Showing papers in "Austrian Economic Quarterly in 2012"

The Sovereign Debt Crisis: Causes and Consequences

Abstract: The quasi-global sovereign debt crisis is currently the focus of the political debate and of media attention. The origins of the crisis have long been considered too narrowly, with often one-dimensional solutions being proposed. A somewhat more comprehensive approach was first adopted at the EU Council Meetings of October and December 2011, thereby providing a major step towards the resolution of the most pressing problems. Tighter fiscal policy and more ample resources for the stabilisation fund are important moves. Nevertheless, a lasting solution must take a broader perspective and address certain deficiencies in the setup of EMU that were brought to the fore by the uneven economic performance of its members.

European Monetary Union in Crisis

Abstract: So far it has not been possible to solve the crisis of the European Monetary Union. In recent months it has worsened increasingly and is now placing a drag on global economic activity. A comprehensive solution to the crisis would include the establishment of joint liability for government debt in the euro area, measures to stabilise the economy and ensuring long-term stability of government debt.

Rating Agencies: Creating, Amplifying or Drawn by Events in the Sovereign Debt Crisis?

Abstract: Market sentiment has a strong and sustained influence on international capital flows. The change of risk appetite on the part of international investors explains more than half of the variation of the interest rate differential between domestic government bonds and those of a safe-haven reference country. In such an environment, downgradings of country ratings may have a destabilising effect. Yet, an investigation into the changes of ratings for four countries at the European periphery for the period from 1994 to 2011 shows no evidence for a vicious circle of rising interest rates, downgradings and sovereign debt increase. The author is thankful to Gunther Tichy and Franz R. Hahn for useful and constructive comments. The data were processed and analysed with the assistance of Ursula GlauningerE-mail adresses: Thomas.Url@wifo.ac.at, Ursula.Glauninger@wifo.ac.at Rating agencies are currently the target of heavy criticism. Their judgement of cer- tain countries' poor creditworthiness is seen as the cause of rising financing cost of government debt. Particularly heated is the debate about the downgrading of sev- eral euro area countries in the course of the sovereign debt crisis. Such downgrades have taken place since March 2010, largely in parallel with a widening interest rate differential of the respective government bonds vis-a-vis the German Bund bench- mark (Tichy, 2011). The European Commission even threatens to forbid the agencies in critical situations to publish their country ratings. From many sides there is also the call for the creation of a European Rating Agency with the aim to confront the An- glo-Saxon-dominated agencies with an independent European opinion. Against this background, a factual analysis of the connection between changes in the interest rate differential and a country rating is considered appropriate. The starting point of such an analysis is the widening interest rate gap for several euro area countries vis- a-vis Germany. Unlike in the period before the start of the European Economic and Monetary Union (EMU), this gap can no longer be explained by different expecta- tions about future inflation, but has other reasons. Before entry into Monetary Union, the EU countries were able to use two economic policy instruments that are now no longer at their disposal: (1) an independent monetary policy with an own national currency allows the inflation rate to differ from the one abroad as well as (2) the adjustment of the exchange rate to changes in the international competitiveness that unavoidably arise from an inflation differential vis-a-vis the trading partners. With an unexpected bout of inflation, the real value of fixed-interest-rate government bonds diminishes, thereby facilitating a smooth debt reduction. What is important is the surprise element, since expected high inflation rates will already be reflected in current government bond yields. This relation is illus- trated by the "Fisher equation" (Fisher, 1906) which splits the nominal interest rate in period t, t i , into a real interest rate t r , and the expected inflation rate e t

The Privatisation of Public Assets as an Economic Policy Instrument: Private versus Public Ownership of Companies - the Practical Implementation of Privatisation Projects and Economic Policy Conclusions

Abstract: Liberalisation, competition and regulation are the most important economic prerequisites for successful privatisation measures, while acceptance by the population (and its political representatives) is the main political precondition. In competitive markets the success of privatisation measures no longer depends on the economic framework, but on (social and) political conditions. However, if a competitive market does not exist, a government willing to privatise faces the challenge of creating the necessary conditions for well-functioning competition ahead of privatisation and of guaranteeing viable competition subsequently. Besides de-ideologisation and transparency, social and political acceptance also requires the illustration of potential trade-offs. This study is conceived as a series of three articles published in WIFO's Austrian Economic Quarterly in autumn 2011 and spring 2012. The first article (http://www.wifo.ac.at/wwa/pubid/42850) dealt with the theoretical foundations and mutual relations between private and government ownership of companies, whereas the second part (http://www.wifo.ac.at/wwa/pubid/43472) focused on the empirical evidence and investigated which extent of government withdrawal from state-owned enterprises would be optimal from the perspective of industrial location policy. Finally, this third article is dedicated to the practical implementation of privatisation projects and conclusions for economic policy. ● The author is thankful to Gunther Tichy for useful and constructive comments. The data were processed and analysed with the assistance of Elisabeth Neppl-Oswald ● E-mail addresses: Michael.Boeheim@wifo.ac.at, Elisabeth.Neppl-Oswald@wifo.ac.at

Slowdown Continues. Business Cycle Report of November 2012

Abstract: Weak global demand, especially in the advanced economies, is dampening world trade and production. The USA is experiencing a decline in equipment investment and exports. Japan's industry is under pressure from chilled diplomatic relations with China. In China, economic activity continues to slow. Production in the EU has not declined further of late; the situation has stabilised for the time being notably in the crisis countries on the euro area periphery. Unemployment remains extremely high in many countries. Refinancing conditions of the euro countries have eased further, but the capital outflow to third countries has not been halted yet. Austrian companies expect production to stagnate and employment to decline. The labour market has cooled recently. Inflation rose noticeably in September.

Between Consolidation and Growth: Federal Financial Framework 2013-2016, "Consolidation Package II" and Stability Programme

Abstract: The government debt ratio in Austria will rise above 74 percent of GDP in 2012 The quantifiable costs of the financial market crisis and the global recession account for nearly 7¾ percentage points of this ratio, further discretionary measures and statistical revisions for the last few years add nearly 6 percentage points The "consolidation package" adopted in spring 2012 is to ensure a balanced general government budget (according to the Maastricht definition) by 2016 In addition, it is intended to reduce the structural deficit to 04 percent of GDP and the debt ratio to 706 percent of GDP

Welfare, Wealth and Work for Europe - WWWforEurope: A New Development Strategy for Europe Objective, Research Design and Project Consortium

Abstract: The EU project "Welfare, Wealth and Work for Europe  WWWforEurope" aims to lay the analytical foundation for a new development strategy for Europe that will make a socio-ecological transition to high levels of employment, social inclusion, gender equity and environmental sustainability possible. Europe has to guarantee its financial stability, the sustainability of public debt and the strength of inner European solidarity in coping with the challenges of climate change and demography, while envisioning a future of high levels of wealth, welfare and employment. The current austerity measures heavily restrict options for policy makers. Still, it is necessary to consider which development path Europe should opt for in the long run. Optimally, it should be a socio-economic model that differs from other models and is also accepted by the young. Such a long term, sustainable growth strategy will necessarily alter short term priorities. Economic performance has been rather disappointing in Europe since the midnineties, specifically in terms of growth of GDP and total factor productivity. Particularly in the highly indebted countries, unemployment has reached record levels, and the average unemployment rate has risen significantly above 10 percent. Some peripheral countries face twin deficits in budget and current accounts. Meanwhile, Europe's share in world trade remains relatively stable, proving the international competitiveness of the economy. This all comes as Europe faces old and new challenges: globalisation, demographic change, new technologies, post-industrialisation, ecological issues and climate change. At the same time, welfare systems have come under strain due to high public deficits and increasing debt. Along with macroeconomic disequilibria within Europe and worldwide, a need for fiscal consolidation and instabilities on the financial markets are seriously restricting the available options for policy makers. Against this background, the new European development strategy has to emphasise growth and employment based on innovation and increased competitiveness. At the same time, the strategy must guarantee high levels of social inclusion, take on the fight against poverty and find a way to deal with climate change. These challenges require a change in European policy: a change that must not point in the direction of reducing social inclusion, postponing environmental goals and opting for price-cost-competitiveness, but rather pave the way for a new growth strategy with social and ecological priorities which ought to be viewed as promoting and not hindering development 1 .

Sovereign Debt Crisis Tightening Its Grip on the Real Economy. Economic Outlook for 2012 and 2013

Abstract: In response to the sovereign debt crisis in the euro area, many member countries apply cuts to their government finances. This will weigh on internal demand and output growth in the euro area, at a time when also the cyclical momentum of the global economy decelerates. For the year to come, economic growth in the euro area is thus expected to come to a halt, and business activity in Austria is about to slacken. Real GDP growth in Austria is forecasted to moderate from 3.2 percent to 0.4 percent in 2012. Only in 2013 will the international upturn lead to a rebound in GDP growth to an expected rate of 1.6 percent. While headline inflation should decline markedly in 2012, the cyclical downturn will take its toll on the labour market, with employment growth levelling off and unemployment heading up.

Effects of the New Capital Requirements of Basel III on the Financing of Small and Medium-sized Enterprises in Austria

Abstract: Due to their very limited access to the capital market bank financing is of outstanding importance for small and medium-sized companies. Often, however, the latter can only barely provide the collateral corresponding to the enhanced capital requirements for financial institutions (Basel III). As a rule their capital base is significantly weaker than that of larger companies. Therefore, small companies are likely to be particularly affected by the anticipated tightening of credit owing to Basel III.

Slow Upturn Following Soft Patch in 2012. Medium-term Forecast of the Austrian Economy until 2016

Abstract: The Austrian economy will not regain significant momentum before 2014. During the forecast period from 2012 until 2016 real GDP will grow by 1.6 percent per year on average. Exports will expand by 5.5 percent per year. Imports, by contrast, will increase by only 5.1 percent. The average inflation rate during 2012-2016 will be 2.1 percent. Despite the increase of employment tensions in the labour market will remain, as the labour supply will grow, too. At 7.3 percent the unemployment rate will be considerably higher in the forecast period than before. Moderate and sustainable consolidation and reform measures in the public sector will not dampen economic activity excessively in the medium term.