Editorial
Reports
Calendar of Monetary and Economic Highlights
Economic Outlook for Austria from 2001 to 2003 (Spring 2001)
Money and Credit in the First Quarter of 2001
Balance of Payments in the Year 2000
Studies
“The New Framework for Fiscal Policy”
Fiscal Policy Design in the EU
With the transition to Stage Three of Economic and Monetary Union (EMU) at the beginning of 1999, the economic policy framework in Europe underwent fundamental changes. Contrary to monetary policy, fiscal policy remained a matter of national responsibility in EMU, but the necessary interaction among the economic policies of EMU Member States inevitably called for enhancing economic coordination. For a comprehensive analysis of economic policy in EMU, it is therefore indispensable to assess the fiscal policies that have been defined at a European level. Fiscal coordination in the EU started to emerge with the Maastricht criteria and has since been refined by the Stability and Growth Pact and the notions of sustainability and quality of public finances. In this process, ever wider areas of fiscal policy have been included in the move toward more coordination, and national fiscal policymakers have consequently had their leeway restricted by European requirements.
Measures and Strategies for Budget Consolidation in EU Member States
The Member States of the EU have undertaken to avoid unsustainable government budgetary positions and to ensure a smooth macroeconomic policy mix in order to promote sustainable growth and employment trends and secure monetary stability in EMU. The common European monetary policy implies the need for greater and, more important still, binding coordination of fiscal policy, which has generally remained a national responsibility. By signing the Stability and Growth Pact, the Member States of EMU committed themselves to keeping their government budget positions close to balance or in surplus. The provisions of the Maastricht Treaty and the Stability and Growth Pact limit the ability of national fiscal policy to serve as a shock absorber in the event of asymmetrical shocks, above all during consolidation phases. Nearly all EU member countries felt compelled to take stringent consolidation measures, first to fulfill the fiscal criteria of the Maastricht Treaty and after 1997 to meet the requirements laid out under the Stability and Growth Pact. The study provides a presentation of the consolidation strategies the individual countries resorted to.
Distributive Aspects of Economic Policy in EMU − An Analysis from an Employee Perspective
Although distributive policy problems in the EU Member States (high unemployment, uneven income distribution, precarious jobs, poverty, gender inequality) have partly worsened over the past two decades, such issues do not rank among the key economic policy objectives of the EU. This study examines to what extent the EU’s economic policy approach taken in the Broad Economic Policy Guidelines (BEPG) is suited to resolve distributive policy problems, with efforts in this area biscally thwarted by the asymmetric economic policy conditions, by a monetary policy which is focused on price stability and the mandate of an autonomous central bank, and by the growing emphasis on fiscal discipline. The gradual tightening of the latter has reduced national policymakers’ leeway in taking redistributive measures. The study therefore suggests a macroeconomic policy course that provides the basis for a cooperative monetary policy and an expansionary fiscal policy.
Problems Relating to the Taxation of Cross-Border Capital Income
The liberalization of short-term capital transactions and the progress in information and communications technology have helped considerably reduce transaction costs, above all of cross-border capital flows aimed at short-term yield maximization, and have hence enhanced the mobility of capital. Higher capital mobility limits the autonomy of national tax policy. The liberalization of capital transactions creates scope for exploiting welfare gains generated by the efficient global allocation of capital. However, tax-induced investment decisions may result in an inefficient allocation of capital at the international level, and thus give rise to welfare costs at the global level.
Cross-border interest and dividend income is basically taxed according to the residence principle of taxation. The broad application and enforcement of the residence principle implies not just a globally efficient allocation of the factor capital, but also continued latitude for national tax policy and the maintenance of the ability-to-pay principle as the cornerstone of a comprehensive income taxation. As there are problems in enforcing the residence principle, some mode of cooperation between states will be imperative to prevent an erosion of the tax base of capital income taxation while at the same time maintaining this international taxation principle in an environment characterized by increasing capital mobility. Business taxation de facto follows the source principle of taxation, which basically encourages strategical tax policy. Tax competition not only curtails the individual countries’ tax policy autonomy, it also has far-reaching effects on the distribution of the tax burden across the different income categories within the individual jurisdictions and hence probably even threatens to jeopardize the welfare state.
Austria’s Sovereign Debt Management Against the Background of Euro Area Financial Markets
The combination of financing instruments in sovereign debt management determines the financial obligations of the government; at the same time, the government’s financial operations exert a major influence on a country’s bond markets. Whereas the objectives of debt management are fairly uncontroversial from a fiscal perspective and are characterized by sustainable cost minimization, the contribution of debt management to the economic policy of a country is subject to debate. Moreover, under the EMU framework, the macroeconomic goals of public debt management must be defined not just for individual countries but also for the euro area as a whole. In Austria, debt management operations have been conducted by a separate organizational entity since 1993. This organization endeavors to manage the public sector’s debt portfolio as cost-efficiently as possible and, by deliberately incurring some (limited) risk, to contain the cost of financing at a level no higher than that of Austria’s large European neighbors despite Austria’s comparatively lower liquidity. Macroeconomic aspects also play a role in debt management operations, as efficient liability and risk management aims to keep market, refinancing, liquidity, credit and operational risks low. The implementation of EMU has noticeably expanded the circle of investors and the financing options for Austria’s debt management; it has also stepped up competition between sovereign issuers in the euro area markedly.
Cyclically Adjusted Budgetary Balances for Austria
Economic and Monetary Union has entailed a forward-looking assessment of all Member States’ fiscal policies within the framework of the convergence and stability programs. In evaluating the countries’ medium-term budgetary targets and their fulfillment, the European Commission attaches particular attention to the cyclically dependent, or cyclical, budget component. The OeNB calculates the cyclical component of the general government budget using a three-step method. First, the Hodrick-Prescott filter is applied to compute the cyclical deviation of the tax and expenditure bases from the long-term trend. Second, the independently estimated elasticities of the tax and expenditure bases are linked with the fluctuations of the underlying indicator and, then, also with the respective budget item. Eventually, the cyclical components of all cyclically dependent budget items are added. The cyclical position of the general government budget is forward-looking because the underlying tax and expenditure indicators are based on the OeNB forecast.
Studies
Economic Aspects of the Euro Cash Changeover in Austria
The introduction of euro banknotes and coins marks the last step toward completing Economic and Monetary Union. The costs involved in the changeover must be considered as an investment in the European monetary infrastructure, an investment that contributes to the long-term growth potential. The first two years of EMU were marked by impressive macroeconomic successes. In the run-up to the final transition to the euro, the following facts and phenomena will be the focus of attention: The introduction of the euro not only means replacing one currency by another (under the motto: “new money, same value“), but it is also the tangible manifestation of how EMU has contributed to the emergence of a new European monetary constitution. In the short run, the changeover may also have an impact on currency in circulation and Austrians’ savings and investment behavior. Market and administrative mechanisms have been put in place to prevent price hikes; still, increases in prices cannot be ruled out altogether. One-time price effects might occur before, during or after the actual transition period. From a monetary point of view, it is vital that if the signaling function of relative prices is affected, the impact must be slight and of a short duration, the price effects must remain small and not give rise to inflation, and monetary policymakers must carefully analyze possible implications for monetary (sub)aggregates.
Updating the Calculation of the Indicator for the Competitiveness of Austria’s Economy
Despite the single currency, the national price and cost competitiveness of the EMU Member States will continue to be determined to a considerable extent by the varying trends in prices and costs from one country to the next within the euro area. As a consequence, in order to evaluate national competitiveness it is indispensable that competition indices be calculated based on comprehensive national foreign trade matrices representing the transactions in goods and services not only with the relevant trade partners outside EMU, but also within the euro area. Austria’s newly calculated competition indices for recording the price and exchange rate effects relevant to competition are based − particularly regarding manufactured goods and tourism − for the first time on a highly differentiated depiction of Austria’s current foreign trade structure broken down into destination and competitor countries. The most remarkable feature is the strong nominal effective appreciation of the Austrian schilling since 1993, which the previous calculation did not reflect. Looking at the development of the real effective competitiveness index during the same period, however, reveals a completely different picture. The distinctly larger discrepancy between the nominal effective and real effective developments makes the inequality of the price trend between Austria and the average of its trade partners much more obvious than in the previous calculation.
The Single Financial Market: Two Years into EMU-Results
of the 29th Economics Conference of the Oesterreichische Nationalbank The 29th Economics Conference of the Oesterreichische Nationalbank (OeNB) was devoted to examining the effects of the euro on the European financial system. The discussion centered on financial market, banking system and financial market supervision developments. It was found that the introduction of the euro not only triggered far-reaching structural changes on Europe’s financial markets but also had an impact on banks’ financing function. On the whole, the integration of European financial markets should markedly improve their functioning and should thus help to sustainably enhance Europe’s economic framework conditions. Many speakers also pointed out that Economic and Monetary Union (EMU) was not the only driving force behind the changes; in the past years deregulation and technological progress have also permanently altered the general environment in which the financial sector operates. Market participants, central banks and governments have an intrinsic interest in keeping financial market supervision efficient, so that the system is capable of guaranteeing financial market stability and of nipping signs of crisis in the bud. The conference clearly stressed how important it is for central banks to be involved in financial market supervision.