European Political Economy

The German automotive sector’s strong global position is one of the country’s greatest economic success stories. In 2018, two out of the three top global automakers achieving the highest sales volumes originated from Germany, and 80% of all premium class cars produced were German brands. Therefore, it is not surprising that the automotive sector was the key driving force of the economy that helped the country recover so quickly from the global financial crisis and achieve the position of the EU’s unquestioned leader.

However, dark clouds are gathering over the automotive sector today. The new era in international relations, where politics and trade are filled with tension, is having an especially strongly impact on the system based on global supply chains built by the German automotive industry. German carmakers’ managers are also concerned about the vision of autonomous electric cars that may lead to the ruin of the traditional model of automobile industry based on the combustion engine.

This paper analyses the causes of the crisis in the German automotive industry and lists its potential consequences for Central Europe.

This is a tale of two monetary theories: the Metallist (M) and the Chartalist (C). It starts with Charles Goodhart's paper: ''The two concepts of money'' (first published in this Journal, vol. 14, 1998), and is continued with commentaries on, and developments of, the ideas set out therein. The authors are sympathetic to C theory, but what gives the book an interesting twist is its focus on the titular ''Euro'', which owes its existence less to C and more to M theory (in the guise of optimum currency area (OCA) theory). C theory differs from M theory in its account of the origin of money. A number of the book's contributors (Goodhart, Hudson, Helleiner, Wray, Guttmann) draw on historical materials to investigate the origins of money. M theory holds that money emerges from private barter, whereby the most ''saleable'' (Menger) commodity attains the status of money because it reduces transactions costs in exchange. In this account, money's medium-of-exchange function is primary. For C theory, money emerges as a means of payment. Money is introduced by an authority (''the state''), which has the power to impose debts (taxes) on its subjects. The state, on this account, not only imposes debts, but also creates the means (money) with which they are to be paid. By guaranteeing the validity of its money as a means of paying taxes, the state thereby endows money with a value independent of its ''intrinsic'' value. This encourages individuals to use the state's money in private exchange, for they know that money will always be sought after as a means of tax payment and thus, if one possesses money, one is certain that it will be accepted in exchange by others who need it to pay taxes; in this way, the state makes its money ''saleable'' by declaring it to be the means of payment acceptable for paying taxes. In C theory, then, money does not emerge within the market. Furthermore, C theory posits an intimate connection between the fiscal and the monetary policy of the state; indeed, money is a tool of the state's fiscal policy. The near universal coincidence of currency areas and nation-state boundaries is a consequence of this. The Euro experiment breaks this ''one nation-one currency'' rule; for the 12 countries comprising the Eurozone, it is no longer true that the limits of my money are the limits of my state. The relationship between fiscal and monetary policy is attenuated by the Euro; monetary policy lies in the hands of the European Central Bank, whilst member states retain control of their fiscal affairs. This division of labour is far from propitious for fiscal policy: the ECB's main task (as laid down in the Maastricht Treaty) is to maintain price stability; the

The paper analyses the problem of coordinating fiscal and monetary policies within an explicit game theoretic model of the interaction between different policy institutions. Specifically, the question is considered under (i) different institutional arrangements, (ii) different kinds of reaction of the two authorities, and (iii) different macroeconomic frameworks. The implications for inflation and output as well as the gains from cooperative policy decisions are considered.

This paper estimates two models of wage and employment determination using time-series data for the Swedish construction sector: the monopoly union model and the model of ellicient bargaining. The major purpose is to examine whether the models provide a theory consistent description of firm technology and union objectives. This gives a natural framework for model selection as the models are not nested. Two versions of the efficient bargaining model are estimated. The first version is based on the assumption that the bargaining power of the union is constant over time, while we in the second version assume that the bargaining power develops with unemployment and labour market characteristics according to the logit distribution. The results from the estimation imply that the monopoly union model describes both a well defined firm technology and well defined union objectives. In the models of efficient bargaining we will, in both cases, end up at a point close to the labour demand curve, although that point seems to provide a less accurate description of data compared with the solution to the monopoly union model.

Institutions and well-being "The tools that the new economic historian inherited from the economist were not intended to deal with long-run economic change… The economist not only accepted tastes, technology, and population as given, but also he accepted equally the current basic ground rules within which both market and non-market decisions were made. For that matter, the theory did not recognize the possibility of making economic decisions via the political process. Information was assumed to be perfect and costless." Douglas North (1971).

Immigration is a controversial topic in most developed economies. The presence of a redistributive welfare state in all major immigrant host countries creates a margin on which immigration affects native welfare. The primary focus of the paper is whether a large intake of immigrants reduces welfare state effort. It is usually argued that steady increases in immigration lead to public pressure for lower levels of publicly-funded social expenditures. In contrastz to the earlier empirical literature on this topic, we find little evidence in favour of this hypothesis. While immigration does have a relatively modest effect on the welfare state, if anything there is some support for the view that a greater influx of immigrants has lead policy-makers to increase welfare state spending.

Although Peacock and Wiseman's 'displacement effect' is frequently cited as an explanation of increases of government spending over time, the theory has so far been inadequately tested. In this paper four versions of the hypothesis are identified, and earlier empirical tests are reviewed and found deficient. A new test focusing on the time-series behavior of government spending is developed and tested on data for Sweden and the U.K. The test examines upward displacement after World War II, the only social upheaval which, due to data limitations, allows for a test of displacement. Strong evidence against the hypothesis is found. 'the final verdict on the "displacement effect". .. cannot yet be handed down because an appropriate hypothesis has not yet been rigorously formulated and tested.' *I am indebted to Dick Durevall, Douglas Hibbs and Anders Vredin for helpful comments and suggestions. 'See e.g. the extensive survey by Larkey, Stolp and Winer (1981) or more recently Henrekson (1988, 1990).

It is now well known by most researchers studying the environment (both economists and others) that solutions to environmental problems must fully consider their economic implications. Indeed, some knowledge of economics is crucial in order to fully understand most environmental problems and their optimal solutions. Moreover, reaching such solutions require integration of other fields and factors as well, such as psychology and politics, with the economic approach. In this light, these two books provide a feasible introduction to environmental economics, by surveying the main environmental problems within a global and interdisciplinary perspective, and by emphasizing the economic tools, with which these problems should be solved. Both of these books do not require any advanced knowledge of economics, mathematics or environmental science. Rather, they begin by providing some basic relevant economic tools and concepts (e.g., cost-benefit analysis, supply-demand analysis, discounting, game theory), which are then utilized for providing solutions to critical environmental problems (air and water quality, forestry, climate change). These books show non-economists interested in ''saving our planet''-who are sometimes quite reluctant to even think about the possibility that economic concepts and methodology can be used as tools for solving environmental problems-that economics and economists can help improve the environment, if economics is applied to environmental issues. They emphasize that the goal of ''zero health, safety and environmental risk'' is unattainable. Eliminating all kinds of risks to everyone is either ''too costly'' or impossible. Even though both of the books deal with gloomy and dismal problems, they are indeed intentionally written in a ''positive outlook''. Their message is that if policy-makers and other stakeholders wisely use the toolkit economics provides, and the scientific knowledge acquired by other disciplines, we all may have reason to be a bit more positively oriented, when talking about the global environmental reality. Distributed energy is a fine example for the above; much of the pollution produced in the process of generating electricity can be abolished by transferring the basis of the electricity supply industry from one based upon inefficient and polluting giant fossil fuel

Political culture in Switzerland is, to a large extent, influenced by its direct democracy. Compared to purely representative systems, direct democracy leads to a different type of communication among citizens and also between citizens and representatives. The opportunity of deciding for themselves on political issues provides citizens with incentives to collect more information. Because citizens are better informed, politicians have less leeway to pursue their personal interests. As a consequence, public expenditure and public debt are lower when citizens enjoy direct democratic rights. Citizens also feel more responsible for their community: tax evasion is lower in direct than in representative democratic systems. q G. Kirchgassner . 0176-2680r00r$ -see front matter q 2000 Elsevier Science B.V. All rights reserved.

This paper has multiple objectives. I set out linkages of a causal model to portray how globalization influences international terrorist strategies. I also point to methodological and theoretical shortcomings in the literature with respect to the levels of disaggregation at which issues are analyzed, and I evaluate the opportunity-cost argument for assessing international terrorism. The paper and conclusions present perspectives on developments of terrorism in the context of globalization, including the relationship of terror to immigration.

What are the responsibilities and limitations of government? By drawing on insights from normative public finance, public choice, and new political economy, Arye L. Hillman's textbook on public finance provides an engaging, clear, and well-organised introduction to the subject and defines a framework within which answers to this question can be given. The book will not only be of value to undergraduate teaching in public finance, but will also appeal to graduate students, academics and policymakers who want a concise and up-to-date overview of the main ideas and developments in the area.

This essay develops a contemporary analysis of the Global Economic
Diplomacy. The intent is to provide a theoretical and methodological basis
for further understanding of the economic relations and international
negotiations complicated procedure. After contextual and generic discussion on the topic, it approaches the question of the European Union role in Economic Diplomacy and its various levels of power that constitutes its institutional structure and the connection of these with others actors
capable of influencing Brussels decisions. In particular, it’s discussed the
useful capability of the European Union to control and to operate within the
international market. Sequentially, it demonstrates how the theoretical
questions tabled in the first section of the work, apply to real events. In
fact, the last segment focuses on three case studies. All of which are
relatively recent episodes within the Italian political, economic reality. The
first analyses the economic diplomacy from the central state point of view.
The timeframe covered starts with Berlusconi’s period as prime minister in
the early 2000’s to conclude with the events of the subprime financial crisis
in 2008. It’s also highlighted the deep interconnections between political
decisions and economic repercussion both on the civil society as well as on the governmental structures itself. Indeed, all this approach is linked to the effects of the globalised international market in internal affairs.
Sequentially, the final case studies take into consideration a different
perspective of the political and economic circumstances worldwide. Hence, it is intended to analyse and understand deeply how corporations use the
instruments of economic diplomacy to guarantee positive economic
outcomes, influence governments and bend policy decision-making.
Additionally, it reveals the importance of how these companies deal with an
international crisis.
The timeframe of this study is relatively short, however, incredibly dense in
events that transformed the international economic arena thoroughly.
Furthermore, the necessity to tackle the subject of economic diplomacy
from a multi-sectoral perspective generates astonishing curiosity and
enthusiasm because grants space to seek to understand throughout several academic fields. Hence, the attempt to connect, link and intertwine different study areas and academic fields into one very current and important subject was the main challenge of this work.

The theoretical literature on monetary integration has been traditionally dominated by the theory of optimum currency areas (OCA). This analysis has its origins in a debate, during the 1960s, between Mundell, McKinnon and Kenen about the criteria which delineate the optimal domain of a currency area. Between the 1980s and early-1990s the traditional OCA theory was gradually modified in line with new theoretical developments. This new phase led to a “new” OCA theory with very different policy implications compared with the traditional approach. The Treaty of Maastricht symbolized the triumph of the new OCA paradigm. The euro crisis has, instead, represented the revenge of the traditional approach. This paper traces how the optimum currency area theory has evolved over time and uses the OCA theory as a framework within which the Eurozone’s governance, crisis and future are examined. Evidence presented in this paper suggests that the Economic and Monetary Union (EMU) has had asymmetric effects on its member States while it lacks of adequate instruments to deal with them. The fact that the EMU did not constitute an OCA, according to the traditional paradigm, contributed to the crisis of the euro area. The paper leads to the conclusion that, without the introduction of supranational adjustment mechanisms, the Eurozone will not survive its own imperfections.

The event study methodology is used to assess the effects of terrorism on global capital markets. We examine the U.S. capital market's response to 14 terrorist/military attacks dating back to 1915 and global capital markets' response to two recent events-Iraq's invasion of Kuwait in 1990 and the September 11, 2001 terrorist attacks. U.S. capital markets are more resilient than in the past and recover sooner from terrorist attacks than other global capital markets. Evidence suggests that this increased market resilience can be partially explained by a stable banking/financial sector that provides adequate liquidity to promote market stability and minimize panic. D

The chapter argues that the neoliberal doctrine, which emerged in the 1980s as a response to the crisis of the Keynesian economics, has shaped both the IMF's conditionality policy and the European economic governance. The orthodox prescriptions known as the Washington Consensus have formed the " one-size-fits-all approach " applied for several decades by the IMF. The EU has given constitutional strength to the neoliberal principles through the Maastricht Treaty of 1992. However, this chapter also shows that the latest global financial crisis has represented a turning point for the IMF-EU consensus on macroeconomic policy. European policy makers have adopted a hyper-conservative approach by remaining devoted to the economic orthodoxy. The Fund has, instead, engaged itself in an open-minded discussion about the best policies to promote stability and growth which has led IMF researchers to challenge all the main neoliberal tenets.

This volume is made up of a selection of papers originally presented at
the 9th international conference on European integration entitled: “The Europe of Tomorrow: Creative, Digital, Integrated” which was held in Skopje on 15 May 2014. The volume seeks to critically address the potential challenges and opportunities for building a stronger European Union which relies on creativity, innovation and digital technologies and considers how the EU should strengthen its basic political values of freedom, solidarity and integration. As such, the papers were written at a time when the member states of the European Union were slowly emerging from the global economic crisis, which had had such a deep impact upon the EU since 2008.

This paper examines the evolution of inequality in an overlapping generations model where each individual's human capital investment depends on quality of schools. We consider an education regime where the quality of schools is a publicly provided input financed by an income tax. We show that the income gap between the rich and the poor may widen even when the quality of public education is the same across all individuals. Thus, in the short run, public education may not be the great equalizer as intended by its proponents, though it is in the long run. We also show that the effect of taxes on inequality is ambiguous. D

Jack Hirshleifer contributed to investment theory, information economics, conflict, and bioeconomics, clarified the foundations of investment and capital theory in the spirit of Fisher, and made basic contributions to the analysis of covariance risk, gambling and insurance, the Modigliani-Miller Theorem, and public investment through a focus on time, uncertainty and information. He formulated new models of public goods, added to understanding of contest success functions, and explained the paradox of power. He developed a general equilibrium approach to conflict jointly encompassing production, exchange, appropriation and defense. He analyzed the emotions as guarantors of threats and promises, proposed alternatives to the tit-for-tat strategy, considered the bioeconomic causes of war, and investigated the truthful signaling hypothesis. Jack Hirshleifer was a leading scholar and original thinker of the 20 th century. His scientific contributions have left a Nobel Prize unbestowed.

Examination of the origins of the 2008 subprime crisis reveals that what occurred was no accident. All the major parties responsible for the crisis appear to have gained something from what transpired, at least in the short-run. Moreover, it seems to have been as much, if not more, a failure of government and its agencies inclusive of regulators as much as any failure of capitalism. Finally, the apparently arbitrary, if not self-interested, bank bailouts seem to indicate that governments are likely to directing bank policy for some time.

When referring to macroeconomic governance of the EU, we mean the supply side of the economics: all policies that deal with change in inflation, price levels, rate of growth, national income, gross domestic product and unemployment. Therefore, in this paper, we focus on monetary and fiscal policy, as well as on banking supervision. With “asymmetric” structure, we intend to indicate the lack of equality or equivalence in the governance of the different Member States, as well as the heterogeneity of the governance, which does not prevent economic asymmetric shocks in the Union.

This paper studies the endogenous emergence of political regimes, in particular democracy, oligarchy and mass dictatorship, in societies in which productive resources are distributed unequally and institutions do not ensure political commitments. The political regime is shown to depend not only on income levels, but also, in particular, on resource inequality. The main results imply that under any economic environment a distribution of resources exists such that democracy is the political outcome. This distribution is independent of the particular income level if the income share generated by the poor is sufficiently large. On the other hand, there are distributions of resources for which democracy is infeasible in equilibrium regardless of the level of economic development. The model also delivers results on the stability of democracy. Variations in inequality across several dimensions due to unbalanced technological change, immigration or changes in the demographic structure affect the scope for democracy or may even lead to its breakdown. Among other historical examples, the results are consistent with the different political regimes that emerged in Germany after its unification in 1871.

The relationship between democracy and economic growth has been widely debated in the social sciences with contrasting results. We apply a meta-analytical framework surveying 188 studies (2047 models) covering 36 years of research in the field. We also compare the effect of democracy on growth with the effect of human capital on growth in a sub-sample of 111 studies (875 models). Our findings suggest that democracy has a positive and direct effect on economic growth beyond the reach of publication bias, albeit weaker (about one third) of that of human capital. Further, the growth effect of democracy appears to be stronger in more recent papers not surveyed in Doucouliagos & Ulubaşoglu (2008). Finally, we show that the heterogeneity in the reported results is mainly driven by spatial and temporal differences in the samples, indicating that the democracy and growth nexus is not homogeneous across world regions and decades.

This paper examines, first, the conditions under which sustained economic growth and the preservation of environmental quality are compatible and optimal, and, second, in what way economic growth is affected by environmental policy. A general equilibrium one-sector model is developed in which the environment is essential for production and welfare. The growth rate is endogenously determined. Pollution occurs as an inevitable by-product of economic activity but can be reduced by spending a fraction of total output on abatement activities.

This article investigates efficient policies against global warming in the case of multiple greenhouse gases. In a dynamic optimization model conditions for an efficient combination of greenhouse gases are derived. The model is empirically specified and adapted to a simulation approach. By various simulation runs, the economics of greenhouse gas accumulation are illuminated; and in particular, it is shown that a CO9-policy alone would most likely lead to an allocation far from efficiency. These results indicate, that policy measures against global warming should allow for substituting between different greenhouse gases. Such a policy would mainly affect the agricultural sector because livestock and intensive farming techniques contribute significantly to the emission of greenhouse gases. The authors are solely responsible for the contents and distribution of each Kiel Working Paper. Since the series involves manuscripts in a preliminary form, interested readers are requested to direct criticisms and suggestions directly to the authors and to clear any quotations with them.

Hilaire Belloc's The Servile State is often seen as an antisocialist tract arguing that bsocialism is slavery.Q It is typically assumed that an appreciation and defense of free market capitalism, as well as a general dislike of government intervention must motivate the its thesis. Nevertheless The Servile State is an argument against what Belloc saw as unbridled capitalism not collectivism. Belloc defines capitalism to mean a state in which there is a skewed distribution of wealth in society where the majority of people are dispossessed, proletariat, and a minority makes up the capitalist, property owning class. For Belloc capitalism is an inherently unstable system and servile measures arise to ameliorate insecurity and instability. D

At first sight, modern economics and justice seem not to fit together. Whereas the former primarily deals with individual self-interest and extrinsic incentives, the latter deals with other-regardingness and intrinsic social motives. However, recent findings, mainly from the field of experimental economics, reintroduce aspects of justice into economic modeling. Other theories, evolutionary models for instance, take up the key findings and apply the economic rationale in order to find out why human traits which apparently run counter to individual selfinterest may have survived. In this introductory note we date this discussion back to the days of Adam Smith and argue that he already set the basis for such a discussion. Apparently, Smith was well aware that principles of justice and the market may, at times, be contradictory. However, he also found that both served a common purpose, or so we will argue. We further aim at bringing together Smith's classical position with recent ideas, for instance Binmore's theory of justice, and see whether the one can be fruitful for the other.

The paper explores the determinants of foreign direct investment (FDI) in Sudan over the period (1970–2010). The study considers the market size, inflation rate, exchange rate, indirect taxes, trade openness, and investment incentive policy as factors influencing FDI. The study uses the cointegration and error-correction techniques to identify the short- and long-run dynamics of the FDI determinants. The Johansen cointegration test statistics indentify four cointegrating relations among the series, which implies an existence of long-run relationship among the FDI determinants. The results of the long-run FDI equation indicate that FDI flows in Sudan are influenced by the market size, inflation rate, exchange rate, and investment incentive policy. The error-correction term suggests that approximately 17% of total disequilibrium in FDI flows was being corrected  each year. Moreover, Granger causality results show that there is a unidirectional causality running from each of the exchange rate, investment incentive policy, and the market size to FDI.