BALCEROWICZ ON EUROPE'S FISCAL STABILITY

CED: Recently, Polish Finance Minister Jacek Rostowski stated that the public debt problems besetting countries like Greece were a bigger danger than the financial crisis that threatened Central Europe last year. How did a debt crisis in Greece – a nation of 10 million on the periphery of Europe – come to pose a threat to the stability of the entire Euro-Zone?

Prof. Balcerowicz: There is a question as to whether Greece poses a threat or not, given the small size of its economy relative to the Euro-Zone. Greece would pose a problem if larger countries like Spain or Italy also had debt problems, so one should focus on these countries. The more these countries present credible fiscal consolidation programs, the more they lessen fears of economic contagion or negative spillover.

So far, the problem with the Euro-Zone has been that larger countries like Germany or France were culpable of first violating the Stability and Growth Pact, which is a fiscal constitution of the Euro-Zone, and then getting it modified. The Stability and Growth Pact should be taken seriously, especially by the larger members of the Euro-Zone.

CED: In a new report, you examine the different types of sovereign debt crises and note that last year’s request to the IMF by Hungary and Latvia was not as controversial for the EU as the initial reaction to a request by Greece. Why did Greece encounter so much resistance at first?

Prof. Balcerowicz: I don’t see any rational economic grounds for this double standard. First of all, the European Union does not have the formal power, legally speaking, to prohibit Euro-Zone and non-Euro-Zone members from going to the IMF. To my knowledge, there was not much discussion about Latvia or Hungary going to the IMF for assistance. But as we can see, there was quite a lot of heated debate regarding Greece seeking assistance from the IMF for conditional lending.

If there aren’t any rational economic grounds for this sort of differentiation, there must have been some prestige or political considerations behind it. On economic grounds, if Latvia and Hungary found it advisable to use IMF conditional assistance, why not Greece? Furthermore, the European Union does not have ready institutions to deal with these sorts of problems. Given this weakness, at the moment, the IMF is technically the most competent.

CED: If the EU bails out the Greeks, it risks creating a moral hazard for profligacy in other “Club Med” economies. If it stands back and allows Greece to fail, it risks unraveling of the euro. Have these been the two options facing the EU?

Prof. Balcerowicz: There are several options.

As I mentioned, Greece can turn to the IMF for conditional assistance and implement structural reform programs. The latter is absolutely fundamental so that the Greek government introduces necessary macroeconomic adjustments and sector reforms. Look at Ireland, Latvia and Hungary, which also face huge problems. At least until recently, after these countries introduced or announced credible adjustment programs, markets stopped worrying. This is the solution for Greece as well. The Greeks should introduce the appropriate adjustments and structural reform programs.

CED: Greece was probably not alone in the use of complex derivatives and other instruments to finance a bloated state budget, raising concerns that other EU Member States could also be hiding off-balance sheet debt. How can Brussels and European finance ministers address this issue without further undermining confidence in the euro?

Prof. Balcerowicz: Even if there are some skeletons, I don’t think they are that significant. I do think that one of the necessary conditions for decreasing the size and impact of future debt problems is credible accounting. Companies should not be the only ones to eliminate Enron-type accounting rules – but governments should too. This should also be required of the United States, since honest accounting rules are fundamental to identifying problems. Second, I would consider not only explicitly – but also implicitly – the full disclosure of public debts, including a government’s pension and medical liabilities. The public should have a full picture of the debt.

CED: Does the Greek crisis show, as some economists have argued, that it is not possible to manage a single currency area with a unified monetary policy and separate fiscal practices? How should the EU address this problem?

Prof. Balcerowicz: The euro, on the whole, has been a huge success, as strong as the German mark and ensuring low interest rates. The European Central Bank has turned out to be a very credible institution. Indeed, the euro is still stronger than the dollar. The debt problems which we see in Greece in no way undermine these achievements. Above all, the key is fiscal discipline.

But the conditions for the functioning of the Euro-Zone should be taken seriously.

The Stability and Growth Pact should be enforced and perhaps strengthened. In their own interests, the euro’s respective countries should implement a more disciplined fiscal policy. This is the main conclusion from the crisis. Another is that, if individual Euro-Zone members can no longer use monetary policy as a shock absorber, and they don’t have the freedom to fluctuate the rate of exchange, then they need other mechanisms to compensate for what they’ve lost. And the most important of these mechanisms is the flexibility of the economy – free markets and especially labor markets. So the second condition for the proper functioning of the Euro-Zone is to implement reforms to balance various rigidities so that the economy can better adjust to shocks.

CED: Both healthy Central European economies like Poland, now discouraged by the austerity measures facing Greece, and countries like Romania and Bulgaria, which share many of the same problems as Greece – corruption, creative bookkeeping, tax evasion and an outsized public sector payroll – are prospective Euro-Zone members. How does the Greek crisis affect their prospects? Should the economically healthy countries still want to join?

Prof. Balcerowicz: I think there are differences between Bulgaria, Romania and Greece. My guess is that the size of the public sector is not overextended in Bulgaria and Romania like it is in Greece. In Bulgaria and Romania, for example, public sector employees do not enjoy the extensive privileges of their Greek counterparts.

Second, my impression is that the population in Romania and Bulgaria, and certainly in Poland, enjoys a greater free market spirit than in Greece. This has to change. In Central and Eastern Europe, one finds fewer true believers in Socialism than in some Western European countries.

Now, I don’t think that, since some Euro-Zone countries turned out to be fiscally undisciplined, this fundamentally changes the value of the Euro-Zone itself. For countries like Poland, Hungary or Romania, their trade is mainly with Euro-Zone members like Germany, France, Italy, Spain and the Netherlands. Adopting the same currency as their main trading partners would give some boost to these countries through increased competition and greater price transparency. So I do not think that what happened to Greece undermines the rationale behind the Euro-Zone. What happened to Greece underlines the importance of fiscal discipline.

"In Poland we need more arguments." [L. Balcerowicz, Wyborcza, 19-20 February 2011]

Leszek Balcerowicz is a Polish economist, the former chairman of the National Bank of Poland and Deputy Prime Minister in Tadeusz Mazowiecki's government. He is famous for implementing the Polish economic transformation program in the 1990s, a shock therapy commonly referred to as theBalcerowicz Plan.

Biography

In 1970 he graduated with distinction from the Foreign Trade faculty of the Central School of Planning and Statistics in Warsaw (now the Warsaw School of Economics). Balcerowicz received hisMBA from St. John's University in New York, in 1974 and doctorate from the Warsaw School of Economics in 1975.

He was a member of the Polish communist party (Polish United Workers' Party) from 1969 until the declaration of martial law in Poland, in 1981. In the late 1970s he participated in an economic-advisory team associated with the prime minister of People's Republic of Poland. In 1978-1980 he worked at Institute of Marxism-Leninism. Later he became an economics expert in the independenttrade union Solidarity, and was forced to leave the communist party.

The Plan:

On the plan consisted of 10 laws passed by parliament in December and signed by President Jaruzelski, 31 December 1989:

1. Act on the financial management of state enterprises - removed the guarantee of the existence of all state enterprises regardless of their financial performance and manufacturing efficiency, allowed the conduct of insolvency proceedings against businesses unprofitable.
2. The Law on banking law - prohibited the financing of the budget deficit by the central bank , prevented the unrestricted emission of money without coverage.
3. Act on lending - credit preferences abolished state-owned enterprises by linking the interest rate with inflation, changing the conditions of the agreements previously concluded fixed-rate loan.
4. Law on tax on wage growth - used the already introduced five years earlier popiwek as a dramatic tool for limiting the growth of nominal wages in enterprises in relation to the actual price increases.
5. Act on the new principles of taxation - to codify the rules on paying taxes on all economic sectors.
6. Act on economic activity by foreign investors - that imposes an obligation on foreign firms to sell you foreign currency at a fixed by the central bank of course, exempted companies with foreign capital from paying EPIT, announced the possibility of export earningsabroad.
7. Law on Foreign Exchange - introduced the convertibility of gold inside, liquidated the state monopoly on foreign trade , and undertook to re-sell the company earned foreign exchange to the state.
8. Law on Customs Law - to codify the rules clenia imported goods for all operators .
9. Employment Law - changed the rules of operation of employment agencies.
10. Act on special conditions of firing workers - provided protection laid off from work (especially in the case of collective redundancies), guaranteed financial clearance and introduced periodic unemployment .

Using the news

Read- High tax rate harms UK economy :

Good for....:

a. incentives to work

b. brain drain

c. Laffer curve

d. elasticities

e. labour mobility

f. tax evasion vs tax avoidance

Read: Greece to speed up cost cutting

Good for discussing:

a. fiscal austerity

b. Eurozone debt crisis

Read- UK international competitives falls

Good for discussing factors that affect international competitiveness on the A2 course

Read- Childcare costs in UK soar :

Good for ideas on:

a. child poverty

b. labour market immobility

c. supply side policies

Read; - Why is US debt so high? (1) ; (2)

Read- Swiss franc intervention

Good for:

a. Currency wars for 2011-2012 have started early this academic year - protectionism

b. beggar thy neighbour policies

LSE Lectures

LSE Lectures - visit here for videos

Look for the December lecture by Raj Patel.

two reasons:

a. it's a clear and well thought through lecture

b. Because of this.....

How the Conservatives can help you pass your A level

From The Conservatives' website:

"At the end of the Parliament, you will be able to use these benchmarks to hold your government to account over whether our economy is more stable, more balanced and more competitive.

We've set them out in detail on our website so you can see exactly what we're proposing. Then, as you have already done with David on our NHS and education policies, you can ask me any question about our plans for economic growth.

You can also vote on any of the questions that have been submitted, so that next week I'll be able to answer the most popular questions in a live webcast."

So, ask George ANY QUESTION about their plans for economic growth....of course you may not get an answer....unless people vote.

The Demand Curve

Is it true or false to say that Demand 2 is elastic and Demand 1 is inelastic?







It is false - but why?

The Supply Curve

On the left we see a supply curve.

As you can see, the supply curve goes up from left to right.

OK so far?



But.....

As the price rises, there will come a time when a lot of firms join the industry. Surely then the supply curve would flatten out?

Also, as production incrases, firms will get economies of scale - so surely the supply curve will shift to the right?

Thoughts...