement patterns
values from the two preceding and subsequent are considered acyclical if the dominant correlation ranges
periods are shown. The overall assessment of between 0 and 0.20 in absolute value; values between 0.20
co-movement patterns for each pair of and 0.39 (-0.20 and -0.39) and between 0.40 and 0.49 (-0.40
and -0.49) are considered weakly and moderately pro-cyclical
variables is based on the dominant correlation, (counter-cyclical) respectively. Strong pro-cyclicality (counter-
i.e. the estimated correlation coefficient with cyclicality) is reflected in a value above 0.50 (below -0.50),
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19. For the euro area aggregate, government wage point to a slightly more pronounced
expenditure and compensation per employee pro-cyclicality for the pre-Maastricht period
follow a distinct pro-cyclical pattern in response (see Table 3, lower panel). However, although
to the three economic indicators. In particular, differences in the general fiscal stance have
they are positively correlated with the business also been found in related literature, 14 this
cycle at a one-year lag and the degree of observation does not provide conclusive
pro-cyclicality is strong. The results for the evidence that the EU fiscal framework has
irregular component are somewhat weaker reduced the pro-cyclicality of government
but still sizeable. This suggests that countries’ wages and employment in the euro area.
discretionary policy measures may have actively
contributed to the pro-cyclical co-movements The above patterns reflect broadly similar findings
between economic activity and the public wage for individual euro area countries (see Table 4).
variables found for the euro area aggregate. The public wage bill, in real terms, shows
moderate to strong pro-cyclicality in all countries
The response of public employment to changes with one or two lags (except for Italy, where the
in cyclical conditions is more sluggish. dominant correlation is contemporaneous, as
In particular, it follows real GDP and GDP well as Austria and Belgium, where economic
per capita pro-cyclically with a two-year activity lags the public wage bill). Wage bill and
lag. However, the patterns are generally less GDP growth shocks also tend to co-move in a
pronounced than for the compensation variables, positive manner, suggesting that policy-induced
pointing only to moderate pro-cyclicality. dynamics tend to reinforce fiscal pro-cyclicality.
Moreover, employment shocks still display a Yet, in several countries correlations are weak.
positive co-movement with GDP variables with Moreover, in Spain, Belgium, and Ireland the
a two-year lag, but the coefficient only points co-movements in the irregular component point
to weak correlation. These results may reflect to weak counter-cyclicality. Furthermore, the
that, owing to rigidities in labour markets and timing of the co-movements of shocks is less
the associated transaction cost of employing or homogenous than for cyclical fluctuations. While
releasing workers, governments tend to respond in some countries the public wage variables
more strongly via the wage rather than the follow the economic indicators (e.g. in Germany
employment component of the public wage bill. and the Netherlands with a one-year lag, and in
Stated differently, pro-cyclicality appears to Italy and Finland with a two-year lag), in others
derive mainly from wage-setting behaviour as they take the lead (e.g. two years in France and
opposed to employment decisions. one in Spain).
From a policy perspective it is also interesting Real compensation per employee follows
to see whether spending and employment patterns similar to those of the real public
patterns have changed over time and, in wage bill. In particular, co-movements with the
particular, whether the EU fiscal framework economic indicators show the same direction
enshrined in the Maastricht Treaty and the for both overall cyclical fluctuations and shocks.
Stability and Growth Pact has influenced The only exceptions are the Netherlands,
policies in this regard. Unfortunately, the need where discretionary policy has not added to
for sufficiently long time series inhibits an pro-cyclicality, and Finland, where discretionary
in-depth analysis of the post-Maastricht period. policies may have had a (weak) counter-cyclical
Instead, the analysis was repeated for the contribution. In Ireland, results are inconclusive
pre-Maastricht period and thereby indirectly given that correlation coefficients differ
examines whether there may be a difference
between the two periods. While the
14 For example, Galí and Perotti (2003) and Annett (2006) find that
co-movement patterns are relatively similar to fiscal policy in euro area countries was less pro-cyclical in the
those for the entire sample period, the results post-Maastricht period than in the pre-Maastricht period.
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20. 3 PUBLIC WAGE
EXPENDITURE
Table 4 Cyclicality of public wage and employment variables for selected euro area countries
OVER THE CYCLE:
STABILISING OR
Real compensation of public employees PRO-CYCLICAL?
Countries Type of co-movement pattern Direction Timing Degree of correlation
Belgium cyclical fluctuations pro-cyclical two leads moderate
shocks and policy changes counter-cyclical two leads weak
Germany cyclical fluctuations pro-cyclical one lag strong
shocks and policy changes pro-cyclical one lag strong
Ireland cyclical fluctuations pro-cyclical two lags strong
shocks and policy changes counter-cyclical one lead moderate
Greece cyclical fluctuations pro-cyclical one lag strong
shocks and policy changes pro-cyclical one lead weak
Spain cyclical fluctuations pro-cyclical two lags moderate
shocks and policy changes counter-cyclical one lead weak
France cyclical fluctuations pro-cyclical one lag moderate
shocks and policy changes pro-cyclical two leads weak
Italy cyclical fluctuations pro-cyclical contemporaneous strong
shocks and policy changes pro-cyclical two lags weak
Netherlands cyclical fluctuations pro-cyclical two lags strong
shocks and policy changes pro-cyclical one lag weak
Austria cyclical fluctuations pro-cyclical one lead weak
shocks and policy changes pro-cyclical one lead weak
Portugal cyclical fluctuations pro-cyclical one lag strong
shocks and policy changes pro-cyclical one lag weak
Finland cyclical fluctuations pro-cyclical two lags strong
shocks and policy changes pro-cyclical two lags weak
Real compensation per public employee Public employment
Degree Degree
Countries Direction Timing of correlation Direction Timing of correlation
Belgium pro-cyclical two leads moderate pro-cyclical two lags weak
counter-cyclical two leads weak pro-cyclical two lags weak
Germany pro-cyclical one lag moderate pro-cyclical two lags moderate
pro-cyclical one lag strong pro-cyclical two lags weak
Ireland inconclusive - - pro-cyclical two lags strong
inconclusive - - inconclusive - -
Greece pro-cyclical one lag weak pro-cyclical two leads strong
pro-cyclical one lead weak a-cyclical - -
Spain pro-cyclical one lead moderate inconclusive - -
counter-cyclical one lead weak pro-cyclical two lags weak
France pro-cyclical one lag moderate inconclusive - -
pro-cyclical two leads weak a-cyclical - -
Italy pro-cyclical contemporaneous moderate pro-cyclical contemporaneous moderate
pro-cyclical two lags weak a-cyclical - -
Netherlands pro-cyclical two lags moderate pro-cyclical two lags moderate
a-cyclical - - a-cyclical - -
Austria pro-cyclical one lead moderate pro-cyclical one lead weak
pro-cyclical one lead weak a-cyclical - -
Portugal pro-cyclical one lag moderate pro-cyclical contemporaneous borderline
pro-cyclical one lag weak a-cyclical - -
Finland pro-cyclical two lags strong pro-cyclical two lags moderate
counter-cyclical one lead weak inconclusive - -
Sources: Lamo, Pérez and Schuknecht (2007). Sample period: 1960-2005.
strongly in size and direction between economic instances pro-cyclical behaviour with two lags
indicators. is found. Again, this may reflect the transaction
cost associated with changes in the number
For public employment the picture is very of employees, which inhibits adjustments in
mixed. While for some series results are the size of the public workforce to changes in
inconclusive or point to acyclicality, in several economic conditions.
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21. 3.3 REMEDIES FOR PRO-CYCLICALITY be complemented by appropriate domestic fiscal
rules. In fact, a widespread consensus on the
The findings described above suggest that beneficial role of rules to restrict government
government wage expenditure in the euro area expenditure has emerged, as summarised,
and its member countries has mostly been for example, by the European Commission’s
pro-cyclical in recent decades. Besides assessment that “Enforced national expenditure
reinforcing economic fluctuations, such pro- rules […] help to counteract forces leading to
cyclical patterns may have an adverse effect on pro-cyclical fiscal policy in good times and thus
the quality of public finances. On the one hand, prevent the need to retrench in bad times”.17
expansionary spending episodes during upturns
bear the risk of remaining entrenched, thus However, these effects on overall spending
inducing a secular growth of the public sector. discipline do not provide a guarantee that pro-
On the other hand, cyclicality of government cyclicality in government wage expenditure
spending may also change the expenditure is also mitigated. For example, the strong
composition. During upturns it is often transfer bargaining position of public employees could
and government wage expenditure that rise, be largely unaffected by rules restricting broad
while much of the burden of adjustment in spending aggregates, since adjustment efforts
consolidation periods tends to fall on public could be redirected to other types of spending.
investment.15 Finally, pro-cyclical changes in Hence specific provisions, such as multi-year
public compensation per employee may put ceilings on the growth rate of the government
pressure on private wages in upswings, which wage bill, might be helpful to address the
would contribute to undermining competitiveness problem of pro-cyclicality in this spending
(for a detailed discussion see Section 4). item. In addition, such rules may support fiscal
consolidation efforts by containing growth of this
What should be done? As an immediate expenditure item and fostering competitiveness.
upshot, these findings call for more fiscal
prudence with respect to government wages The effectiveness of fiscal frameworks in
and, in particular, a more acyclical stance in reducing pro-cyclicality is closely linked to
line with the automatic stabilisation objectives. public wage-setting institutions. In particular,
However, in order for governments to change in several euro area countries (e.g. Belgium,
their policies successfully, behavioural Cyprus and Luxembourg) public wages are
incentives of politicians and wage negotiations explicitly indexed to inflation.18 This indexation
may need to be improved through a suitable could complicate the task of adopting a sound
institutional environment. Here, two aspects fiscal stance. First, it establishes a direct
deserve particular attention: rules-based fiscal positive link between cyclical conditions and
frameworks and public sector wage-setting
institutions. 15 See Alesina and Perotti (1995) and European Commission
(2006). Interestingly, in those countries that achieved substantial
and sustainable improvements in fiscal positions, consolidation
Properly designed fiscal rules can provide a useful also involved sizeable reductions in government wages and
employment (see Hauptmeier, Heipertz and Schuknecht (2006)).
commitment device for policy-makers, allowing 16 The definition of fiscal rules proposed by Kopits and Symansky
them to overcome common pool problems in (1998) is used. According to this definition, fiscal rules are
fiscal policy.16 For example, if governments “a permanent constraint on fiscal policy, expressed in terms of
a summary indicator of fiscal performance”. For a discussion of
are legally bound to respect certain spending the political economy considerations in the design and workings
limits, it will be easier for them to resist political of fiscal rules, see Schuknecht (2004) and Hallerberg, Strauch
and von Hagen (2007). For empirical analyses documenting
pressures for budgetary expansion, since they a favourable role of expenditure rules in reducing pro-cyclical
are “tied to the mast”. While the Maastricht spending bias, see Turrini (2008), Wierts (2008), Afonso and
Treaty and the Stability and Growth Pact Hauptmeier (2009) and Holm-Hadulla (2010).
17 See European Commission (2004), p. 37.
provide a general fiscal framework for the EU, 18 For more information on labour market institutions in European
these legal and institutional provisions should countries see Du Caju et al. (2008).
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