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Euro – How Big a Difference: Finland and Sweden in Search of Macro Stability

Vesa Vihriälä — Mon, 04 Mar 2013 12:29:32 +0000

Abstract: The euro crisis has rekindled questions about the advantages and disadvantages of membership in the European Monetary Union. In the Northern periphery of the EU, the different monetary regime choices of Finland and Sweden have created a particularly interesting testing ground for the benefits of the EMU. The average growth rates were rather similar before the Great Recession that started in the autumn of 2009, while Sweden has grown faster since that. In terms of price stability Sweden has fared somewhat better than Finland in the EMU period. We assess the effects of the regime choice by simulating the behaviour of the Swedish economy with National Institute’s Global Econometric Model (NiGEM) on the assumption that Sweden had joined the EMU in 1999. The simulation exercise suggests that the independent monetary regime reduced the impact of the global shock on Sweden. The different monetary regimes cannot, however, explain the growth gap between Sweden and Finland anymore in 2012. Other factors, such as the decline of the Nokia cluster, are needed for that. As a whole, our results suggest that the different choices with regard to the EMU have not affected the macroeconomic outcomes very much.

How to Restore Sustainability of the Euro?

admin — Wed, 21 Sep 2011 11:00:00 +0000

We reassess the result of unsustainability of the euro with respect to inflation differentials claimed by Wickens (2007) by specifying an open-economy version of a two-region New Keynesian model for EMU and demonstrate that the result by Wickens does not hold in general. We are able to derive a result that the model is determinate for a wide range of policy rules so that the sustainability of the euro area and the member countries is reached over time with respect to supply and demand shocks and emerged imbalances in price levels and competitiveness. We then enlarge the numerical analysis to consider EMU and sustainability in the case, prevailing currently, where a high debt country should both restore its competitiveness and its fiscal balance, and the policies re-quired from the single monetary policy and the national fiscal policies. Strong fiscal consolidation and far-reaching successful structural reforms are needed to reach sustainability in the sense that emerged imbalances in competitiveness and price levels and the threat of ever mounting debt levels could be eliminated over the medium run. We also illustrate how the current deflationary adjustment involves a major polarisation in economic developments within the euro area.

Should Sweden Join the EMU? An Analysis of General Equilibrium Effects through Trade

admin — Wed, 13 Apr 2011 11:00:00 +0000

The paper considers whether Sweden should join the EMU as based on general equilibrium (GE) effects through reduced trade barriers linked to the single cur-rency. We use in this evaluation a gravity model for trade in Europe derived and estimated in the paper, and the estimates of trade barriers linked to EMU reached in the literature. First, we present an alternative derivation of the gravity equation for foreign trade, which is explicitly based on monopolistic competition in the export markets. In contrast to the usual specification, our model allows for the realistic assumption of asymmetry in mutual trade flows. We then present a straightforward methodology how to carry out a simulation, based on the estimated model, of GE effects related to a change in a trade barrier. Numeri-cally, we apply this to analyse the effects of a possible Swedish entrance into EMU. The effects are quite clearly in favour of EMU enlargement, and do not indicate a trade diver-sion effect either for the incumbent EMU countries or the rest of the European countries. However, a stochastic simulation of the effects reveals that there is a substantial uncer-tainty related to the effects of such a change in policies.

Tax/benefit Systems and Growth Potential of the EU

admin — Thu, 14 Feb 2008 11:00:00 +0000

The EU has ambitious goals in terms of economic performance. The goals are to be reached in combination with social cohesion and sustainable development in terms of environment. The key economic policy instruments to be used by the EU member states are comprised of taxes and benefits. The economic and political framework for carrying out measures in this field is currently delineated, both encouraged and constrained, by factors such as ageing, globalisation and more intense international system competition in tax and social policies.

The aim of the project Tax/benefit systems and potential growth of the EU – TAXBEN (SCS8-CT-2004-502639), as outlined in SSP Priority 8 Topic 3.1. Task 4, has been to carry out an in-depth analysis of tax/benefit policies in five broad themes, where these policies play a crucial role in terms of the key EU goals : Employment; Corporate taxes under tax competition; Productivity growth and convergence; Macroeconomic policies under a single monetary policy; and Environment and climate change. The project was carried out by seven European economic policy research institutes within the ENEPRI (European Network of Economic Policy Research Institutes) network.

The project team has used many novel approaches, especially in building new tools that rely on the approach of general equilibrium models so that both the direct and indirect effects of taxation can be analysed. Also new applications of existing large-scale multi-country models were carried out to evaluate the impact of tax policies. In addition, recourse was taken to econometric estimation of the relationships between key economic target variables, on the one hand, and tax/benefit and other fiscal policies and other labour market indicators, on the other, using large international data sets. A number of theoretical approaches on economic policies under the single currency were carried out, too. The analysis covered the EU-15 countries, the New Member States, in some cases other OECD countries as well, and some research efforts made had a global approach to policy making.

Altogether, the projects output was 24 working papers in the five Work packages, and five seminars held, in addition to the Final Conference. The project delivered, on the one hand, a large number of research insights on actual behaviour related to tax/benefit systems and, on the other hand, reached conclusions which should be taken into account while considering policy-making in, and reforms related to, tax/benefit policies in the EU.

The projects web site at www.taxben.org provides detailed information on the whole output and events arranged within the project. Contact person is Kari E.O. Alho : Kari.Alho@etla.fi, scientific co-ordinator of TAXBEN.

Stabilization Inside and Outside EMU

admin — Fri, 27 Sep 2002 11:00:00 +0000

Implications of EMU on Industrial relations – The Country Report on Finland

admin — Sat, 17 Aug 2002 11:00:00 +0000

Fiscal Policy Co-ordination, Imperfect Labour Markets, and Monetary Union

Ville Kaitila — Mon, 25 Mar 2002 11:00:00 +0000

Economic Policy in EMU

admin — Sat, 12 Jan 2002 11:00:00 +0000

Fiscal Policy, Automatic Stabilisers and Policy Coordination in EMU

admin — Thu, 21 Dec 2000 11:00:00 +0000