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last upadate: 18/08/2020

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The EU’s Recovery and Resilience Facility: no illusions, please! (posted 5/08/2020)

The establishment of a “Recovery and Resilience Facility” (RFF) looks like a milestone on the EU’s way to an own, sovereign fiscal policy as supported by many economists. But I believe that this construction offers an ambivalent impression. At another place (https://mpra.ub.uni-muenchen.de/83965/) ,I argued in favor of a central fiscal capacity on the EU level making the EU more resilient against severe external shocks and the European Central Bank’s monetary policy more effective. It is easy to observe that more trade and financial integration transformed asymmetric shocks into commons shock via the trade and financial multipliers, and that there is no more room for effective responses on the national level. Such separate responses would only disintegrate the European economy and undermine the effectiveness of the European Central Bank’s monetary policy. I used the analogy of a fire department of any larger town, which task is not only to extinguish – unconditionally (!) - a burning building, but also to prevent the fire spreading out to the neighborhood. In very old times, each house owner was responsible for his/her own house. But with more housing density, modern cities have a public fire department available. Similar to the transformation of privately organized and competing fire departments into publicly organized ones in the 18th century, the introduction of a central fiscal capacity would be this milestone on the way transforming the EU’s present architecture into a powerful modern concept of economic policy. Also, I argued in favor of non-repayable grants (a standard instrument of public budgets), borrowing on financial markets, and own revenue sources.

Does the RRF deliver these ingredients? Only partly. Apparently, the facility consists of three components, which raise hopes in a new central fiscal capacity: (i) the 310 bn euro of non-repayable grants (ii) the financing of the Fund by long-term borrowing on capital markets, and (iii) the imposition of own tax revenues (‘plastic tax’) of the EU budget to be used for debt service. But as I will argue in a moment, the new facility does not yet constitute a sovereign fiscal policy of the EU; it is merely a milestone towards a central fiscal capacity, nothing more. Certainly, spending 310 bn euro will have some positive effect, but effectiveness will be reduced. The weak point is the ongoing lack of fiscal sovereignty of the EU authorities. What does that mean? A legal entity is sovereign when it is not subject to orders from its constituents or addressees of its operations. Seemingly, this is ensured. However, external independence is a necessary but not sufficient condition for sovereignty. Goodhard and Lastra (2017) pointed out that sovereignty means internal independence, and independence is a prerequisite for policy discretion within the framework of rules that established a border to arbitrariness.[i] There is the rub. The EU council negotiated a compromise in exhausting sessions in two respects: First, the council of ministers, not the EU commission or the European parliament, decides actually on the approval of funds according to a member states’ application and the background documents about reform plans and the use of means. In Council voting, the well-known principle of double majority is applied. Second, the so-called "’super emergency brake,’ requested by a minority of five EU member governments, among them prominently the Dutch prime minister Mark Rutte, creates a veto right for each single EU government on the recovery plan of another EU government, when the double majority is already secured. Similar, tax financing: The introduction of an EU tax and its changes remains in the competence of the Council; the EU parliament does not have this right that is fundamental for a sovereign fiscal policy. The RRF solution will be less effective compared to a status with sovereign competences of the Commission and the Parliament. Nevertheless, one has to respect that a first and important step towards such a solution is done: grants, budget deficits, and own taxes – all of them not allowed until today.

Hence, the way toward a true and effective fiscal policy body on the EU level remains very long.

[i] Goodhart, C. and R. Lastra (2017), “Populism and central bank independence”, Discussion Paper Series, DP 12122, Centre for Economic Policy Research, London, UK.

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Now, my latest publications and work in progress.

Just published: "Elements, origins and future of Great Transformations: Eastern Europe and global capitalism": Economic and Labour Relations Review (ELRR), https://doi.org/10.1177%2F1035304620911123. The article is available as 'Online First'.

https://journals.sagepub.com/eprint/XCJUQKR7MAWIDHDJTNAD/full

The article is fully accessible to all users at libraries and institutions that have purchased a license.

This essay analyses the relationship of two ‘Great Transformations’: the first from socialism to capitalism, more specifically in Eastern Europe in the 1990s, and the second from regulated to unregulated capitalism in the global economy since the 1980s, with respect to their common origins, elements and social results. Applying Karl Polanyi’s double-movement concept, it is concluded that these two, in essence neoliberal, transformations have led to societies being deeply divided economically, socially and culturally. Moreover, the self-protection of transformation losers is generating adverse political outcomes on a global scale. For both reasons, the outcomes of neoliberal transformations are jeopardising also the viability of the European Union, which was initially built on the basis of a regulated capitalism. The future of the global economy and also of the European Union depends on how the conflicts between the deepening of unregulated globalisation, national sovereignty and democratic politics can be solved.

Just published: The long-run properties of the Kaldor-Verdoorn law: a bounds test approach to a panel of Central and East European (CEE) countries. Empirica, (), 1-21. DOI: 10.1007/s10663-019-09467-0.The article is available as 'Online First'.

http://link.springer.com/article/10.1007/s10663-019-09467-0.

It is fully accessible to all users at libraries and institutions that have purchased a SpringerLink license. An expanded version can be find as .Narodowy Bank Polski, NBP Working Paper No. 318. Download: http://www.nbp.pl/publikacje/materialy_i_studia/318_en.pdf

This study attempts to identify the short- and long-run components of the Kaldor-Verdoorn (KV) law. The law claims that demand dynamics drive productivity dynamics. The claim is tested with a panel of ten Central and Eastern-European countries, where productivity and demand growth have been slowing since 2004/2006 and where fears of an end of convergent growth are spreading. Meanwhile, the gradual slowing of output and productivity growth applies not only to the region considered, but it is also a global phenomenon that is occurring despite remarkable technical progress and that is referred to as the productivity puzzle. However, this puzzle would be solved in light of the KV law. To test for its long-term properties, panel cointegration models with autoregressive distributed lags (ARDL) are applied. Our results confirm the law for the region; slower productivity growth is not due to ‘adverse technological progress’ but to weakening external and domestic demand, which might block the implementation of product and process innovations. A longer and slightly different version can be obtained as NBP Working Paper No. 318 (see below).

Just published: From the socialist command to a capitalist market economy – the case for an active state. In: European Journal of Economics and Economic Policy - Intervention. Special issue on the Economics of Kazimierzmierz Łaski (1921 - 2015), volume 16, issue 3.

Kazimierz Łaski belonged to the group of economists who particularly clearly and convincingly criticized the application of neoliberal doctrines to the transition of socialist countries into market economies. His analysis of the transition agendas was deeply rooted in the Kaleckian tradition of reasoning and brought him much respect but also fierce opposition in the international arena. In answering the why and how of his work, this article will summarize his contributions to the economics and politics of transition.

My current research projects include

  • Actual problems of European integration, chiefly: reforms of the governance system;
  • The role of the intererest rate in Keynesian and Kaleckian investment functions
  • Finance, growth and competitiveness of Central- and East European countries

I am a registered author of Repec - http://econpapers.repec.org/ and in Research Gate - http://www.researchgate.net/profile/Hubert_Gabrisch/info?editInstDialog=true