The New EU Members on the Verge of Disaster: What to Do?
Hubert Gabrisch
Wirtschaft im Wandel,
No. 3,
2009
Abstract
The long lasting, but externally financed boom in the new EU countries has collapsed under the impacts of the global financial crisis. The countries’ fiscal and monetary authorizes do not seem to be able to effectively resist – a deep crisis is under way. The situation is particularly dramatic in the Baltic countries, where the hands of the monetary authority are institutionally tied, and an expansionary fiscal policy would trigger off speculative attacks on the exchange rate. Neither the maintaining of the currency board arrangement nor an ‘emergency access’ to the Euro zone would help. The other non-Euro members of the Union still aim to adopt the Euro in the next future and, thus, are reluctant to give up the Maastricht criteria. The Euro countries Slovakia and Slovenia might face a major deterioration of their credit rating if governments would attempt to increase fiscal deficits. All in all, two problems are to be solved: first, the external provision of liquidity to their economies and, second, an approach that anchors policies in the countries against economic nationalism, which is a beggar-thy-neighbor policy. We propose a combination of a reformed exchange rate mechanism with a stability and solidarity fund for all countries. The former would help to avoid too strong depreciations and the latter would provide liquidity to stabilize the exchange rate and the entire economy.
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The Exchange Rate of the Euro Cannot be Explained Fundamentally even Ten Years after the Introduction of the New Currency
Tobias Knedlik
Wirtschaft im Wandel,
No. 1,
2009
Abstract
On first of January 2009, the Euro’s tenth birthday can be celebrated. The introduction of the Euro led to diminishing importance of trade in foreign currency for the Euro-countries. However, a significant part of foreign trade of Germany and other Euro-members is still nominated in foreign currency. Therefore, the external value of the Euro plays a crucial role for the European economy. Since the early depreciation of the exchange rate just after the introduction until 2000, an almost steady increase in the external value of the Euro could be observed. The contribution elaborates on the exchange rate development and tests whether the Euro was following a path as it would be predicted by both, the interest rate parity theory and the purchasing parity theory. Both theoretical approaches are not able to explain the specific valuation figure of the Euro. For the conduct of economic forecasts, it is to conclude that modelling exchange rate developments as random processes can be legitimate. Regarding exchange rate policy, it remains to ask which alternative policy approaches might be better suitable for the European economy.
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Exchange Rates and FDI: Goods versus Capital Market Frictions
Claudia M. Buch, J. Kleinert
World Economy,
forthcoming
Abstract
Changes in exchange rates affect countries through their impact on cross-border activities such as trade and foreign direct investment (FDI). With increasing activities of multinational firms, the FDI channel is likely to gain in importance. Economic theory provides two main explanations why changes in exchange rates can affect FDI. According to the first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if investment depends on firms’ net worth (capital market friction hypothesis). According to the second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of these two explanations. We analyse the implications of the model empirically using a dataset based on detailed German firm-level data. We find greater support for the goods market than for the capital market friction hypothesis.
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Long-term Effects of Business Incubators: What Happens to Incubated Firms after they Have Graduated from the BIs?
Michael Schwartz
Wirtschaft im Wandel,
No. 8,
2008
Abstract
Many cities and municipalities devote considerable public resources to the establishment and operation of business incubators (BIs) to promote the survivability and the positive development of newly founded firms. In the context of incubator evaluations, survival is one of the most important performance indicators, and survival rates of incubated firms are frequently communicated to the public by local authorities to demonstrate the success of those policy initiatives. However, in most cases, these data refers to the initial incubation period. Little is known about survival or exit dynamics of incubated firms after they have graduated from the BIs. On the basis of a comprehensive research project concerned with the development of graduate firms from incubators in Dresden, Halle (Saale), Jena, Neubrandenburg and Rostock, this article not only investigates how many firms survive after leaving the incubator facilities, but also investigates if graduation causes an immediate negative effect on subsequent survivability. The results show that about one third of all graduate firms fail after leaving the incubator. Furthermore, it can be found that graduate firms from the BIs in Halle (Saale) and Neubrandenburg face a relatively high risk of business closure especially in the first years after the completion of the incubation period.
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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The Maximum Level of Fines Restricts the Effect of European Competition Law
Henry Dannenberg, Nicole Steinat
Wirtschaft im Wandel,
No. 2,
2008
Abstract
In 2006, the fining guidelines for competition law infringements were completely renewed. The aim of this reform was twofold: on the one hand to decrease the incentive for cartelization and on the other hand to increase the likelihood of cartel detection.
The article studies how company’s decision for or against a cartel is influenced by these guidelines. We show that due to the maximum level of fines – which refers to the worldwide group turnover - an effective deterrence level can be achieved only for those companies, which realize just a small part of their turnover in the relevant market. Their incentive to blow the whistle increases with the cartel duration. This leads to a rising instability of cartels where one member generates only a small part of its turnover in the relevant market. In contrast, the deterrence level for companies that realize a large part of their sales in the relevant market is quite low due to the maximum level of fines.
The article gives a short overview of the risk factor competition law – from a company perspective. We illustrate how the expenditures related to cartel law infringements can be calculated. Further on, the minimum profit margins that are necessary for an economically advantageous cartel are determined. We show that for certain types of cartels already small rates of return are sufficient to make cartel participation attractive.
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For a Sustainable Contribution Rate of the Statutory Unemployment Insurance
Ingmar Kumpmann
Wirtschaft im Wandel,
No. 11,
2007
Abstract
The German Federal Government has decided to decrease the contribution rate of the statutory unemployment insurance from 4.2 to 3.3 per cent of gross wages. The unemployment insurance retards the income loss in times of increasing unemployment, which has a dampening effect on the business cycle. In order not to countervail this effect it is necessary to hold the contribution rate stable over times with high and low unemployment. Therefore, the budget surplus of the unemployment insurance agency in the current economic upswing is no sufficient argument for a contribution cut. A present reduction of the contribution rate induces the risk of a new contribution rise in the next economic slowdown. It would be better to build up sufficient reserves so that a contribution rise will be avoidable even in times with increasing unemployment.
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The German Upswing Takes a Break
Wirtschaft im Wandel,
2. Sonderausgabe
2007
Abstract
The world economy continues to expand healthily, but risks have increased during summer. The crisis of the housing sector in the US has deepened: A revaluation of mortgage backed assets has triggered turbulences on global financial markets. The institutes expect that financial markets will calm down during the coming months, but that the downswing in the US will slow the pace of the world economy. The economy in the euro area will, in addition, be dampened by the appreciation of the euro. The German economy is, in spite of a restrictive fiscal policy, in a robust upswing. Because wage setting and inflation continues to be moderate, there will be no need for a restrictive monetary policy. Thus the German economy will, due to slower demand from the US and higher costs of financing, lose momentum, but chances are good that the upswing will only take a break. In the coming year private consumption is expected to be the main contributor to growth, because wage incomes will expand strongly. Unemployment will continue to shrink, albeit at a smaller rate than during 2007. Fiscal policy will no longer be restrictive. Economic policy has improved the conditions for growth in Germany; there is, however, still much to do. Public finances have to be consolidated further, but at the same time, public investment has to be strengthened. This can be achieved if public consumptive expenditure growth is limited. The institutes suggest to increase public expenditure by 2% per annum over the cycle in nominal terms; this is, by less than by the trend growth rate of nominal GDP.
The institutes advise against a reversal of the recent labour market reforms. Instead, incentives for taking up jobs should be increased further.
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The Role of Credit Ratings in Banking Regulations. Credit Ratings Are Insufficiently Anticipating the Risk for Currency Crises.
Tobias Knedlik, Johannes Ströbel
Wirtschaft im Wandel,
No. 10,
2007
Abstract
This contribution analyses whether the behaviour of rating agencies has changed since their failure to predict the Asian crisis. The paper finds no robust econometric evidence that rating agencies have started to take micro-mismatches into account when assigning sovereign ratings. Thus, given the current approach of credit rating agencies, we have reservations concerning the effectiveness of Basel II to prevent the transmission from currency crises to banking crises for potential future crises.
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Banking Regulation: Minimum Capital Requirements of Basel II Intensify Transmission from Currency Crises to Banking Crises
Tobias Knedlik, Johannes Ströbel
Wirtschaft im Wandel,
No. 8,
2007
Abstract
Emerging market currency crises are often followed by banking crises. One reason for the transmission is the increased value of foreign debt measured in local currency. Equity capital is often insufficient to ensure liquidity. This problem is addressed by Basel II, in particular by its minimum capital requirements. In difference to the current regulation (Basel I), Basel II employs a differentiated risk weighing on base of credit ratings. This contribution calculates the hypothetic effects of the new regulation on minimum capital requirements for the example of the South Korea currency and banking crises of 1997. The results are compared to current regulation. It can be shown that minimum capital requirements in the case of Basel II would have been lower than in the case of Basel I. Additionally, minimum capital requirements would have increased dramatically. The transmission from currency to banking crises would not have been prevented, but would have been accelerated. Thereby, minimum capital requirements under Basel I have been relatively low because of South Korea’s OECD membership. It can therefore be concluded that in other emerging market economies, which are not OECD members, the ratio of minimum capital requirements of Basel II to the minimum capital requirements of Basel I prior the crises would have been even lower. Therefore, the new instrument of banking regulation would have intensified the transmission from currency to banking crises.
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