Central to this theme is the transition of the countries of the former communist block. This allows us to draw some general conclusions for the theory of economic systems, which is of great practical importance for the future of the European Union, as it will admit some of these countries in the near future. The project pays particular attention to the institutional aspects of the transition, the role of agriculture, the role of the informal sector (which is much more important than was initially expected) and the role of ethnic issues. The analysis is both theoretical and empirical.
Programme Evaluation
The main objectives of the Programme, embracing three subprogrammes with its own leaders, are to enhance our understanding of current European policy issues in the subject areas of this Programme (positive analysis) and, where possible, to come up with welfare enhancing policy recommendations (normative analysis). The Programme has generated a number of interesting and substantive results that have been published in leading journals:
Subprogramme A:
Beetsma (in collaboration with Bovenberg, Tilburg University) has explored the case for a fiscal risk sharing scheme in European Monetary Union as a substitute for national monetary policy in dealing with country-specific shocks. He concludes that while monetary unification may be optimal, international risk sharing may be undesirable because it weakens fiscal discipline.
Beetsma (in collaboration with Franc Klaassen and Xavier Debrun, IMF) shows that fiscal policy coordination may be counterproductive, because of the potentially adverse reaction of the ECB to coordinated fiscal policies. In contrast to some of the consensus views, this problem may be particularly serious when shock correlations are high across countries. Vermeylen finds that job destruction Granger-causes an increase in aggregate consumption. This is interpreted as evidence that precautionary saving subsides and consumption recovers when the uncertainty associated with impending job reallocation is resolved. Another finding is that the effect on aggregate output of sectoral reallocation, as measured by the cross- sectional volatility in stock market returns, is almost entirely due to the effect of depressed consumer confidence on aggregate demand.
Westerhout has extended Pissarides' (1990) standard model of equilibrium unemployment with disability risk and disability benefits and concludes that only policies that lower the rate of disability shocks succeed in reducing both the participation in disability and unemployment schemes.
In exploring the case of Argentina, Jager shows that a currency board system is not compatible with an active economic policy.
Veestraeten has studied the announcement of the conversion rates of EMU currencies that have been fixed as of 1 January 1999. Estimates reveal subjective discount factors that are mostly (well) below 2%, contradicting results from previous studies that report substantially larger values.
The Transformation of Europe - Beetsma - Economics
The results have direct policy relevance. One of the major views is that EMU is not feasible without some mechanism that replaces national monetary policy in stabilising the effects of country-specific shocks. Research by Beetsma and Bovenberg shows that this is not necessarily correct and that EMU may well be feasible without international fiscal risk sharing. The work by Beetsma, Debrun and Klaassen addresses one of the major issues of disagreement in connection with EMU: should the role of the Euro-group be strengthened from an informal discussion forum to a body with formal powers, which can provide a counterweight to the ECB. Vermeylen’s work is particularly relevant now that the European economy is slowing down. It may help to explain the effects of the slowdown on aggregate demand in Europe. Westerhout provides policy recommendations that are of particular interest in view of the political attempts to stem the inflow of Dutch workers in disability schemes. Jager’s results concerning currency boards have a normative character and may provide a valuable lesson for some of the EU accession countries that also have currency boards and that want to become member of EMU. Veestraeten’s research can be characterised as positive in nature. It may help to explain the behaviour of exchange rates of Central and Eastern European countries in the run-up to their EMU membership.
Subprogramme B:
This subprogramme started in about 1990 and is a co-operative effort of Fase with researchers at the Nederlandsche Bank, of which he was till September 2001 a deputy executive member of the Board in charge of research, and a few researchers of the ECB. In spite of it’s small size in terms of fte’s, over the years this subprogramme has been quite productive in view of both the number of A- and B- as well as other publications and the number of completed Ph.D. dissertations which amount to about 20 (one in 2001 and another in 2002). As two the research results in 2001 two examples are mentioned here. The first is Fase’s empirical analysis of financial intermediation and economic development in the Netherlands during the twentieth century shows a strong causal relationship from financial intermediation to growth before World War II, but none after the war. Moreover, the econometric analysis over the whole period indicates an increasing importance of financial intermediation for allocating funds to finance capital investments.
The second is his work on policy rules for EMU, Fase finds that a policy of interest rate targeting is superior to monetary targeting from the viewpoint of a stabilisation policy, thus supporting the hypothesis that policy rules enhance stability and transparency for EMU. This finding puts into perspective the current two-pillar policy of the ECB, which makes use of a reference value for M3 money growth and an indicator for inflation expectations. The results of the research are both positive and normative and often cited in the monetary and general economic literature as exemplified in ESB’s Polderparade where Fase scores in the top one or two for many years. It is to be expected that the subprogramme will end in 2002 so that no new targets have been set.
Subprogramme C:
Ellman (in collaboration with Kontorovich, Haverford College, Pennsylvania, USA) shows that the collapse of the USSR was an unintended result of political changes initially intended to strengthen the Soviet system and the USSR. It was not caused by economic factors. This is counterintuitive, since the acute shortages and widespread queues at the end of the Soviet period are widely seen as the cause of the collapse. This research, however, shows that this was not the case. Ellman also explores the social deterioration during the transition. He demonstrates that the optimistic descriptions of the transition process were extremely one-
The Transformation of Europe - Beetsma - Economics
indicators (mortality, morbidity, poverty, nutrition, etc). This work on transition economics can be characterised as positive, and will help us to better understand the potential difficulties associated with the accession of Central and Eastern European countries to the EU in the near future.
Self-evaluation:
Although the Programme has generated results that are both of scientific interest and of policy relevance, there is also scope for further improvement. The productivity (in terms of publications and in terms of supervision of Ph.D students) is somewhat unbalanced across the regular staff members of the programme. The new appointments recently made (or expected to be made) are one way in which we try to address the issue. We also intend to monitor the quality of the Programme more closely, thereby trying to increase further the average quality of the journals that we publish in.