NOVA UNIVERSITY AT LISBON
FACULTY OF ECONOMICS
FALL 1996
THE EUROPEAN ECONOMY
(COURSE #144)
Prof. Jorge Braga de Macedo
PRESENTATION
The courses meets in Room 221 on Mondays and Wednesdays
from 9.30 to 11.00 am. It consists of lectures and student presentations,
both of which may take place in review sessions to be scheduled in the
same Room on Mondays, from 3.00 to 4.20 pm.
Grading will assign 50% to final exam and 50% to presentations in review
sessions, papers and class participation. Papers are due on the same day
as the final exam, which has been scheduled for Tuesday 14 January 1997
at 5.30 pm, Room to be announced. There will be another final exam (with
less choice) on Thursday 30 January at 2pm.
Prerequisites for enrollment are courses #110 and #115
(required) and #140 and #141 (recommended) or permission of the instructor.
The perspective taken on the European economy has been used in Course #142
(Spring 1994 and 1995 Programs) to understand experiences of economic integration
among nation states in diverse continents. Examples are NAFTA, MERCOSUL,
SADEC and other organizations outside Europe, let alone CEFTA, the Nordic
Union or the CIS of the former Soviet Union. The latter spans two continents
- like APEC.
The specific macroeconomic perspective is therefore not
particularly European. Nevertheless, it grows out of 4 decades of experience
with European economic integration. In that sense, one may speak of "European
economics" and apply it to the emerging European economy.
The perspective taken on the European economy in this
course is even less specific to Portugal. Yet it stresses the ability of
a newcomer to acquire reputation and credibility faster by pursuing appropriate
policies, a clear example of which has been Portugal´s 1992 regime
change towards currency convertibility and stability. This regime change
which is now well recognized by international financial markets and by
domestic voters, surprised both when it happened. The episode should allow
students to contrast popular interpretations with the available evidence:
its presentation combines history and geography in a way that neatly reflects
the approach pursued here.
The course emphasizes how economic analysis can clarify
the debate of European affairs, in particular the current revision of the
Treaty on European Union and the forthcoming enlargement to Central and
Eastern Europe.
The outline below suggests topics for presentation and
discussion, but many other relevant topics are compatible with the perspective
and can usefully be put forth. Accordingly, the topics to be covered during
each one of the 26 classes are tentative. The programme leaves room for
student presentations and other adjustments as deemed appropriate during
the semester. In particular allowance should be made for scheduled review
sessions where new material will be covered, whilst regular classes are
used for student presentation and discussion.
MOTIVATION
The following elaboration on the perspective taken in
the course may help in the motivation and in the selection of topics for
papers. It draws freely on the instructor’s experience
in public service.
The European economy differs from that of the 15 members
of the European Union (EU). It goes beyond the EU established in Maastricht
and the European Economic Area (EEA=EU+Norway and Iceland) established
in Porto, both in 1992. Because it includes the economies of the member
states and those of EFTA (not members of EEA as is the case of Switzerland),
CEFTA (Hungary, Poland, Czeck and Slovak Republics), and other states associated
in one way or another to the EU (Bulgaria, Romenia, Baltics, Slovenia in
the former Soviet bloc, various Mediterranean and Middle Eastern countries).
But the European economy is less than the EU because
not all member states share the same values and objectives about economic
and public policy. The European Monetary System, for example, only includes
10 members. There are states who wish to join but can´t and those
who could join but do not wish to. All know that they have signed a Treaty
on adopting a single currency on January 1st, 1999.
Rather than a macroeconomy in the national sense, therefore,
the European economy is a case of coordinated response to growing interdependence
between the national macroeconomies of member and associated states.
The European Economy must accordingly be analyzed with
a perspective of ongoing integration. This perspective is neither national
nor international and it is likely to differ across countries and issues.
National economies which are very open to trade in goods, services and
assets may find that their macroeconomic policy instruments are less effective.
If they consequently resort to structural measures designed to improve
the functioning of markets at a more microeconomic level they may capture
greater gains than if they revert to real or financial protection.
The ability to design and implement such structural measures
depends on the nature and functioning of market and policy making institutions,
not only in the monetary and fiscal areas broadly defined but also in the
banking supervision and budgetary procedures.
All things considered, the European economy will emerge
if the benefits of a coordinated response to policy interdependence are
perceived to be greater than the alternatives of a defensive or exploitative
response. If not, various clubs of nations will compete within and outside
the EU, ultimately undermining coordination between and even within nations.
This approach is at the heart of the efforts at managing
interdependence through regular summits which have become a feature of
the international order since the demise of the Bretton Woods system of
fixed exchange rates in early 1973. The regular summit meetings among the
leaders of the largest industrial economies (Canada, France, Germany, Italy,
Japan, United Kingdom and United States, the so-called G-7 which also meets
at the level of Ministers of Finance and Governors of Central Banks) include
the President of the European Commission and, in the last few years, have
partly been extended to the President of the Russian Federation.
At the private level, this management of interdependence
has been promoted by the Trilateral
Commission, which includes a North American, a European and a Japanese
groups. According to the Statement of Purpose, dated November 1973, "trilateral
cooperation will be facilitated as greater unity is achieved in Europe
through the progress in the European Community and as Europe and Japan
develop closer relations". Already then it was said in closing that
"further progress of the developing countries and greater improvement
in East-West relations will be a major concern". Now interdependence
is replaced in some areas by globalization while in others the tendency
is towards greater fragmentation.
The European group of the Trilateral Commission itself
reflects these two antagonistic forces present at world level. In effect,
Europe has no clearly defined borders and includes countries in various
stages of economic development. Moreover, if account is taken of the role
of language and culture, large parts of Africa, Asia and Latin America
show various affinities to Europe.
The enlargement of the 14 national groups (Austria, Belgium,
Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway,
Portugal, Spain, Sweden and United Kingdom, i.e. the members states of
the EEA less Greece and Luxemburg) to include rotating representatives
of the former Eastern bloc is currently being envisaged within the Trilateral
Commission (Europe). It is a debate which reflects the structured dialog
of associated states with the EU, as a solution to the deepening versus
widening discussion of some years ago.
OUTLINE
Section I reviews models of international interdependence
and the evidence for economic convergence conditional on appropriate policies
with a global - rather than a European - perspective. The model is keynesian
and has its roots in a book published nearly 30 years ago entitled The
Economics of Interdependence: Economic Policy in the Atlantic Community
but remains useful in dealing with the theory and practice of European
Integration.
Section II focuses on the EU and presumes some familiarity
with its goals and policies. More information can be obtained at Nova's
European Documentation Center or at the Commission
homepage (currently in motion to another
site). Background on the Council of Ministers can also be found there
(an alternative is here;
the economic services of the Commission are described here).
The Treaty is grounded on the values of good government,
such as proximity to the citizen, national legitimacy and democratic accountability
(P, L, A). The rules present in the Treaty, its current revision and its
forthcoming application to the associated states of the Central and Eastern
Europe are reviewed, especially the medium term orientation of macroeconomic
policy. The contribution of National Parliaments is stressed, especially
a unanimous Portuguese resolution of 1995.
Progress towards a single European currency is linked
to self imposed fiscal discipline (in the form of national convergence
programs) and a more competitive environment, as called for in the 1993
White Paper on Growth,
Competitiveness and Employment. The Commission document is analyzed
as well as the Portuguese contribution. This is presented as a model for
the analysis of other national contributions in student presentations.
In Section III institutions and procedures are linked
to policy rules in the fiscal and monetary domains. If good government
is lacking, the orientation of macroeconomic policy is not likely to be
medium term but rather determined by the political business cycle. A change
in economic regime is then required for economic integration to be beneficial
rather than harmful to national cohesion. This has been known since at
least the Commission Report of 1990, One Market One Money.
Section IV brings monetary history to bear on the financial
reputation of a national government. Center / periphery dynamics within
regions, nations, the union and the entire European continent are addressed
in that connection, again with particular attention given to the Portuguese
case. The other three cohesion states - Greece, Ireland and Spain - are
also analyzed, together with North-South differences in Italy and East-West
differences in Germany.
In Section V, the challenges of deepening and widening
are taken up again in the context of transition from plan to market, including
both the associated states of Central and Eastern Europe and the former
Soviet Union. The latest Transition Reports of the European Bank
for Reconstruction and Development and the Country Profiles presented
at its 1996 Annual Meeting provide abundant material for class presentations.
PROGRAMME AND READING LIST
Starred (*) items are required, others recommended.
16 September: class 1 PRESENTATION
I. ANALYTICS AND EMPIRICS (classes 2-5)
18 September: class 2 INTERDEPENDENCE AND INTERNATIONAL
COORDINATION OF ECONOMIC POLICIES.
* Richard Cooper, Economic Interdependence and Coordination
of Economic Policies, in Handbook of International Economics, edited by
Ronald W. Jones and Peter B. Kenen, Elsevier Scence Publishers, 1982.
Aktish Ghosh and Paul Masson, Economic Cooperation in
an Uncertain World, Blackwell, 1994.
Kathryn Dominguez, G-3 Monetary Interdependence and Coordination,
paper presented at the 1996 NBER Summer Institute.
23 September: class 3 TRADE BLOCS
* Policy Implications of Trade and Currency Zones, A
Symposium Sponsored by the Federal Reserve Bank of Kansas City, 1991 especially
paper by Paul Krugman.
Jeff Frankel, E. Stein and S. Wei, Trading Blocs: The
Natural, the Unnatural and the Super-Natural, Berkeley CIDER Working Paper
nº C94-034, Abril 1994.
Richard Baldwin and Rikard Forslid, Trade Liberalization
and Endogenous Growth: a q-theory approach, paper presented at the 1996
NBER Summer Institute.
Charles Engel and J. Rogers, How Wide is the Border?,
NBER Working Paper nº 4829, August 1994.
25 September: class 4 CURRENCY ZONES
Robert Mundell, A Theory of optimum currency areas, American
Economic Review, 1961
* Jeff Frankel and Andrew Rose, The endogeneity of the
optimum currency area criteria, NBER Working Paper nº 5700.
30 September: class 5 POLICY CONVERGENCE?
D. Ben-David, Convergence Clubs and Diverging Economies,
CEPR Discussion Papers Series, nº 922, February 1994.
Bent Sorensen and Oved Yosha, Income and Consumption
Smoothing Among US States: Regions or Clubs?, paper presented at the 1996
NBER Summer Institute.
* Jeff Sachs and Andrew Warner, Economic Convergence
and Economic Policies, NBER Working Paper nº 5039, February
Giuseppe Bertola, Convergence: an overview, paper presented
at the CEPR conference on Regionalism, La Coruña, Spain, April 1996.
II. VALUES AND OBJECTIVES (classes 6-10)
2 October: class 6 THE TREATY ON EUROPEAN UNION AND ITS
CURRENT REVISION
* CEPR, Flexible Integration:Towards a More Effective
and Democratic Europe, Monitoring European Integration 6, London, November
1995, Chapter 1: Europe at the crossroads.
Luigi Spaventa, A Survey of the Issues and Proposals,
paper presented at the CEPR/BNL Workshop on Monetary Coexistence in Europe,
Rome February 1996
* CEPR, Flexible Integration, Chapter 7: Reforming the
European Constitution.
7 October: class 7 PROXIMITY, LEGITIMACY AND ACCOUNTABILITY.
* J. Braga de Macedo, Multiple allegiances as fate, draft,
Lisbon, November 1995.
Jean Pisani-Ferry, Variable Geometry in Europe, draft
CEPII Paris, March 1996.
CEPR, Making Sense of Subsidiarity: How Much Centralization
in Europe?, Monitoring European Integration 3, London, 1993.
* CEPR, Flexible Integration, Chapter 3: Combining Flexibility
and Commitment in the EU.
9 October: class 8 CONTINUED
14 October: class 9 DEEPENING AND WIDENING OF SINGLE
MARKET.
* Barry Eichengreen, A More Perfect Union? The logic
of economic integration, Princeton Essay # 198, June 1996.
D. Fair and Christian de Boissieu, editors, Fiscal policy,
Taxation and the Financial System in an Increasingly Integrated Europe,
Kluwer, 1991.
Christopher Bliss and J.Braga de Macedo editors Unity
with Diversity in the European Economy: The Community's Southern Frontier,
Cambridge: Cambridge University Press, 1990, Chapter 2 by C. Bliss, Adjustment,
compensation and factor mobility in integrated markets.
* CEPR, Flexible Integration, Chapter 4: Defining the
common base and Chapter 5, Implementation and enforcement of the common
base.
16 October: class 10 MEDIUM TERM STRATEGY FOR GROWTH
COMPETITIVENESS AND EMPLOYMENT
* Commission of the European Communities, Growth, Competitiveness
and Employment, Bulletin of the European Communities, Supplement 6/93 (2
vols).
Paul Krugman, Peddling Prosperity, Economic Sense and
Nonsense in the Age of Diminished Expectations, Norton, 1994.
Jose Vinals and Juan Jimeno, European Unemployment and
Monetary Union, CEPS Meeting on European Monetary Integration, Lisbon,
Catholic University, 1996.
* Diogo Lucena and J. Braga de Macedo, Reforming Social
Security: Efficiency and Governance, in Sustaining social security, edited
by J. Braga de Macedo, New York: United Nations 1996.
Lawrence Kotlikoff, Privatizing Social Security at Home
and Abroad, unpublished manuscript, January 1996.
III. MONETARY INSTITUTIONS AND BUDGETARY PROCEDURES (classes
11-14)
21 October: class 11 FROM EMS TO ECB
* One Market One Money; An evaluation of the benefits
and costs of forming an economic and monetary union, European Economy,
nº 44, October 1990.
CEPR, Flexible Integration, Chapter 6: Currency union
and other open partnerships.
Daniel Gros, A Reconsideration of the Cost of EMU: The
Importance of External Shocks and Labour Mobility, CEPS Meeting on European
Monetary Integration, Lisbon, Catholic University, 1996.
Willem Buiter, Paolo Pesenti, Giovanni Corseti, A Center/Periphery
Model of Monetary Coordination and Exchange Rate Crises, NBER Summer Institute
1995
Alex Cukierman, Central Bank Strategy, Credibility and
Independence: Theory and Evidence, Cambridge: MIT Press, 1994.
Currency Convertibility: The Gold Standard and Beyond,
edited by J.Braga de Macedo, Barry Eichengreen and Jaime Reis, London:
Routledge 1996, Editors' introduction.
* Currency Convertibility, chapter 9 by J.Braga de Macedo,
Converging towards a European currency standard: convertibility and stability
in the 1990s and beyond.
* Richard Portes, The Ins and Outs of EMU, CEPR European
Economic Perspectives, Special Issue June 1996.
Niels Thygesen, The Prospects for EMU by 1999 - and Reflections
on Arrangements for Outsiders, paper presented at the CEPR/BNL Workshop
on Monetary Coexistence in Europe, Rome February 1996
* Sylvester Eijffinger and Jacob de Haan, The political
economy of central bank independence, CentER Discussion Paper nº 9587,
Tilburg University
Torsten Persson and Guido Tabellini, Monetary Cohabitation
in Europe, draft, March 11 1996.
Tommaso Padoa-Schioppa, Cooperation between Banking and
Market Regulators, International Organization of Securities Commissions
Paris, July 1995
Bernard Connolly, The Rotten Heart of Europe, London
1995
23 October: class 12 CONTINUED
28 October: class 13 CAN WE BELIEVE IN EDP?
* Commission of the European Communities, Broad Guidelines
of the Economic Policies of the Member States and of the Community, May
1996
Stable Money Sound Finances: Community Public Finance
in the perspective of EMU, European Economy, nº 53, 1993.
* Jurgen von Hagen and Ian Harden, National Budget Processes
and Fiscal Performance, in Towards Greater Fiscal Discipline, European
Economy, Reports and Studies nº3, 1994
Tassos Belissiotis, Fiscal Revenues and Expenditures
in the Community, European Commission, DG II Economic papers nº 114,
July 1995.
António Cabral, Similar budgetary problems in
Belgium, Ireland and Italy, European Commission, DG II manuscript, November
1995
* Philip Lane and Roberto Perotti, Profitability, Fiscal
Policy and Exchange Rate Regimes, CEPR Discussion Paper nº 1449, July
1996
30 October: class 14 CONTINUED
IV. HISTORY AND REGIME CHANGES (classes 15-20)
4 November: class 15 CENTERS AND PERIPHERIES
* CEPR, Flexible Integration, Chapter 2: European Integration
1945-95.
Currency Convertibility, Chapter 2 by Michael Bordo and
Anna Schwartz, The operation of the specie standard - evidence from core
and peripheral countries 1880-1990.
Currency Convertibility, Chapter 5 by Barry Eichengreen
and Marc Flandreau, The Geography of the Gold Standard.
Paul Krugman, Growth, Trade and Uneven Development, Journal
of Development Economics, 1981.
One Market One Money, chapter 9: Spatial aspects.
* J. Braga de Macedo, A European Monetary Union
of Nations, Regions and Cities, draft, Palermo, June 1996.
Currency Convertibility, chapter 4 by Marcello de Cecco,
Short Term capital Movements under the Gold Standard.
6 November: class 16 CONTINUED
11 November: class 17 PORTUGUESE CURRENCY EXPERIENCE
Currency Convertibility, chapter 7, by F. Teixeira dos
Santos, Last to join the Gold Standard 1931.
Alvaro Ferreira da Silva and J. Braga de Macedo, "Gold,
Taxes and Soldiers: Monetary and Fiscal History of Portugal", in progress.
* J. Braga de Macedo, Convertibility and Stability 1834-1994:
Portuguese Currency Experience Revisited, Moura Festchrift. Nova Economics
Working Paper nº 217, Março 1994.
J.Braga de Macedo and S. Serfaty, editors Portugal since
the Revolution: Economic and Political Perspectives, Boulder: Westview
Press, 1981 Chapter 5 by J. Braga de Macedo: Portugal and Europe: The Channels
of Structural Interdependence.
Macedo and Serfaty, Portugal since the Revolution: Chapter
2 by Paul Krugman and J. Braga de Macedo:The Economic Consequences of the
April 25th Revolution.
Bliss e Macedo, Unity with Diversity chapter 7 by J.Braga
de Macedo: External Liberalization with Ambiguous Public Response: The
Experience of Portugal.
* J. Braga de Macedo Portugal and European Monetary Union:
Selling Stability at Home, Earning Credibility Abroad. Nova Economics Working
Paper nº 269, October 1995 and Francisco Torres, editor, Monetary
Reform in Europe, Lisbon: Catholic University, 1996.
J. Braga de Macedo, Crises? What Crises? The Portuguese
Escudo in European Perspective, draft, Helsinki June 1996.
13 November: class 18 CONTINUED
18 November: class 19 COHESION STATES
J. Braga de Macedo, "European Union and Cohesion",
Nova Economics Working Paper nº 217, Março 1994.
* Frank Barry, Trade, Industrial and Macroeconomic Policies
and Structural Transformation in Ireland, University College Dublin mimeo,
1994
Frank Barry and Aoife Hannan, Multinationals and Indigenous
Employment: An "Irish disease"?, University College Dublin, October
1995
* Olivier Blanchard and Juan Jimeno, Structural Unemployment:
Spain versus Portugal, FEDEA documento de trabajo 95-04.
Bliss e Macedo, Unity with Diversity chapter 7 by Louka
Katseli, Economic Integration in the Enlarged European Community: structural
adjustment of the Greek economy.
* Lucas Papademos, Greece and the EMS: issues, propects
and a framework for analysis, in Paul de Grauwe and Lucas Papademos, editors
The European Monetary System in the 1990's, London: Longman, 1990.
20 November: class 20 CONTINUED
V. GEOGRAPHY AND TRANSITION (classes 21-26)
25 November: class 21 LESSONS OF GEMSU
Michael Burda and Michael Funke, Eastern Germany: Can´t
we be more optimistic?, CEPR Discussion Paper nº 863, December 1993.
* The Economic and Financial Situation of Germany, European
Economy nº2, 1994.
27 November: class 22 THE EASTERN BORDER
EBRD, Economic Transition in Eastern Europe and the former
Soviet Union, esp. part II Institutional change, London October 1994
* EBRD, Transition Report 1995, Investment and enterprise
development, London November 1
CEPR/IEWS, Banking Sector Development in Central and
Eastern Europe, Economic Policy Initiative, 1996.
Ronald Mc Kinnon, The Order of Economic Liberalization
Financial Control in the Transition to a Market Economy, Baltimore 1993
2 December: class 23 CONTINUED
4 December: class 24 STRUCTURED DIALOG WITH THE EUROPEAN
UNION
* Jurgen von Hagen and Andrej Kumar, Coming to terms
with accession, paper presented at the CEPR/IEWS Conference of the Economic
policy Initiative Forum, Brussels June 1996
* William Branson and J. Braga de Macedo, Macroeconomic
Policy in Central Europe, CEPR Discussion Paper, 1995
9 December: class 25 RUSSIA AND THE FORMER
SOVIET UNION.
EBRD, Economic Transition in Eastern Europe and the former
Soviet Union, esp. part II Institutional change, London October 1994
EBRD, Transition Report 1995, Investment and enterprise
development, London November 1
* EBRD 1996 Country Profiles: Russian Federation, Ukraine,
Belarus, Kazakstan, Kyrgystan, Uzbekistan, Tajikistan, Moldova, Georgia,
Turkmenistan.
* Stabilization Liberalization and Devolution; Assessment
of the economic situation and reform process in the Soviet Union, European
Economy, nº45, October 1990.
Shaping a Market Economy Legal System, European Economy,
Reports and Studies, nº2, 1993.
J.Braga de Macedo and Jean Pisani-Ferry,The Path of Reform
in the Soviet Union, in The Economic and Social Imperatives of the Future
Europe, edited by A.Clesse and R. Tokes, Baden-Baden: Nomos Verlagsgesellschaft,
1992.
