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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Institutionelle Defizite und wachsende Spannungen in der Euro-Zone
Hubert Gabrisch
Wirtschaft im Wandel,
No. 7,
2007
Abstract
The introduction of the Euro was certainly a success. Nevertheless, behind this success one may find some increasing asymmetries and imbalances across member countries, which may undermine the stability of the common currency in the long run. Tensions include the paralysis of fiscal policy, increasing divergence in per capita income, a high volatility of real state prices, and diverging unit labour cost developments. The given forms of macroeconomic coordination seem not to be appropriate to mitigate the problems. Obviously, countries can compete with wage policy only after currencies and their exchange rates were abolished, and the use of fiscal policy has been restricted. In particular, Germany and Austria were successful in competitive wage policy, while countries like Spain, Greece, Portugal, Italy, and also France did not yet use the competitiveness channel. Germany was able to reduce its unit labour costs more than other countries by labour market reforms and higher indirect taxes in replacing social taxes. However, the advantage may proof to be temporary only, for other countries will be forced to follow the German example. Given an ECB inflation target of 2 %, more competitive wage policy in the Euro area might jeopardize the stability of the currency through deflation and higher unemployment. It does not wonder that the discussion on other and new forms of macroeconomic coordination revived recently. This debate does not only include the introduction of a central EU budget with anti-cyclical effects, but also forms of direct and indirect coordination of national wage policies. In any case, it would be useful to oblige national wage policies to obey the common interest of the Union.
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Determinanten des Erfolgs im Transformationsprozess der mittel- und osteuropäischen Länder - eine empirische Würdigung der Beiträge von Karl Wohlmuth
Tobias Knedlik
Ökonomische Systeme im Wandel der Weltwirtschaft/Economic Systems in a Changing World Economy - Festschrift zum 65. Geburtstag von Professor Dr. Karl Wohlmuth,
2007
Abstract
In his academic career Prof Dr Karl Wohlmuth is, among others, concerned with questions of the economics of transformation. In early contributions regarding the transformation process of Eastern European countries, he deducts policy recommendations for a success-ful transformation process. The present paper summarizes the analyses of Wohlmuth and empirically evaluates - as an ex post analysis - determinants of success in the transforma-tion process. The central question is whether the determinants as identified by Wohlmuth had a significant influence on the success of transformation. The results are that the factors ‘reform of the private sector’, ‘liberalization of the labor market’, and ‘fiscal consolidation’ have been of special importance. It could therefore be shown that the factors that have been early identified by Wohlmuth played in deed an important role in the transformation proc-ess. Thus, his recommendations are of relevance for the ongoing process of transformation.
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Book Review: Sanjeev Gupta et al. (eds.): Helping Countries Develop – The Role of Fiscal Policy, 2004
Tobias Knedlik
Africa – Commodity Dependence, Resource Curse and Export Diversification, African Development Perspectives Yearbook 2007, No. 12,
2007
Abstract
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Book Review: Philippe Burger: Sustainable Fiscal Policy and Economic Stability, 2003
Tobias Knedlik
Africa – Commodity Dependence, Resource Curse and Export Diversification, African Development Perspectives Yearbook 2007, No. 12,
2007
Abstract
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Die Lage der Weltwirtschaft und der deutschen Wirtschaft im Frühjahr 2007
Wirtschaft im Wandel,
1. Sonderausgabe
2007
Abstract
In spring 2007, the global economy remains robust. While growth rates have declined slightly from last year, as business activity in the US has slowed, they continue to reflect an upswing, which by now has held on for a notably long time. Especially the developing and emerging countries have been raising output very fast, due in part to their increasing role in the international division of labour. In the industrialised economies, on the other hand, the current recovery has not been remarkably strong. So far the slowdown in the US economy has not spilled over to other regions and the Euro Area as well as Japan continue to expand at a high pace. Here expansive monetary policy provided a notable support. Buoyant financial markets stimulated the world economy additionally, even though market volatility has increased since the end of February. The US central bank’s current concern with inflationary risks keeps it from loosening its slightly restrictive monetary policy. It will be the second half of the year – when price pressures have eased – until the Fed makes its first rate cut. The ECB, on the other hand, has been preparing financial markets for a further increase in interest rates by summer. In 2007 and 2008 the growth disparities in the industrialised countries will diminish. On one hand, the upswing in the Euro Area will start to moderate, as fiscal policy hampers business activity and monetary policy will not stimulate anymore. On the other hand, the US economy will slowly gain pace from summer onwards; the emerging markets will continue to develop in a highly dynamic fashion. World-GDP in this and next year will likely rise by about 3 ¼ % in 2007, which is still faster than in the average of the last ten years. World trade will rise by 7 ½ % in the coming two years. An oil price of 65 US-Dollar and an exchange rate between the Euro and the US-Dollar of 1.32 were assumed for both years 2007 and 2008. The real estate market in the USA continues to be a risk for...
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Local Public Utilities' Profits and Municipal Expenses in Germany: An Empirical Analysis
Peter Haug, Birger Nerré
Proceedings of the 99th Annual Conference on Taxation (November 16-18), Washington DC,
2006
Abstract
German municipalities are currently struggling with growing budget deficits and other financial hardships. From a public choice point of view it seems tempting for vote-maximizing local governments to raise revenues from sources which create fiscal illusion or allow tax exports. An increasingly important revenue source of this kind are profits of local public utilities. In this paper we try to fill an empirical gap and provide data of the development of the profitability over time for selected German local public utilities. Furthermore, we develop and estimate a municipal expenditure function for a panel data set of large German cities . We found some slightly positive relationship between per capita expenses of the municipality and the disposable per capita profits of the local public utilities. This indicates that probably the German municipalities – according to our theoretical considerations – tend to burden their citizens as well as non-voters outside their boundaries with implicit taxes to satisfy their increasing financial needs.
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Interregional equalization policy in focus: Donor regions and beneficiary regions and their economic performance
Gerhard Heimpold, Peter Franz
Wirtschaft im Wandel,
No. 11,
2006
Abstract
The future of the interregional equalization policy in Germany is discussed intensively at present. While in the past the interest of equalization policy was focussed primarily on the regions which benefit from interregional equalization policy (beneficiary regions) and the effects obtained there, recently the view is directed also toward the regions which bear the fiscal burden of the equalisation policy (donor regions). Concerning the donor regions, a fear of growth-absorbing withdrawal effects exists, which gives reason in view of declining economic growth rates on the national level to think about the future of interregional equalization policy. The IWH contributed to this debate together with two project partners by an investigation, which was accomplished on behalf of the Federal Office for Building and Regional Planning. The following findings will show the economic performance of the donor regions (exclusively West German regions) and of the beneficiary regions (all East German regions and a few West German regions) and their changing economic growth patterns. Concerning the level of economic performance, measured by means of the gross domestic product (GDP) per capita, as expected, the donor regions, consisting of West German regions, in the period 1992-2003 altogether show an above average GDP per capita. In contrast, the beneficiary regions, both the East German and (less strongly) the West German show a GDP per capita below average. Concerning the development of the economic performance, which was measured on the basis of the relative GDP per capita (GDP per capita of the region concerned in relation to the national average), the East German beneficiary regions could catch up in the first period (1992-1998) strongly. This catching up process, however, clearly slowed down in the second period 1998-2003. Like a mirror-image the lead of the donor regions regarding GDP per capita in relation to the national average became smaller. But after 1998 many West German donor regions regained their growth dynamics. Additionally the contributions of the regions to the absolute increase of the GDP in the period 1998-2003 were investigated: 30 of 271 regions have a share of around 50% in the overall GDP increase, 28 of them located in West Germany, and 21 of them donor regions. This in mind, the policy should further provide and secure favourable development conditions for those regions, which contribute at most to the increase of the overall economic performance and thus create the economic base for the interregional equalization policy.
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The coalition treaty from a fiscal point of view
Kristina vanDeuverden
Wirtschaft im Wandel,
No. 12,
2005
Abstract
After weeks of negotiations the coalition finally agreed on the conditions for their political work. Not surprisingly, the coalition agreement is complex and intransparent – with a multitude of single measures far away from a precise definition. Quantifying the programme and estimating resulting cash flows is currently difficult; official calculations are – if at all – only partly available. Anyhow, the contract will form the basis for economic policy during the next four years; therefore its evaluation by now is indispensable. The thin red line of the agreement – not astonishingly when considering the precarious financial situation of the public sector – is consolidation. However, more than 80% of the consolidation volume results from the revenue side. Though one third of this is due to the cutback of tax exemptions, the lion’s share comes from raising tax rates, mainly the VAT standard rate. In contrast, cutting back public expenditure is minor and the agreement clearly comes short of the Koch/Steinbrück proposal; even new tax reliefs are created. The consolidation is almost completely borne by private households. Enterprises as a whole are barely hit. However, they have to wait until 2008 for a reform of company taxation – one of the most pressing problems in this legislative period. To reduce the companies tax burden until the reform starts the conditions for tax depreciation are temporarily relaxed. Anyway, from an international point of view the statutory tax rate is an important signal to enterprises deciding where to invest. Lowering effective tax rates by changing depreciation conditions is intransparent and, thus, will be less effective. Furthermore savings within the public sector are planned to accomplish consolidation; 10 billion Euro should result from efficiency gains and reduced expenditure. Consolidation measures mainly focus on the budget of the federal government. However, Länder and communities will participate in the additional tax revenues. In contrast, social securities will loose – and therefore also the share of employment that is subject to social insurance contribution. Particularly the unemployment insurance will be burdened by the decrease of its premium rate. Besides, the federal government will reduce its grants to the pension funds and most notably the health system. The contract is dominated by fiscal constraints. Cyclical requirements are considered only cursory and pressing structural reforms are put off. The reforms of company’s taxation, of fiscal federalism, of the health system as well as a proceeding reform of the labour market are only proposed. How and when measures in these fields are realised will determine whether fiscal policy can set a new course.
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Stability and Growth Pact: No appropriate Strategy for Consolidation
Kristina vanDeuverden
Wirtschaft im Wandel,
No. 2,
2005
Abstract
In the last years public budgets in the EU worsened more an more. Especially when considering the demographic development in western industrial countries and, thus, increasing pressures on public spending, these findings are distressing. Consolidation can either be achieved by a sequence of discretionary policy decisions or be the result of a fiscal rule – whereas the last seems to be predominant. Creating the Stability and Growth Pact the EU decided to establish a fiscal rule. This rule, which apparently has failed to reign in public deficits. So a reforming debate has recently started. The superiority of a rule crucially depends on whether it is well defined and whether it satisfies certain criteria. According to these criteria the Stability and Growth Pact clearly shows weak points. Moreover the proposals now discussed not only show the same weaknesses – they even create new ones and mainly work by reducing requirements. Against this background the IWH again proposes the implementation of a spending path that is superior to the Stability and Growth Path.
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