Bringing macroeconomics back into the political economy of reform: The Lisbon Agenda and the 'fiscal philosophy' of EMU

The Lisbon Strategy supports reform of member states’ tax-benefit systems while the ‘fiscal philosophy’ of the EU postulates that governments should allow only automatic stabilisers, built into tax-benefit systems, to smooth aggregate income. We ask whether these two pillars of EU economic governance are compatible. By exploring how structural reforms affect fiscal stabilisation, we complement a political economy literature that asks whether fiscal consolidation fosters or hinders structural reforms. We conclude, based on simulations in EUROMOD, that Lisbon-type reforms may worsen the stabilising capacity of tax-benefit systems

A double bind: Cameron urges non-discrimination in one policy area, while wanting to discriminate in another

The UK government has entered the final stages of its negotiations with the EU. The issues of immigration control and the refugee crisis seem to overshadow the debate. Yet, as Waltraud Schelkle points out, the “Dear Donald — Yours David” letter of Prime Minister Cameron to European Council President Tusk reveals that the other leading issue is financial integration in a European Union with “effectively two sorts of members”, those in the Eurozone and those outside

The ‘Poundzone’ is just as sub-optimal a currency area as the Eurozone

One of the arguments frequently made against the euro is that the Eurozone represents a ‘non-optimal’ currency area. This derives from the notion that the variations between regions within the Eurozone are simply too large for them to share a single currency without encountering problems. Waltraud Schelkle assesses this argument by comparing the experience of the Eurozone with that of the UK during the financial crisis. She argues that the criticisms levelled at the Eurozone are equally applicable to the UK and that if diverse regions are a reason to break up the Eurozone, then the same conclusion would also have to be drawn about Britain’s currency union

Greece vs. California – Comparing fiscal crises within the monetary Unions

California is not Greece – but why not? The answer to this question seems simple. To be precise, there are two simple answers. First, California is not Greece because the U.S. state is a vastly successful economy, on its own among the ten biggest economies in the world, good at producing blockbusters, software and computer lifestyle products that cannot easily be replaced by cheaper providers in emerging markets. Unfortunately for California, the private riches goes with public poverty. A populist political system allows voters to act collectively like a schizophrenic person: hedonistic and lavish as regards their own private expenditure, prudish and insanely stingy when it comes to state expenditure for public goods. However well the private economy did before the crisis, it seemed to make Californians just more inclined to starve the beast that is their state government. It has forced the executive repeatedly to resort to creative accounting and outright forging of figures to pass a budget

How does the introduction of ‘choice’ affect the pooling of risks in European welfare states? The case of long-term care

Ongoing reforms of European welfare states that aim at increasing ‘choice’ for patients, clients, and beneficiaries provide a unique opportunity to explore what exactly drives these reforms and how they reconstitute communities of economic risks. Traditionally, the solidaristic bargain underpinning European welfare states revolved around the twin objectives of a redistribution of resources and a pooling of risks (Baldwin, 1990). Much of the retrenchment literature to date has focused on the income distributive effects of dwindling resources to explain changes in European welfare states. We postulate that more profound changes in welfare arrangements are being driven by the introduction of ‘consumer choice’ which is compatible with welfare expansion of new welfare state pillars. Our case study on long term care explores in particular, what choices users get and whether this allow us to infer the thrust behind ‘choice’ reforms as well as the effects on the pooling of risks in European welfare states. We find that welfare state expansion in long-term care has responded to growing demand and that there is a great variety in the cost-sharing arrangements which cannot all be subsumed under the imperative of cost containment

Risk sharing between member states through migration as a social right

Economists claim that the European monetary union would work so much better if labor mobility were higher. But economic models treat workers’ migration to another member state essentially in the same way as workers’ changing jobs within the domestic economy. The jurisprudence on free movement of persons (workers and services) and non-discrimination that the CJEU developed over the years can show how different cross-border and within-border movements are. For comparative political economists, who conceptualize welfare states as institutionally coherent regimes, this proves that free movement of persons clashes with the “logic of closure” (Ferrera) on which welfare states rest. This paper takes free movement of citizens within the United States as reference point to show how homogenous social security systems are, how contested the social right of free movement is and what role courts play in shaping them. The basis for differentiated regulation of free movement in the euro and the dollar area is that welfare states consist of varied social programs with specific access rights. They operate on principles of discrimination, rather than closure. Judicial interventions can clash with these principles but there is no irreconcilable difference of logics at work. At the same time, labor migration as an economic adjustment mechanism for entire regions is arguably overrated, both in its positive and its negative impact

Demographic Change, Human Capital and Endogenous Growth

This paper employs a large scale overlapping generations (OLG) model with endogenous education to evaluate the quantitative role of human capital adjustments for the economic consequences of demographic change. We find that endogenous human capital formation is an important adjustment mechanism which substantially mitigates the macroeconomic impact of demographic change. Welfare gains from demographic change for newborn households are approximately three times higher when households endogenously adjust their education. Low ability agents experience higher welfare gains. Endogenous growth through human capital formation is found to increase the long-run growth rate in the economy by 0.2-0.4 percentage points.

Introduction: up for grabs? Key issues in the negotiations about Britain's membership in the EU

The UK’s negotiating position in the area of ‘economic governance’ started from the assumption that there is a deep dividing line between insiders and outsiders of the ‘Eurozone’. To protect the outsiders, the UK government did not ask for a veto but a safeguard mechanism that can postpone a decision in the euro area. This is exactly what David Cameron achieved in the negotiations with Council President Tusk. The article explains why the UK demands were so modest. It is largely explained by the peculiar situation of the UK being the major financial centre for a currency union to which it does not belong. This means that the UK taxpayer needs protection from the City and EU membership has helped to provide this. There is not much else a UK government could ask for

Online Appendix to "Demographic Change, Human Capital and Welfare"

This appendix of our paper, "Demographic Change, Human Capital and Welfare", contains further material that could not be included in the paper due to space limitations. It is organized as follows. Section A contains the formal equilibrium definition. Section B provides more results on the fit of our model to observed life-cycle profiles of hours and wages, the implied labor-supply elasticities of our model, additional results on predicted aggregate variables during the demographic transition as well as the associated welfare effects and a sensitivity analysis. Our population model is explained in Section C. Details on our computational procedures can be found in Section D.Population aging; Human capital; Rate of return; Distribution of welfare

The second Greek rescue programme was not merely late, but also insufficient, making a third programme inevitable.

Last week the IMF published a review of the financial assistance given to Greece during its debt crisis. One of the key limitations identified in the report was that debt relief for the country was provided far later than it should have been. Waltraud Schelkle writes on the fallout from the report, which generated angry responses from both the European Commission and the European Central Bank. She argues that while the second Greek rescue programme was undoubtedly late, it was also insufficient: amounting to a write-down of only around 33 per cent of Greece’s debt-to-GDP ratio. As a result Greece is likely to need a third rescue programme