Rocznik Instytutu Europy Środkowo-Wschodniej

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Rocznik
Instytutu Europy
Środkowo-Wschodniej
Rok 10 (2012)
Zeszyt 6
Yearbook
of the Institute of East-Central Europe
Volume 10 (2012)
Issue 6
Rada Naukowa | Advisory Board
„Rocznika Instytutu Europy Środkowo-Wschodniej”
Natalia Yakovenko, Adolf Juzwenko, Jūratė Kiaupienė,
Andreas Lawaty, Alexei Miller, Antony Polonsky,
Adam Daniel Rotfeld, Henryk Samsonowicz,
Aleksander Smolar, Oleksiy Tolochko,
Piotr S. Wandycz, Jerzy Wyrozumski
Komitet Redakcyjny | Editorial Board
„Rocznika Instytutu Europy Środkowo-Wschodniej”
Jerzy Kłoczowski | Przewodniczący | Editor-In-Chief,
Mirosław Filipowicz | Zastępca | Vice-Editor,
Anna Paprocka | Sekretarz | Editorial Assistant,
Andrzej Gil,
Hubert Łaszkiewicz,
Tomasz Stępniewski
Rocznik
Instytutu Europy
Środkowo-Wschodniej
Rok 10 (2012)
Zeszyt 6
Yearbook of the Institute of East-Central Europe
Volume 10 (2012)
Issue 6
European
economic integration
and convergence
Edited by
Bartosz Jóźwik & Tomasz Stępniewski
Lublin 2012
The Yearbook
of the Institute of East-Central Europe
is a peer-reviewed journal
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Table of contents
Bartosz Jóźwik, Tomasz Stępniewski
Introduction
7
Papers
Tomasz Grzegorz Grosse
Debate on the cohesion policy during the Euro crisis
11
Józef Bogusław Osoba
Theory of optimum currency areas and monetary integration in the European Union
27
Tomasz Stępniewski
The European Union’s Eastern Partnership: between realism and disillusion
45
Paweł Pasierbiak
Nominal Convergence Criteria. Their significance and fulfilment by the Central
and Eastern European countries with a derogation
59
Bartosz Jóźwik
Economic convergence in the regions of the European Union
Member States of Central and Eastern Europe
79
Bożena Oleszko-Kurzyna
Projected directions of the CAP Reform post 2013 and economic convergence
in the European Union
99
Katarzyna Sołkowicz
Cultural convergence as an element of Cohesion Policy
113
Monika Banaś
Nordic Federation as a state – a challenge for European integration?
129
Aleksandra Dyba
The knowledge-based economy in the Central and Eastern European countries
in view of the World Bank ranking
145
Jesús Sánchez Cotobal
Key factors in the Spanish economic crisis
161
Book Reviews
Henryk Ponikowski
Sławomir I. Bukowski (ed.), Polityka kohezji i konwergencja gospodarcza regionów Polski
oraz krajów Unii Europejskiej. Wybrane zagadnienia [Cohesion Policy and Economic
Convergence in the Regions of Poland and EU Member States. Selected Issues],
Warszawa: Difin, 2011
179
Jarosław Kuśpit
Igor Lyubashenko, Europejska polityka sąsiedztwa Unii Europejskiej wobec państw
Europy Wschodniej [The European Neighbourhood Policy towards the East European States],
Toruń: Dom Wydawniczy DUET, 2012
183
Bartosz Jóźwik
Krzysztof Falkowski, Eufemia Teichmann (eds.), Państwa bałtyckie i Europy Wschodniej.
Reakcja na światowy kryzys gospodarczy i regionalny kryzys gazowy [Baltic
and East European States. Reaction to World Economic Crisis and Regional Gas Crisis],
Warszawa: Oficyna Wydawnicza Szkoły Głównej Handlowej, 2010
187
Wojciech Misterek
Bartosz Jóźwik, Mariusz Sagan (eds.), Rozwój Polski Wschodniej. Ograniczenia i wyzwania
[Development in Eastern Poland. Limitations and Challenges], Warszawa: Difin, 2012
191
Information and Materials
Bartosz Jóźwik
IV Forum Regionalistyczne: Polityka spójności Unii Europejskiej.
Doświadczenia, wnioski i rekomendacje na lata 2014-2020
4th Forum on Regionalism: European Union Cohesion Policy.
Experience, conclusions, and recommendations for 2014-2020
197
Bartosz Jóźwik
Konferencja: Europejska integracja gospodarcza i konwergencja
Conference: European economic integration and convergence
201
About the Authors
205
Introduction
The papers in Issue 6 of The Yearbook of the Institute of East-Central Europe entitled European economic integration and convergence focus on
integration difficulties which mostly arose during the economic crisis.
Examined in the paper by Tomasz Grzegorz Grosse, the role of cohesion policy has begun to be discussed again in the East-Central European countries which are EU Member States. Tomasz Grzegorz Grosse
discusses the future issues of concern relating to this policy that have
emerged in the debate on the economic crisis. The rich countries of the
Eurozone and the United Kingdom seem to have shifted their emphasis to the problems of monetary integration in the debate on the European policy, which is examined by Józef Bogusław Osoba. He criticises
the functioning of the Eurozone and attempts to answer the question
of whether the today’s level of integration is sufficient to maintain the
monetary union consistent and strong enough. Importantly, many of
the problems of the Eurozone have begun to have a direct impact on the
economic condition of the strongest EU economies such as Germany
and France. Tomasz Stępniewski studies another essential issue of European integration, or the Eastern Partnership which as he emphasizes is
becoming an increasingly recognisable sign of European Union’s activities in Eastern Europe.
The present difficulties encountered by the European Union in
East-Central Europe are largely in convergence that is supported by
the cohesion policy. In the current financial perspective, this policy is
to strengthen the European Union’s economic potential to achieve and
maintain its high rate of growth, given any discrepancies since its enlargement in 2004 and 2007. As the effect of cohesion policy, convergence influences conditions for efficient and complete economic and
monetary integration, which has become more difficult since the 20072008 economic crisis. This Yearbook includes several papers on the issues of convergence in the European Union. In the first two papers,
Paweł Pasierbiak and Bartosz Jóźwik consider economic convergence as
nominal convergence and real convergence, respectively. Even though it
can be a tough task, Bożena Oleszko-Kurzyna attempts to evaluate the
8
Bartosz Jóźwik, Tomasz Stępniewski
impact of trade and agricultural policy on economic convergence. She
substantiates that agricultural policy is not insignificant for economic
convergence although the way it was previously implemented seems to
be in practice often detached from the problems defined in the convergence-oriented cohesion policy. One should also remember that convergence can refer not only to economy, which is stressed by Katarzyna
Sołkowicz and Monika Banaś. Finally, the two papers by Aleksandra
Dyba and Jesús Sánchez Cotobal describe the study cases of economic
development in the selected countries of the European Union.
Moreover, this issue of the Yearbook includes the reviews of monographs on the economic convergence of European cohesion policy,
European Union’s neighborhood policy towards the states of Eastern
Europe, economic crisis in the Baltic and East Europe states, and the
development of the Polish Eastern regions in which the European and
Polish institutions responsible for national convergence under the cohesion policy are showing a lively interest. The two conferences on European economic integration and convergence are reported in the final
part of this Yearbook.
This issue of the Yearbook is the result of the collaboration between
the Institute of East-Central Europe and national and international
research centers. We express our gratitude to the Konrad Adenauer
Foundation for their support. Special thanks are due to the authors for
their commitment to writing the papers and reviews. We hope that this
Yearbook will be well received by readers and encourage specialists who
study this issue in continuing their research.
The Editors:
Bartosz Jóźwik and Tomasz Stępniewski
Lublin, December 2012
Papers
Debate on the cohesion policy
during the Euro crisis
Abstract: The Eurozone crisis has exposed the discrepancy between the political positions of central and peripheral states where the largest EU Member States
are favoured. Reflected in reinforcing the role of the strongest EU Member States,
this phenomenon gives rise to two- or multi-speed Europe. Another phenomenon
rooted in the crisis of the single currency refers to the diversification of the status of
the EU borderland. This is of particular importance to a relatively stronger position
of less dynamically developing areas of the Eurozone as compared to the countries
outside it. Such a tendency significantly impacts on the cohesion policy. It was detrimental to the power of the Central European states to negotiate the scope of this
policy for the period after 2013.
Keywords: cohesion policy, Euro crisis, central and peripheral EU Member States
Introduction
The trends in European integration processes reflect a waning spirit of
solidarity between richer and poorer countries accompanied by growing national egoism. This results from the 2008-2012 economic crisis
and the difficulties in managing the enlarged European Union (EU).
However, the most important trait refers to the breakdown of the idea
of forming a supranational political union with a strongly marked European identity of EU inhabitants, and a supreme role of the acquis communautaire and institutions of the European Community over national
authorities. This sentimental approach came to the fore already during
12
the debate on the changes to the EU Treaty in 2002-20071 and was more
clearly voiced as a result of the crisis which hit the Eurozone. Instead,
governments of individual countries increasingly tend to liaise with
a view to making decisions in crucial matters, which significantly weakens the bodies of the European Union, including the European Commission.
A parallel trend consists in introducing changes to the EU policies
which reflect the interests of key Member States rather than the desire
to increase the effectiveness or efficacy of specific segments of European
policies. This clearly evidences rationality asymmetries between the rationality of action (interests) of the most influential EU Member States
and the rationality of the system defined within the European Union.
The way of handling the crisis in the Eurozone is a case in point2. Under
such circumstances, less influential Member States are put at a disadvantage to the detriment of underdeveloped border areas.
The Eurozone crisis has also exposed the discrepancy between the
political positions of central and peripheral states where the largest
EU Member States are favoured. This phenomenon is reflected in EU
decision-making bodies, including those which decide economic matters. Consequently, the role of the strongest Member States is reinforced
and two- or multi-speed Europe can emerge. From Poland’s perspective,
a variable geometry Europe will gradually reduce Poland’s political importance across the EU. Another phenomenon rooted in the crisis of the
single currency involves the diversification of the status of the EU borderland. This is of particular importance to a relatively stronger position
of the less dynamically developing Eurozone areas as compared to the
countries outside this area. For instance, in 2012 the European Council
proposed3 an appointment of a special European budget (known as soli-
1
2
3
More information in: W. Wessels, The Constitutional Treaty – Three Readings from a Fusion Perspective, Journal of Common Market, 2005, Vol. 43, Annual Review, pp. 11-36; P. De
Schoutheete, H. Wallace, The European Council, Research and European Issues, Notre Europe, 2002, No. 19, http://www.notre-europe.asso.fr; P. Ludlow, The European Council and
IGC of December 2003. Why and How?, EuroComment Briefing Note, No. 2.8, Brussels 2004,
pp. 329-339; T.G. Grosse, Hybrydowy ustrój Unii Europejskiej: dwie logiki zmian w projekcie
traktatu konstytucyjnego [Hybrid System of the EU: Two Approaches to Changes to the
Draft Constitution], Analizy natolińskie [Natolin Analyses], 2008, No. 3 (26) http://www.natolin.edu.pl/publikacje_analizy.html [2012-11-29].
T.G. Grosse, Systemowe uwarunkowania kryzysu strefy euro [System-related Conditions of
the Crisis in the Eurozone], [in:] J. Kundera (ed.), Globalizacja, europejska integracja a kryzys
gospodarczy [Globalisation and the European Integration versus the Economic Crisis], Institute of Economic Sciences at the University of Wrocław 2010, pp. 339-364.
Conclusions, 13/14 December 2012, European Council, EUCO 205/12, Brussels 2012, p. 6.
darity mechanisms) which will be spent on structural policy in the least
developing countries of the Eurozone. Such a tendency was detrimental
to the power of Central European states to negotiate the scope of the
cohesion policy for the period after 2013.
1.
Consequences for the future Cohesion Policy
Began in 2007, the crisis has brought to the surface two ways of thinking about the cohesion policy. During the initial period marked by the
expansion of national fiscal programmes, the European Commission
made it easier to take advantage of the European programmes and increased the scope of funding trans-European communication lines and
some investments in the power industry4. The Commission also intended to combine short-term growth-stimulating undertakings with structural reforms understood primarily as strengthening effectiveness and
innovation in business. During the second phase of the crisis, following an unprecedented rise in public debt, EU decision makers focused
mainly on structural reforms to fiscal consolidation in the Member
States and the stability of the single currency system. The EU institutions pointed out the future role of the cohesion policy as an instrument
to strengthen the administrative potential and facilitate the implementation of fiscal reforms5. The issues relating to the improvement of economic structures capable of ensuring economic competitiveness in the
countries and regions of a slower growth rate in particular were of lesser
concern.
As a result of the fiscal crisis in the Member States of the European Monetary Union (EMU), some net taxpayers who contribute to the
EU budget demanded to reduce the funds earmarked for the cohesion
policy. They wanted to reduce their EU membership contributions dur-
4
5
Communication from the Commission to the European Council: A European Economic
Recovery Plan, Commission of the European Communities, COM (2008) 800, Brussels, November 26, 2008. More information in: T.G. Grosse, Władze publiczne wobec kryzysu gospodarczego: przykład działań antykryzysowych podejmowanych w latach 2008-2009 [Public
Authorities and the Economic Crisis: An Example of Anti-Crisis Activities Undertaken in
2008-2009], Myśl Ekonomiczna i Prawna, 2009, No. 2 (25), pp. 57-107.
The EC proposals to reinforce economic governance in Europe, European Commission,
MEMO/10/204, Brussels, May 20, 2010, p. 3.
13
14
ing the period of fiscal consolidation and to ensure that national governments would trim the fat. They also feared that established in spring
2010, the European Financial Stability Facility (later transformed into
permanent European Stability Mechanism [ESM]) to counteract the
crisis could prove insufficient to protect the other Eurozone countries
against insolvency. The total budget of this facility is € 750 billion6.
Originally, these funds were perceived as verbal guarantees to appease
financial markets rather than genuine aid which could increase financial burdens on national budgets7. But with the deteriorated situation
in the Eurozone, the risk of direct costs on the budgets of most of the
Member States has increased. The budget for the cohesion policy, therefore, was reduced as a result of further emergency schemes in the Euro
area. Some economists argue that such a scenario is likely to happen
once more in the event of insolvency of EMU members or their banking sector8.
The main proposals to decrease funds for the cohesion policy were
actually the proposals to limit funds for the poorest EU areas or narrowly understood infrastructural activities. The suggestions to transfer
the core of the cohesion policy, especially the regional policy to national governments have been put forward again. They went hand in hand
with the idea to narrow down the scope of the cohesion policy to goals
of significance for the whole Community, i.e. those that offer an added
value on a European scale. Numerous examples of the ineffectiveness
of the cohesion policy strongly supported this proposal. As suggested,
the situation can possibly be remedied by strengthening the role of market mechanisms which could guarantee more effective utilisation of EU
funds. Another measure to apply market principles and reduce the budget for the cohesion policy was to increase the role of loan facilities to
replace the system of EU funded grants9.
6
7
8
9
Cf.: Press Release. Extraordinary Council Meeting Economic and Financial Affairs, 9596/10
(Presse 108), Brussels, May 9/10, 2010.
Cf.: Statement of an anonymous officer of the European Commission on T. Bielecki,
Zwiększyć euro fundusz ratunkowy czy nie? Niemcy mają dość [To Increase the Euro Solidarity
Fund or Not? The Germans Have Had Enough of It], Gazeta Wyborcza, December 7, 2010.
Ch. Wypłosz, Banking union as a crisis-management tool, [in:] T. Beck (ed.), Banking Union for
Europe. Risk and Challenges, London: CEPR, 2012, pp. 17-23.
J. Hahn, Simplification of Policy Delivery, D.G. Regio, European Commission, Zaragoza, February 19, 2010; Conclusions of the Fifth Report on Economic, Social and Territorial Cohesion:
The Future of Cohesion Policy, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the
Regions and the European Investment Bank, COM (2010) 642 final, Brussels, June 30, 2010,
pp. 7-8.
The catalogue of sanctions for failing to meet fiscal criteria also included disbursements from EU funds. As specified in the Commission’s
proposals10, this referred to the funds for the cohesion policy and common agricultural and fishing policies. If excessive deficits were reported, payments from these funds would be suspended, and a breach of
the Council’s recommendations on relevant adjustments would result
in cancelling the EU obligations in a given year. Simultaneously, the
Commission emphasised that such a loss of funding by a Member State
should not be affected to the detriment of the beneficiaries of EU subsidies. This means that the state budget would be obliged to make relevant disbursements. If adopted, such a solution would certainly make
fiscal consolidation more difficult achieve. Moreover, contrary to the
Commission’s intentions, this would seriously disrupt investment programmes carried out under the cohesion policy.
Another proposal concerned the disbursement of the funds under the cohesion policy depending on the implementation of specific
structural and institutional reforms. The Commission explained11 that
the reforms in question refer the areas directly linked to the cohesion
policy. Their implementation would be a prerequisite for the disbursement of the cohesion funds at the beginning of a given period or during
a review by the Commission to assess how the reforms agreed proceed.
The reform areas in question also cover those that directly involve the
reduction of public spending by introducing the concept of flexicurity,
i.e. a flexible labour market and social security model. Furthermore, the
tasks to be performed would be listed in National Reform Programmes,
a measure to bind the cohesion policy with reinforced mechanisms of
economic governance across the EU and the convergence criteria behind the Stability and Growth Pact.
In short, a number of specific proposals have been made since the
crisis in the Eurozone began. Undoubtedly, they influence the future
cohesion policy. Interestingly enough, these proposals refer not only
to the EMU members but also to the remaining EU countries that are
beneficiaries of the cohesion policy. Most of the proposals are sanctions
designed to discipline fiscal policies of national governments. If these
sanctions were imposed, the economic slowdown might turn into recession and national governments might face certain limitations in active
supporting the competitiveness and growth in the weakest EU regions.
10 Conclusions of the Fifth Report..., pp. 11-12.
11 Cf.: Ibidem, p. 5.
15
16
To accomplish fiscal goals may also cause some problems because the
consolidation of public finance during an economic slump is extremely
difficult to be accepted by the Community and certainly less effective as
compared to a period of an economic boom.
2.
Recent European Commission’s proposals
In October 2011, the European Commission (EC) submitted a package
of projects regulating the future EU cohesion policy. This was the way
the Commission initiated the legislative procedure and the next stage of
the European debate on the post-2013 cohesion policy. This debate is expected to finish in the late 2012 and early 2013 when the said regulations
are accepted. This would be a decisive phase in the discussion about
shaping the future management system and a definitive framework for
financing the cohesion policy.
The discussion is being held at the specific time of the serious Eurozone crisis, just when the pressure to limit EU expenses is growing. Given that there is no collapse of the Eurozone, any financial means allocated for this policy could probably dwindle a little in comparison with
the existing ones. For 2014-2020, the Commission has proposed € 379
billion (€ 347.5 billion was allocated for the current perspective of 20072013)12. Most of the Member States have accepted it as a basis for further
negotiations. Unfortunately, as a result of the pressure exerted by the net
contributors to the EU budget in the autumn of 2012, the amount of the
multiannual financial framework was significantly reduced13. Finally, in
February 201314 the European Council adopted a reduced EU budget by
more than € 73 billion (in relation to the initial Commission’s proposal).
The cohesion policy budget was reduced by 14% during negotiations
to € 325 billion. For example, the funds for the Common Agricultural
12 Amended proposal for a Council regulation laying down the multiannual Framework for the
years 2014-2020, European Commission, COM (2012) 388 final, Brussels 6.7.2012; Polityka
Spójności – Nowoczesna polityka inwestycyjna UE. Główne elementy pakietu 2014-2020 [Cohesion Policy – Modern EU’s Investment Policy. Major Elements of the 2014-2020 Package],
Presentation by H. Jahns, European Commission, November 2011.
13 N. Watt, I. Traynor, EU summit breaks up without agreement over budget, The Guardian, Friday, November 23, 2012, http://www.guardian.co.uk/world/2012/nov/23/eu-summit-breaksup-budget [2012-11-29].
14 Conclusions, 7/8 February 2013, European Council, EUCO 37/13, Brussels 2013.
Policy were reduced by about 2%. At the same time, the budget for the
innovation policy (known as framework programmes) were increased
in the new financial perspective by almost 40% (in comparison to the
2007-2013 period). The recipients of these programmes are primarily
the largest and better developed EU countries. Nevertheless, Poland remains the major financial beneficiary of the cohesion policy because, as
specified in the EC documents, the less developed regions will continue
to be the main recipients of the financial assistance, i.e. about 70% of the
planned resources.
The obligation to relate the new cohesion policy with the Europe
2020 Strategy15 may become an opportunity for Poland, which is manifested in eleven thematic aims that should be present in the current cohesion programmes. They specify the aims related to the development
of entrepreneurship and innovation, competitive economy as well as
the support for companies to join the low carbon economy. As it seems,
Poland should concentrate on those specified priorities in the next UE
budget period because the cohesion policy should promote a sustainable economic development and build a new model of Poland’s competitive economy. As compared to the current one, this new model should
be based less on the prevalence of cheaper production costs. Beneficially, the Commission proposes a greater thematic focus on selected measures taking into account the objectives of the Europe 2020 Strategy on
the one hand and national and regional needs on the other16. This creates a potential focus of the policy objectives discussed in Poland on the
development of the innovative and low carbon economy.
Therefore, it has turned out advantageous to cancel the previous
goals of the 2007-2013 cohesion policy. They classified the EU regions
as better developed because of developing innovation and economic
competitiveness and as the least developed because of investing mainly
in basic infrastructure. Now, the proposal for the main objective of the
cohesion policy involves any investments to promote economic growth
and employment to support all the regions. EC officials, however, still
15 See: Regulation of the European Parliament and of the Council laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion
Fund, the European Agricultural Fund for Rural Development and the European Maritime and
Fisheries Fund covered by the Common Strategic Framework and laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1083/2006, COM (2011) 615 final, Brussels, October
6, 2011, Article 9.
16 Ibidem, Article 16.
17
18
follow the previous trend to classify regions, which is evidenced by the
proposed allocation of resources for various groups of regions under
the European Regional Development Fund (ERDF) for the innovative
economy. More developed regions and the ones known as transitional
(because of its location between the most and least developed ones) are
to receive 80% of the funds for investment in energy efficiency, renewable energy resources, R&D, innovation and competitiveness of small
and medium-sized enterprises. Whereas less developed regions are to
receive about 50% of the funds for the same objectives. Poland should
seek as much financial means for innovative economy as possible regardless of the fact that most projects for this aim are difficult in implementation. Our country should also strive to ensure that not only small
and medium-sized enterprises but also larger ones could receive funds
for these objectives. The proposal might be, for example, that large companies could become beneficiaries of these funds except for those reallocating their economic activity from Western Europe.
As mentioned, the discussion on the 2014-2020 multiannual Community budget shows a strong trend of the net payers to the EU budget to reduce
the EU financing, including the cohesion policy. This tendency is bothering
as it may result in creating under the new cohesion policy such regulations
which will effectively limit the absorption of funds from the EU budget. In
principle, any unused funds could be allocated to finance any other European objectives, especially in the Eurozone Member States or be returned to
national budgets of particular countries.
The introduced more rigorous capping to lower the level of accessible
funds from the current 4 to 2.5%17 of GDP of a given member country
can be one of numerous examples. It is worth recalling that the allocation for Poland is more than 3% of GDP in the current EU budgetary
period (2007-2013). This is a dangerous proposal, regarding the possibility of slower economic growth in Europe.
The concept of more rigorous conditionality to regulate the use of
funds is another example. The literature18 indicates that the trend noticed in the cohesion policy to successively introduce provisions to
improve the quality of spending does not contribute to achieving that
purpose. Bureaucratic difficulties are multiplying and the absorption
17 Ibidem, p. 12.
18 See: J. Bachtler, Administrative Reform and unintended consequences: an assessment of the
EU Cohesion policy audit explosion, Journal of European Public Policy, Vol. 18, 2011, No. 5, pp.
746-765.
of financial resources is being impeded. The latest EC’s regulatory proposals imply much more extensive supervisory procedures, including
reporting. Although substantially justified, the idea of conditionality
allows for the suspension of further payment of European funds if no
progress in achieving project objectives and indicators is made. Undoubtedly, the absorption of EU funds will be hindered under such circumstances.
Macroeconomic conditionality may be another manifestation of the
potential limitation to the absorption of funds19. This solution enables
suspending, wholly or partly, any payments for the sake of the cohesion
policy if a Member State fails to meet the fiscal criteria regulations, e.g.
procedure of the extensive deficit proceeds ineffectively or no compensatory actions are taken to reform public finances. It should be emphasised that the sanctions concerning fiscal criteria should not condition
receiving any assistance under the cohesion policy. The said policy is
potentially the only EU’s supportive instrument to improve economic
competitiveness and growth in the less developed Member States and
regions. Any effective reforms in the public finances sector are possible
only after the economic structure is substantially improved and GDP
grows. Any actions for fiscal consolidation restrict the growth rate and
may cause difficulties in finding public funds necessary for co-financing
any investments under the cohesion policy. Actually, any large investment projects under this policy are more difficult to be managed in Poland due to the risk of surpassing the level of 55% of the public debt
in relation to GDP20. In addition, the Polish Minister for Finance has
imposed on local authorities some restrictions in the case of a deficit,
which hampers any cohesion investments21. All these considerations
and the fact that Poland faces some difficulties in meeting the requirement to reduce the budget deficit in the last period, macroeconomic
conditionality pose a serious risk to the absorption of funds under the
cohesion policy.
19 Regulation of the European Parliament and of the Council laying down common provisions
on..., Article 21.
20 The delay in building the A1 motorway is a good example because the costs could increase
the public debt, see: A. Stefańska, Problemy z prywatnymi drogami [Problems with Private
Roads], Rzeczpospolita, December 10-11, 2011, p. B2.
21 Insofar a deficit targeted at PLN 8 billion per year as for the reduction of the industry sector. P. Skwirowski, Rostowski znów dokręca śrubę samorządom [Rostowski Puts the Screws
on the Local Government Again], Gazeta Wyborcza, December 9, 2011.
19
20
While macroeconomic conditionality should be assessed critically,
introducing a solution that can help any Member States with budgetary difficulties co-finance investment projects is a good idea22. Such assistance reduces co-financing by 10% below the required level. This applies in particular to the countries that receive financial support from
the European Stability Mechanism, intended only for the Eurozone
members. This may facilitate the implementation of the cohesion policy
during a crisis in public finances. This case also illustrates the conflict
between the EC’s proposals. Although some financial facilities are being
implemented, the threats of the totally suspended cohesion policy can
be sensed. Consequently, any criteria for macroeconomic assessment
should not be a condition for receiving any funds from the cohesion
policy.
Another way to limit the amount of funds for less developed regions, including Poland is the proposal to increase credit instruments
under the cohesion policy23. It may lead to an actual reduction of funds.
This is related to the fact that credit procedures are often more complex and demanding than grants because they are controlled by officials
and verified by banks or other institutions. The formula for the application of financial instruments will be primarily regarding all the projects offered to enterprises or those which may bring financial advantages24. This means hampering the absorption of funds, particularly for
entrepreneurship support which is essential for Poland’s development
and stimulation of economic growth. In addition, certain beneficiaries
might be deterred from participating in such projects, especially if there
are simultaneously announced competitions for non-returnable grants.
It should be also remembered that relatively few small and mediumsized enterprises in Poland invest using bank credits. Most frequently,
they use their own resources or non-refundable grants.
The Commission announces25 that the idea of innovative financial instruments will be applied on a wider scale to all types of investments and
by all types of beneficiaries. Such an extension of the instruments could
probably further limit the possibility of using of EU funds. For exam-
on..., Article 22.
23 Ibidem, p. 12; Q & A on the legislative package of EU regional, employment and social policy for
2014-2020, MEMO/11/663, Brussels, November 6, 2011.
on..., p. 10.
25 Ibidem.
ple, rather than finding the required co-financing only, public entities
will have to put all their funds for projects although instalments for the
repayment will spread out over a longer period of time. Such a limitation will be severe, especially in the case of fiscal consolidation, which
reduces the amount of investment resources available from the public
authorities’ budgets.
What should also be highlighted is the risky, from the Polish perspective, proposal of introducing competition mechanisms into the
trans-European transportation instrument, known as the Connecting
Europe Facility. A part of the allocations from the Cohesion Fund, i.e.
€ 10 billion will be earmarked to finance transportation, energy, broadband and digital service projects under this instrument. It constitutes
20% of the total value of the Cohesion Fund. The resources from the
Cohesion Fund will also be subject to the competition procedures although only authorised countries will be probably regarded. Some experts26 claim that Polish entities may encounter serious difficulties in
winning these competitions, given the problems in preparing transportation projects in our country. A similar experience is noticed for other
types of competition procedures in the UE. For example, Polish participants received only € 200 million out of € 53.2 billion offered by Brussels in 2007-2013 under the 7th Framework Programme27. Nonetheless,
in this way the European Commission could gradually move away from
national envelopes to competitions under the cohesion policy. Similarly,
the Commission moves away from grants to instruments which credit
investments only. Both of the cases are detrimental to poorer regions
which are less competitive and have minor investment capacities.
Under the new cohesion policy, the Commission aims at more integrated developmental actions. This idea is valuable as it enables more efficient using of funds to develop a given area. It is also in line with many
experts’ postulates28. The Commission introduces three new initiatives
to integrate management. The first one called local action groups was
26 See: A. Furgalski, Kosztowne pomysły Brukseli na transport w Unii [Brussels’ Expensive Solutions to the EU Transportation], Rzeczpospolita, November 16, 2011; A. Stefańska (2011),
Gorzkie zwycięstwo w sprawie unijnego budżetu [Bitter Victory on the EU Budget], Rzeczpospolita, October 20, 2011.
27 A. Osiecki, Nie sięgamy po dotacje wprost z Brukseli [We do not Apply for Direct Grants
from Brussels], Rzeczpospolita, October 11, 2011.
28 See: T.G. Grosse, Ł. Hardt, Sektorowa czy zintegrowana, czyli o optymalnej strategii rozwoju polskiej wsi [Sectoral or Integrated Optimal Strategy for the Development of the Polish Rural Areas], Fundacja Ewaluacji i Badań Ekonomicznych Pro Oeconomia, Warszawa:
Wydawnictwo Key Text, 2010.
21
22
introduced into the cohesion policy on the basis of good experiences
stemming from the LEADER programme for the development of rural
areas. They are to operate employing local development strategies and
concentrate on a designated subregional territory. They will be probably
used to support rural areas. Importantly, projects under this initiative
may be financed from many EU funds within various operational programme priorities.
The second tool known as integrated territorial investments is to
manage any actions within different priorities or operational programmes in a given area in accordance with urban development strategies or other strategies and territorial pacts. The Commission postulates
at least 5% of the ERDF resources to be addressed to urban development
under integrated territorial investments29. In addition, these actions can
also be financed by the European Social Fund (ESF). Given the role of
urban areas in the regional development, especially in the weakest regions, the Commission’s proposals should be recognized as valuable and
correct. However, in Poland, any resources for this initiative should be
organised under regional programmes rather than, for example, a separate urban programme. It is all about the integration of actions to support cities with the regional development.
The Joint Action Plan is the third integrated measure proposed by
the Commission30. It is intended to facilitate the spending of resources
under the cohesion policy, especially for any actions financed from the
ESF. However, certain management problems may be expected. Centralised management is expected regardless of the fact that any further allocation of funds in this procedure depends on achieving tangible results.
The proposal under this procedure shall be raised by the Member States
and the EC shall decide on it. Consequently, decision-making processes
will be longer, i.e. up to 6 months and thus any current implementation of operational programmes will be hindered. Moreover, Poland has
got actually no specialised institutions to coordinate such a new and
additional procedure. Therefore, besides the existing novel documents,
some operational activities and new officials will be required. The Com-
29 See: Proposal for a Regulation of the European Parliament and of the Council on specific provisions concerning the European Regional Development Fund and the Investment for growth
and jobs goal and repealing Regulation (EC) No 1080/2006, COM (2012) 614 final, Brussels, October 6, 2011, Article 7.
30 See: Regulation of the European Parliament and of the Council laying down common provisions on..., Articles 96-98.
mission’s proposal envisages also the appointment of a steering committee for each of the Joint Action Plans.
Summary and recommendations
The European Commission’s legislative proposals31 have initiated a period of discussions and inventing new solutions to the new EU cohesion policy. It seems that Poland should attempt to combine this policy
with all of the objectives of the Europe 2020 Strategy although priority
should be especially given to the development of innovation, research
and economic competitiveness, and the financing of costs related to
adjusting to the conditions of the EU climate and energy package. The
Commission’s initial proposal sets a minimum level of 50% of the ERDF
for this kind of investments. This seems consistent with the Polish longterm developmental interest. Entrepreneurship support should be addressed mainly to small and medium-sized enterprises and still available to larger ones excluding those that relocate their production from
other Member States.
Any unnecessary bureaucratic barriers need to be removed and
management be facilitated. However, many of the Commission’s proposals actually increase clerical difficulties, including stronger conditionality and surveillance activities. The Joint Action Plan may proceed
in a similar way. Although the Commission’s ideas basically intend to
improve the cohesion policy, they may paradoxically contribute to a reverse effect that can substantially hinder the absorption of supporting
funds. As a result, this would be beneficial for net contributors to the
EU budget.
In June 2012, the European leaders made the commitment to take
action to stimulate economic growth. Although the formally proposed
instruments are to cover the whole EU, they will be probably limited to
the Eurozone. These include the loans granted by the European Investment Bank, the release of investment grade corporate bonds known as
project bonds to finance any infrastructural projects, and the reallocation of any unused funds from the EU cohesion policy. Referring to the
last case, the tightened eligibility rules for implementing this policy, e.g.
in Poland can be expected to increase the pool of funds directed to the
31 The initial proposal adopted on October 6, 2011 was changed by the Commission on March
14, 2012.
23
24
weakest Eurozone countries. This solution is not favourable enough for
Central Europe and other countries outside the Eurozone. Additionally
to creating a separate redistributive measure for the weakest countries
of the Monetary Union (solidarity mechanisms), European policymakers intend to use the money already available in the EU budget also
for development of the Eurozone. Moreover, the projected financial
resources (declared an overstatement of € 120-130 billion) may not be
sufficient, given the scale of collapse in southern Europe. It is difficult
to openly acknowledge that the politicians effectively dealt with the excessive structural differences in the Euro area. In the near future, this
will be a basic problem that could influence the cohesion policy implemented in Central and Eastern European regions.
In this context the idea of macroeconomic conditionality introduced
to the cohesion policy should be assessed critically. It is contrary to the
basic objectives of solidarity within this policy. Gradual transferring
from non-refundable grants to financial instruments under the cohesion policy as well as the distribution of certain funds by Europe-wide
competitions should be assessed similarly. The cohesion policy should
aim at supporting economic development and market competitiveness,
especially in more vulnerable countries and regions. Smaller entrepreneurs from Central and Eastern Europe have limited capabilities to
compete with the best ones and cannot fully take advantage of repayable
credit instruments.
All of the previous examples prove that Polish diplomacy as well
as diplomacy from the other Central and Eastern European countries
should influence the debated regulations so that they could not restrict
the absorption capacity for their beneficiaries.
Winter 2012/2013
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Theory of optimum currency
areas and monetary integration
in the European Union
Abstract: Establishing the Economic and Monetary Union (EMU) with a common currency, i.e. the Euro means the consolidation of all integration processes
within the European Union. The currency integration was accompanied by the process of financial and economic integration to make the entire zone more coherent
economically and organisationally. However, the current financial crisis has demonstrated a number of disadvantages and imperfections of the Eurozone and the
whole EMU in terms of economic integration and convergence. This phenomenon
has been triggered by moving away from the initial assumptions behind creating
the EMU known as an optimum currency area (OCA). Thus, the previous actions
taken by the EMU countries to save the integration of the Eurozone seem to be very
difficult and now the EMU states and the entire EU should take comprehensive and
daring actions in line with the convergence and OCA rules.
Keywords: Economic and Monetary Union, optimum currency area, integration,
economic crisis
Introduction
The European Union is a common economic zone based on integrated
commodity markets, services and production factors as well as the Economic and Monetary Union (EMU) when a common currency was introduced. Usually, currency integration in a given area is accompanied
by financial integration which means the liberalization of capital flows,
harmonization of tax and budget systems, unification of banks and financial institutions, and the integration of capital markets. These phe-
28
nomena are beneficial to the economic and organizational cohesion of
the whole zone. However, the current financial crisis has demonstrated
a range of shortcomings and imperfections both in the Eurozone and
the European Union.
Firstly, this paper attempts to answer the question what has caused
the imperfections of the Eurozone and whether the present degree of
integration within the Eurozone is sufficient to maintain the cohesion
and strength of the EMU as a uniform economic and monetary area in
the face of any socio-economic challenges of the contemporary world.
The author argues here that the root causes of the economic crisis of the
Eurozone involve departing from the rules of currency integration defined in the theory of an optimum currency area (OCA) and the primary rules of convergence. Secondly, he points out that such an area can
be no longer coherent, which shows the current crisis in the Eurozone
if the rules of currency integration while forming an OCA and the convergence rules are violated.
The research methods adopted here involve generally observation of
macroeconomic phenomena, implementation of all features of the crisis
in the EMU and check of the conclusions received so against macroeconomic data. The paper is composed of three subsections. The first subsection briefly outlines the background of the OCA theory; the second
one discusses the EMU integration process in terms of the debt crisis
of its members and the actions taken to counteract its consequences.
The paper ends with several conclusions on the considerations covered.
1.
Theoretical grounds of the economic
integration of the European Economic
and Monetary Union countries
The integration of the countries that are members of the European
Economic and Monetary Union recognised as a currency area with
the highest degree of economic integration should be associated with
an optimum currency area which is a well-known concept in the theory
of international economics. Professor Robert Mundell1, a Nobel Prize
winner in economics, is regarded as its founder. He formulated the op-
1
Professor Robert Mundell won a Nobel Prize in 1999 for his work on the theory of optimum
currency areas which laid a foundation for the common Eurozone – see: R. Mundell, A The-
timum currency area (OCA) theory2 which deals with a cost-benefit
analysis of establishing a currency union. The founders of this theory attempted to answer why floating exchange rates can prove more useful in
some circumstances, whereas fixed exchange rates can do so in others.
They speculated on the necessary features of an economy of a state (or
group of states) so that the benefits from introducing a fixed exchange
rate or a common currency could outstrip the costs of such a decision.
The benefits include the intensification of international trade, reduction
of inflation, and the growth of economic policy credibility; whereas the
costs include resignation from an autonomous monetary policy and any
resultant consequences, i.e. no influence on the competitiveness of their
own export.
This theory holds that the cost of resigning from its own exchange
rate and monetary policies and then joining an OCA is lower for a given country if an OCA economy is hardly vulnerable to financial and
economic shocks, or is symmetric3.
Symmetry appears only if the following phenomena are noticed:
• correlation of business cycles. The more convergent cycles between OCA countries are, the more useful a common monetary
policy created to the benefit of the whole currency union can
be. Also, asymmetric shocks are less possible then. Actually, this
means that a countercyclical policy needs coordination at the level of an entire OCA;
• similarity of inflation rates. Any differences in a price increase
rate between countries may result in a loss of competitiveness in
countries which allow the excessive growth of inflation;
• production diversification. Countries of a diverse export structure are less exposed to a sudden collapse of external demand
which may influence the employment in a member state of
an OCA. The risk of a sudden demand decrease in several or
2
3
ory of Optimum Currency Areas, American Economic Review, November, 4, 1961. Its continuators also include R.J. McKinnon and P.B. Kennen and others.
A definition of an OCA as an area having these features was also introduced. The founders
of this theory claimed that an area of a state or a group of states can be called an OCA if
using a common currency there does not decrease its welfare. Fixed exchange rates are
desirable within this area, whereas floating exchange rates in relation to other zones as
in: J. Borowiec, Unia ekonomiczna i monetarna [Economic and Monetary Union], Wrocław:
Wydawnictwo Akademii Ekonomicznej, 2001, p. 32.
Symmetry was discussed by, e.g. M. Frenkel, C. Nickel, [in:] How Symmetric are the Shocks
Adjustment Dynamics between the Euro Area and Central and Eastern European Countries?,
IMF Working Paper 02/222, 2002, pp. 6-21.
29
30
all export sectors is thus lower. In practice, this means that any
country which belongs to an OCA should have a similar though
diverse structure of its economic system.
Moreover, an economy of an entire OCA (and countries which belong
to it) should be capable of absorbing financial and economic shocks, or
be flexible. This can be proved by:
• wage-price flexibility, i.e. employees of a sector affected by the
shock of lower demand for their products in a given country
should reduce their remuneration expectations. This should result in reduced prices and remuneration as well as an improved
competitive position of this sector;
• mobility of productive factors, i.e. effects of an asymmetric shock
should be less if employees of a shock-affected sector are able to
retrain themselves quickly (intersectional/functional mobility) or
find a job in another place (geographical mobility);
• financial markets integration, i.e. diversification of investments
and capital investment in a whole currency union are conducive
to the stability of income that can be a kind of a buffer against
any negative effects of asymmetric shocks;
• fiscal integration perceived as a common budget should be conducive to income transfer to countries affected by an asymmetric shock. This rule seems to have been misunderstood by some
countries of the Eurozone. In fact, these countries felt a sense of
security for their membership in the Eurozone and the guarantees offered by the stability of a common currency and accompanied by the possibility of transferring financial means from
a common budget even if their public finances showed an excessive deficit and they were running into debts. This was often reinforced by falsifying statistics prior to joining the Eurozone and
during its functioning as it has happened in Greece.
The principal aim of the OCA theory was to elaborate criteria for a successful currency integration process. H. Visser claims that the research
output on optimum currency areas refers to two basic issues, i.e. sustaining both an internal balance, or full employment and an external
balance of the balance of payments after an asymmetric shock4. Briefly,
it is about keeping economic cohesion in such an area.
As a result, the development of the theory of optimum currency
areas was accompanied by a varied pressure on different, necessary to
satisfy conditions of integration within this area. Consequently, a new
OCA theory was formulated. The new theory focused on calculating the
benefits from joining a currency union at assumed costs and evaluation
of country’s capability for this. The symmetry of macroeconomic shocks
was assumed to be a basic criterion of establishing a currency union.
In the beginning, the first authors focused on a real economic sphere
and argued that this should provide a basis to evaluate the optimality of
a currency area. Initiating a discussion about an OCA, R. Mundell focused on some recommendations which were to help avoid asymmetric
demand shocks and thus recognised an internal mobility of production
factors as a critical factor behind a currency area. Under the new OCA
theory, R. McKinnon broadened the concept of optimality by his considerations about the influence of economic openness in a given currency area5. He argued that making exchange rates fixed is more profitable
for open economies. He claimed that a separate currency area is beneficial for full employment and sustaining an external balance if large currency areas are established. Moreover, McKinnon made the OCA theory real because he employed a concept of countries but not economic
regions as Mundell did and claimed that any optimum currency area
should be established as a result of alliance of countries. The optimality
of a currency area in terms of economic openness was also studied by
H. Heller. He considered the role of marginal costs due to adjustment
processes with reference to a size of a region. He argued that a given
country should join a currency area if the costs due to adjustment processes resulting from changes in its income are lower than the costs due
to a change in an exchange rate.
P. Kennen introduced another new criterion for creating the new
OCA theory6, i.e. a level of production diversification in a given area.
This means that the higher this level is, the better the conditions for
making an exchange course fixed are in relation to third countries
4
5
6
H. Visser, A Guide to International Monetary Economics. Exchange Rate Theories, Systems
and Policies, Northampton: Edward Elgar Publishing, Cheltenham, 2004, p. 189.
R. McKinnon, R.G. Schnabl, Synchronized Business Cycles in East Asia and Fluctuations in the
Yen? Dollar Exchange Rate, Hong Kong Institute for Monetary Research, January 22, 2003.
P.B. Kennen, E.E. Meade, Regional Monetary Integration, New York: Cambridge University
Press, 2008.
31
32
and thereby establishing the optimum currency area is more probable.
He said that small countries with their hardly diversified and low-volume production should have a floating exchange rate, or actually their
own national currencies which can enable such a rate. Consequently, their joining the OCA is not discredited though they should aim
at adopting a common currency in the long run. Kennen claims that
production diversification is reflected in a diversified export structure,
which limits terms of trade fluctuations and thus exchange rates fluctuations. Additionally, Kennen postulated to centralise fiscal and monetary authority at a supranational level as a condition necessary to create an optimum currency area. This issue is also discussed by H. Grubel
who adds that under an OCA, countries can remain sovereign in their
foreign and internal policies, e.g. be autonomous in concluding agreements with third countries, adopting the most suitable tax system and
tax rates, setting their government expenditure, setting limits on their
turnover or transfer of production factors.
Some further developments of the new OCA theory focused on
nominal factors such as inflation rate convergence or a level of financial
integration. For example, M. Fleming emphasised that an optimum currency area can be created only by countries of a similar inflation level.
T. Scitovsky and J. Ingram argued that integration in financial markets is
necessary as a determinant of an optimum currency area, besides assuring internal job mobility7. The high level of financial integration could
facilitate a capital flow if a current account appeared to have moved into
deficit. This could help member states avoid a negative demand shock
which would increase an unemployment rate.
In the 1990s, the discussions on the theory of an optimum currency
area, accompanied by increasingly intensive integration in the European Union (Treaty of Maastricht), were highly animated. Above all, it
was stressed again already under the new OCA theory that a currency
union can be successfully set up if political premises besides economic
conditions are satisfied and public support is gained. In addition, a currency union began to be perceived as a possible solution that could be
beneficial for less developed countries and those with higher inflation.
Actually, joining a currency area can be beneficial to the expectations
about inflation and improve international credibility of a given country. Satisfying the criteria formulated by the current OCA theory on
an ex ante basis, which was just a contribution of this new OCA theory,
7
H. Visser, A Guide to..., pp. 192-193.
was not necessarily a decisive factor for joining a monetary union. Under the conditions of the globalising world market and growing integration of economies, a more relevant concept of so-called endogeneity
of the OCA criteria was proposed. This theory assumes that economic
integration and business cycle synchronisation are endogenous processes relative to monetary integration. That is why the countries that
can create a currency union and eliminate an essential barrier for economic and financial integration, i.e. a separate currency, will be capable
of intensifying their trade exchange. As a result, a range of correlation
of business cycles between them will increase, and thus they will better
fulfil the criteria of an optimum currency area on an ex post basis. Retrospectively, this concept seems to be too optimistic.
The new OCA theories focus much on synchronising business cycle
phases. If there no synchronization, the risk of asymmetric shocks occurs8. A. Zielińska-Głębocka notices that the asymmetry of shocks requires a diversified economic policy, which is limited or simply impossible in a currency union. Consequently, higher costs of membership in
a union, especially for less developed countries are obvious9. This synchronization hardly exists in the European Union. Furthermore, A. Bień
claims that the concept of an optimum currency area is difficult to be
defined as a group of countries establish a currency area with a common currency as in the Eurozone or national currencies as in the area
of the whole EU, they are interrelated by mutual fixing exchange rates
when the external convertibility of established currency or interrelated
currencies is based on a floating exchange rate10. Therefore, it is difficult
to confirm that such an area is an OCA for sure. Undoubtedly, the OCA
8
The simplified course of the asymmetric shock is as follows. Let us assume that the EMU
consists of two countries: A and B. Let us assume that country A’s demand decreases, e.g.
due to a decrease in demand on import declared by foreign countries at the cost of commodities from country B. This change in A country results in a production decrease and
unemployment increase. There is a deficit on its current account because automatic stabilizers that operate in an economy make a decrease in income (and expenses) less than
a production decrease. Consequently, export drops faster than import. Symmetrically reverse processes occur in country B as this country experiences an increase in exogenous
demand. Thus, both of the countries suffer from adaptation problems.
9 K. Gawlikowska-Hueckel, A. Zielińska-Głębocka, Integracja europejska. Od jednolitego rynku
do unii walutowej [European Integration. From a Unified Market to a Currency Union], Warszawa: Wydawnictwo C.H. Beck, 2004, p. 252.
10 This author adopts a given region’s capability of better satisfying the needs of its residents
as a criterion for currency area optimality followed by the rules on a currency area in relation to the period prior to its creation. See: A. Bień, Optymalny obszar walutowy. Teoria
i praktyka [Optimum Currency Area. Theory and Practice], Warszawa: PWE, 1988, pp. 16, 17.
33
34
theory was highly modified over time, which was not always good for
the invariability of the criteria that define its inherent rules. Therefore,
the original criteria seem to be the most relevant to define the essence
of an OCA area and rules for joining it. When the EMU was expanded,
although the criteria for joining it were modified, observing these criteria was of little importance. For example, Germany violated the convergence criterion of the 3% GDP deficit reference value over many years
after 1991, which is a well known fact. This country exceeded this deficit
reference value 6 times between 2000 and 2010, i.e. in 2002, 2003, 2004,
2009, and 201011. Surprisingly, the European Commission has imposed
no sanctions on Germany by far although it commenced a procedure of
an excessive deficit against RFN in 2002.
2.
Integration in the EU and debt crisis in the Eurozone
The current global depression has demonstrated a significant lack of
currency and financial cohesion within the economic union established
by the Eurozone countries and other European Union Member States.
This cohesion is perceived as the cohesion of the OCA area. It is about
the following countries of the Eurozone: Belgium, Spain, Portugal, Ireland, Italy, and even France and Greece. Also, the countries from outside the Eurozone like Hungary, Latvia are coping with a serious public financial and debt crisis. Figure 1 shows particular levels of the debt.
The data prove that more than 12 countries of the EMU have a public
debt higher than 60% of their GDP, which means that they, including
the EMU pillar, or Germany’s economy, actually fail to obey the convergence rules. Thus, the question arises whether other members can
be accepted to the Eurozone in the near future under the current rules.
So one must think about whether the present Euroland is a coherent
area in terms of the balanced public finance in each country and the
entire zone regarded as a coherent OCA. Are any activities to improve
its functioning required now, and thus improving its coherence? Can,
therefore, the Eurozone overcome the current crisis and keep its common currency, or the Euro?
11 Data from the Statistisches Jahrbuch for the years referred – Stastistisches Bundesamt,
Wiesbaden.
The debate on the public finance system in the Economic and Monetary Union refers to three issues, i.e. EU budget, especially its significance for implementing the Lisbon Strategy objectives of economic and
employment growth, national budget policies and the rigors imposed by
the provisions of the Treaty of Maastricht and the Stability and Growth
Pact, and importance of a fiscal policy in the EMU. The debate was prior
to, e.g. European Economic Recovery Plan, adopted on November 26,
200812. This plan involved a number of actions to both mitigate the economic recession and support the long-term structural reforms. Under
the budget policy, the plan proposed a counter-cyclical macro-economic response in the form of an immediate budgetary impulse estimated
in total for € 200 milliard (1.5% of the EU’s GDP) of which € 30 milliard
were made up of EU funding. Consequently, this immediate budgetary
impulse was designed to stimulate demand and restore consumer confidence and reduce social costs of the recession. Based on the income
and expense side of the budget, these immediate budgetary impulses
involve extra public expenses, guarantees and credit subventions, financial incentives, reduced social insurance contribution, and reduced
taxes. The actions taken were expected to be: fast so that their effects
could be noticeable just during the economic slowdown but not when
emerging from the recession, temporary to avoid the long-term deterioration of public finance, capable of solving the most urgent economic and social problems, and well-coordinated. Obviously, the actions
taken by individual countries should have referred to their budgetary
situation. If some of them, however, were in excess over the permissible
budgetary deficit reference value of 3% of GDP, such an extraordinary
relaxation of budgetary discipline was still justified under the Stability
and Growth Pact which allowed an excess over the reference value as
a result of “a negative annual GDP volume growth rate or from an accumulated loss of output during a protracted period of very low annual
GDP volume growth”13. Nevertheless, the countries with an excessive
deficit should make an effort to correct it in an average period together
with an improvement of economic situation14.
12 European Commission, A European Economic Recovery Plan, COM (2008) 800 final.
13 Council Regulation (EC) no 1056/2005 of 27 June 2005 amending Regulation (EC) no 1467/97
on speeding up and clarifying the implementation of the excessive deficit procedure, Official Journal of the European Union 174/5 of 7 July 2005.
14 European Commission, Public Finance in EMU – 2009, pp. 13 and 14.
35
36
The need of pursuing a stabilising fiscal policy also results from the
theory of optimum currency areas discussed previously15. As in Robert
Mundell’s theory cited, delegating a fiscal policy to an Economic Union is necessary to assure the undisturbed functioning of this Economic Union, composed of countries with a common currency and those
without it though belonging to the Economic Union, e.g. Hungary, Poland, Czech Republic. They may be endangered by asymmetric shocks
relieved by mechanisms which can redress the balance in these countries. These mechanisms come from a monetary policy, e.g. changes in
exchange rate or interest rate, a budgetary policy, e.g. budgetary savings,
and a fiscal policy, e.g. interregional transfers from a central budget to
the budgets of countries facing such problems, and demand-stimulating
measures as well as market mechanisms, e.g. changes in remuneration
and prices, and workforce mobility. The only problem is that a monetary policy is not accessible to all members of the EMU area. Thus,
an adjustment burden shifts towards market mechanisms and a budgetary policy only. Even if we assume that remuneration and prices
are flexible and workforce is mobile, market mechanisms may be too
expensive for economies of some countries in the EMU. Therefore, they
resort to budgetary and fiscal policies as the easiest and most accessible tools to respond to asymmetric shocks, and budgetary indebting in
some countries is triggered.
The research by Dullien and Schwarzer indicates that between 1991
and 2006, a fiscal policy in two countries only, i.e. Austria and Finland
had a meaningful impact on mitigating the business cycle fluctuations16.
The impact of a fiscal policy is statistically insignificant or hardly significant for the remaining countries unlike the United States and Japan where a 1% production gap growth is reflected in budgetary deficit
growth by about 0.9% and 0.6%, respectively. This correlation means
that a discretional fiscal policy is clearly contradictory to automatic
stabilizers and does not contribute to mitigating business cycle fluctuations.
If you want to determine the reasons for the ineffective Eurozone
fiscal policy with respect to economic stabilisation, you should consider the level at which it is implemented. Nowadays, EU Member
15 R. Baldwin, C. Wyplosz, The Economics of European Integration, 2nd edition, London 2006, p.
358.
16 S. Dullien, D. Schwarzer, Integrating the Macroeconomic Dimension into the EU Budget: Reasons, Instruments and the Question of Democratic Legitimacy, [in:] EU Consent EU-Budget,
Working Paper, August 2007, No. 4.
States are mainly responsible for this task. Actually, the theory of fiscal federalism or multilevel governing indicates that macroeconomic
stabilization should be provided just by a central level, or supranational in the EU. For small open economies, any effects of fiscal policy
stabilisation like higher prices of imported commodities by a given
country are noticeable abroad, and thus this case pertains to external
benefits which are one of the rationales of centralisation of a given
policy17. The costs of economy stabilisation in the form of higher debt
are merely paid by a given country. Consequently, such a country may
be reluctant to make efforts to mitigate business cycle fluctuations,
which, in turn, may deepen its current account deficit, and thus increase its debt.
Admittedly, a decision about fiscal policy coordination under the
EMU was taken but member countries retained some flexibility to decide about their budgets so that not to limit automatic stabilizers embedded in the income (tax) and expense side of their national budgets.
However, an autonomic fiscal policy was subject to European rules written in the Stability and Growth Pact so that it could not hamper a pursuit of a homogeneous monetary policy and, what is more, could not
be a source of asymmetric shocks. With these rules, current account
deficits deepened and debt continued to increase because some countries like Greece could not overcome the temptation of not using their
budgetary means to cope with symptoms of asymmetric shocks. They
thought that the Union would manage them somehow as a guarantor of
a common currency. The budget was balanced by issuing indebt securities which were mostly bought by German and French banks. Budgetary means were used, for example, for current consumption like wellknown extra salaries, i.e. 13th and 14th month’s salaries for employees of
expanded self-government and government administration. In fact, this
action could be justified by the economic theory of Ricardian equivalence only18. However, the assumptions of D. Ricardo’s neoliberal theory
have been recently abandoned in the economic theory and an increasing number of economists are questioning the plausibility of Ricardian
17 J. Pelkmans, European Integration. Methods and Economic Analysis, FT Prentice Hall, 2006, p.
48.
18 In its brief form, Ricardian equivalence called Barro-Ricardo equivalence theorem, is based
on the lack of difference between the effects of financing public expenses by indebting
and those by charging taxes. Taxes are socially unpopular that is why financing public
expenses by borrowing money is more attractive, which was used by countries such as
Greece and other EMU countries.
37
38
equivalence which underlies the previous way of implementing a budgetary policy.
The emergency actions taken by the EU countries consisted first in
creating the Euro-Plus Pact, initiated by Germany19. Its main goal was
to strengthen the competitiveness of not only the Eurozone but also the
whole European Union. Consequently, its common objectives such as
introducing statutory debt limits, reforming a retirement system, increasing employment, limiting bureaucracy or associating wages with
productivity though not common methods of their achievement were
specified. The Competitiveness Pact and then its extended version Euro-Plus was to, above all, save the PIGS countries, or Portugal, Ireland,
Greece, and Spain where a public debt-to-GDP ratio exceeded 100% or
was close to this value, as given in Table 1. Yet, a serious situation in
Italy where this index exceeded 100% did not arise entirely then. Thus,
a new institution was established because the defensive mechanisms of
the European Union and the Eurozone like the Stability and Growth
Pact could not prevent this financial predicament.
The action undertaken then was known as the six-pack which was
accepted by EP’s Economic Affairs Committee in April 2011. It was
a packet of six documents, i.e. five regulations and one directive on
managing the economy of the EMU zone and the Eurozone. The sixpact strengthened the Stability and Growth Pact, keeping the EU public
finances in check. Four of these documents directly strengthened the
Stability and Growth Pact and supervised the budgets of the EU Member States. The remained ones defined rules for monitoring and controlling macroeconomic discrepancies among the EU Member States. These
regulations harmonise the rules of the budgetary policy in the Eurozone
countries, strengthen the budgetary discipline, limit the possibility of
incurring debt by individual countries, and permit imposing automatic
severe financial sanctions on any wasteful members of the Eurozone.
Inflicted automatically, disregarding the consent by any suitable bodies
of a guilty country and the EU bodies, this financial penalty means taking a guilty country’s deposit made earlier in the ECB if this country
exceeds the amount of this deposit.
19 For now, 17 countries of the Eurozone and Poland, Denmark, Lithuania, Latvia, Romania
and Bulgaria have joined the Euro-Plus Pact. They have declared their willingness of more
ambitious reforms and intense coordination of their autonomous so far economic policies
in relation to the one required by the Treaties underlying the European Union. To make
work more effective, the leaders of 23 countries are to meet at least once a year to develop
the details.
Figure 1. Debt of the Eurozone countries, Poland, and Estonia at the end of 2011
Source: Eurostat data at www.bankier.pl of April 23, 2012. The red line refers to the criterion of
Maastricht.
Figure 2. Budgetary deficit of the Eurozone countries, Estonia and Poland against GDP at the
end of 2011
Source: Eurostat data at www.bankier.pl of April 23, 2012. The red line refers to the criterion of
Maastricht.
39
40
Figures 1 and 2 show a serious level of debt of the selected EU countries as of the end of 2011. The debt of 12 countries exceeds the 60% reference value of debt-to-their GDP and the 3% reference value of a budgetary deficit-to-their GDP. These values are shown against the data for
Estonia that is one of the EU countries with the most favourable ratio
of debt and deficit to GDP. The Eurostat data for 2011 shows that the
budget deficit of all EU-27 MS amounted to € 565.1 milliard and the total public debt increased to € 8.22 billion in relation to € 7.82 billion in
2010. The data in Figure 2 show how much 11 countries of the Eurozone
exceeded the budget deficit reference value despite taking remedial actions in the previous years. Poland does not differ from most of the
EMU countries.
In 2010, the Eurozone members established the European Finance
Stability Facility (EFSF) known as Firewall of € 432 milliard. Having
a legal status, this fund defences the stability of the Euro and redresses
financial balance in each country20. This fund expires in the middle of
2013 but it will be replaced by the European Stability Mechanism (ESM)
which will be a permanent mechanism as an international financial organisation. The mechanism will have its own capital of € 80 milliard
and a callable capital of € 620 milliard. The ESM will be capable of subsidising banks and purchasing bonds without a go-between activity of
governments. Contrary to the EFSF, any urgent decisions in the ESM
are to be taken by the majority of votes representing 85% of capital in
the fund. Consequently, the ESM can be more resistant to any decreases in rating of its countries – shareholders. As with its predecessor, the
ESM will emit bonds to finance loans. For the ESM, every-time consent
of national parliaments to pay out next tranches of financial assistance
may turn out to be redundant because any loans granted by the ESM
will not directly increase its shareholders’ debt as it was for the guarantees by the EFSF. Despite these payouts will be more automatic, initiating every tranche of assistance, whether for a country or banks, will still
20 It is worth mentioning that Moody’s credit rating agency on July 24, 2012 lowered the rating of this fund from stable to negative. It was stated in the communication published that
this decision is a consequence of the recent changes in the evaluation of Moody’s credit
forecasts concerning the Eurozone states’ bonds as the EFSF guarantors. A few days later,
Mood’s lowered also the credit rating forecast of Germany, Netherlands and Luxemburg
from stable to negative for – as it was said – increasing uncertainty around the debt crisis
in Europe. Another reason was high probability that any further help for countries experiencing financial difficulties will be necessary. Until now Ireland, Portugal, and Greece have
taken advantage of the EFSF assistance. Spain and Cyprus are queuing for the aid for their
banks.
be conditioned by an approval by the Eurogroup, or the finance ministers of the Eurozone. Just as it is now, their decisions will be based on,
e.g. the evaluation by the European Commission as well as the European Central Bank or the International Monetary Fund (IMF), depending
on a type of financial aid. By virtue of the decisions of the EU summit in
June 2012, the ESM will be more capable of intervening in the financial
markets. This can be possible if common banking supervision will be
established. Any key decisions will still, however, require shareholders’
unanimity.
Nevertheless, the previous actions concerning this subject matter
seem to be insufficient because the European Central Bank in October
2012, for the first time, was forced, despite its earlier resolute denials,
to intervene in the capital market by buying bonds issued by one of the
EMU countries, i.e. Spain.
Conclusions
To sum up, the European Economic and Monetary Union was intended
as an example of an optimum currency area based on the rules developed by R. Mundell, called the New OCA theories which expanded his
assumptions in the following years. This formation also based on the
written convergence rules which obviously put some limits on macroeconomic indexes for the new countries. Any further expansion of the
EU and accepting new members to the Eurozone aimed at creating
a new OCA free from any disturbances and crises. Unfortunately, this
has not happened so. The unwritten rules for creating the EMU and its
further functioning have considerably moved away from the initial assumptions of an OCA. Also, the convergence rules included in the Union Treaty were violated when new countries were accepted to the EU.
Therefore, one can hardly agree that the European Economic and Monetary Union can still be called an optimum currency area as it has lost
the features typical of cohesion.
Nowadays, the EU and Euroland are at the turning point evoked by
the most serious financial crisis in their history. The breach of convergence rules by some countries of this zone may lead to irreversible and
negative effects for the EMU. Departing from the principal and primary
OCA rules that underlay the EMU has resulted in this state of affairs.
It is mainly about the lack of similarity of structures of individual national economies in terms of a level of production diversification and
what follows their flexibility and resistance to asymmetric shocks, e.g.
41
42
Portugal and Germany, Greece, and Germany and an ineffective pursuit
of a countercyclical policy, as well as the falsification of financial statistics on the convergence criteria both when joining the Eurozone and
being its member, e.g. Greece. Violating the convergence rule like the
one applied to some pillars of the Euroland and the whole EMU when it
functioned, e.g. Germany’s economy exceeded a budget deficit above 3%
of GDP and the reference value of general debt-to-GDP, i.e. above the
60% reference value of GDP. The EU members take numerous actions
to save the coherence of the Eurozone and deepen the integration of the
EMU zone and the whole EU. These actions can be briefly described as
a return to the EMU convergence rules with automatic penalties paid
for breaking them. The question arises whether it is also a return to the
initial OCA rules, which means achieving economic symmetry of the
whole EMU area. The answer is that this objective seems achievable for
countercyclical policy coordination, balancing inflation rates although
in the short run, it is not so for production diversification and mobility
of productive factors. Actually, the necessity of deepening political integration of the whole EMU to take any economic actions successful in
the longer run is not discussed here.
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43
Tomasz Stępniewski
The European Union’s Eastern
Partnership: between realism
and disillusion1
Abstract: The European Union’s Eastern policy has been modified continually in
the 21st century because the European Neighbourhood Policy, the framework for its
activities towards its neighbours, is an ineffective tool. Faced with the low efficient
activities, the EU authorities and the individual Member States have been coming
up with new initiatives aimed at making the operations more productive. This is exemplified by the Black Sea Synergy and the Eastern Partnership projects managed
by the Eastern neighbours and the Union for the Mediterranean pertaining to the
states of the Southern neighbourhood.
The Eastern Partnership is becoming an increasingly recognisable sign of the EU’s
activities in Eastern Europe. The Partnership is a young policy, still under implementation. Its effective implementation requires all of the 27 EU Member States
and the 6 states embraced by the policy to cooperate. During its Presidency of the
EU in the second half of 2011, Poland strove to make the Eastern Partnership the
main objective of the East European and South Caucasian policy. As it turned out,
certain international events precluded the EaP from becoming the key issue under
the Polish Presidency, and the state of the affairs behind the Eastern border of the
EU also seems to indicate that this initiative is waning for perceiving it as a project
of a little impact.
Keywords: European Union, Eastern Partnership, South Caucasus, security
1
This paper was previously published in Polish: T. Stępniewski, Partnerstwo Wschodnie Unii
Europejskiej: między realizmem a rozczarowaniem [Eastern Partnership: Between Realism
and Disillusion], Rocznik Instytutu Europy Środkowo-Wschodniej [Yearbook of the Institute of East-Central Europe], T. Stępniewski (ed.), Year 10 (2012), Vol. 2: Kaukaz – kultura,
społeczeństwo, polityka [Caucasus – Its Culture, Society, and Policy], pp. 11-22.
46
Tomasz Stępniewski
Introduction
The European Union’s Eastern policy has been modified continually
in the 21st century because the European Neighbourhood Policy, the
framework for its activities towards its neighbours, is an ineffective tool.
Faced with the low efficient activities, the EU authorities and the individual Member States have been coming up with new initiatives aimed
at making the operations more productive. This is exemplified by the
Black Sea Synergy and the Eastern Partnership2 projects dedicated to
the Eastern neighbours and the Union for the Mediterranean pertaining
to the states of the Southern neighbourhood.
The Eastern Partnership is becoming an increasingly recognisable
sign of the EU’s activities in Eastern Europe. The Partnership is a young
policy, still under implementation. Its effective implementation requires
all of the 27 EU Member States and the 6 states embraced by the policy
to cooperate. During its Presidency of the EU in the second half of 2011,
Poland strove to make the Eastern Partnership the main objective of the
East European and South Caucasian policy. As it turned out, certain international events precluded the EaP from becoming the key issue under the Polish Presidency, and the state of the affairs behind the Eastern
border of the EU also seems to indicate that this initiative is waning for
perceiving it as a project of a little impact.
The efficiency of the EU’s Eastern policy also depends on the Union itself. Its decision makers tend to approach the Eastern neighbourhood in a technocratic way, devoid of sensitivity to the peculiarity of
the states addressed by the Union’s activities. The lack of a clear strategy
towards the region means that the EU is impairing its efficiency. Meanwhile, history tells us that a prospect of integration has been the most
efficient mechanism of change in the internal situation of the candidate
countries3.
2
3
More in: T. Stępniewski, Geopolityka regionu Morza Czarnego w pozimnowojennym świecie
[The Geopolitics of the Black Sea Region in the Post-Cold War World], Lublin–Warszawa
2011; M. Klatt, T. Stępniewski, Normative Influence. The European Union, Eastern Europe and
Russia, Lublin–Melbourne 2012.
P.J. Borkowski, K. Dośpiał-Borysiak, T. Kapuśniak, Wymiar południowy, północny i wschodni
Unii Europejskiej: osiągnięcia, szanse, wyzwania [The Southern, Northern and Eastern Dimensions of the EU: Achievements, Opportunities, Challenges], Prace Instytutu Europy
Środkowo-Wschodniej [Proceedings of the Institute of East-Central Europe], Vol. 1, Lublin–
Łódź–Warszawa 2009, pp. 67-74; T. Kapuśniak, Polityka Unii Europejskiej w regionie Morza
Czarnego [The Policy of the EU in the Black Sea Region], [in:] T. Kapuśniak (ed.), Unia Europejska i Federacja Rosyjska wobec regionu Morza Czarnego [The European Union and the
Russian Federation towards the Black Sea Region], Lublin 2010, pp. 13-22.
The paper briefly outlines the assumptions, goals and instruments of
the Eastern Partnership and the challenges it faces in Eastern Europe
and South Caucasus, followed by a discussion of its achievements and
development prospects. An attempt will be made to answer the question: Will the Eastern Partnership share the fate of the European Neighbourhood Policy and be held hostage by haggling inside the EU and the
sceptical approach of the addressees of the policy, or will it prove capable of tangibly influence the shape and logic of the EU’s relations with
its Eastern partners? And, first and foremost, does the EaP have the potential and ability to transform the EU’s Eastern policy?
1.
The European Union’s Eastern Partnership:
origin, goals, instruments4
The initiative of the Eastern Partnership, an essential component of the
European Union’s Eastern policy, is a new proposal of regional co-operation dedicated to some states of Eastern Europe and South Caucasus: Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine. Put
forward by Poland and Sweden, the idea was launched on May 7, 2009
during the Prague summit. Back in May 2008, the initiating states had
proposed to strengthen the relations with their Eastern neighbours, included the European Neighbourhood Policy (ENP) although the final
shape of the project was also an outcome of the activities by many other
EU member states5. The need to intensify the relations with the Eastern neighbours had been repeatedly brought to attention by the states
of the Vysehrad Group, and Lithuania, Latvia and Estonia maintained
a similar stance6. Germany, which had come up with the idea of the so-
4
5
6
This subchapter has been based on: T. Kapuśniak, T. Olejarz, Partnerstwo Wschodnie
w kontekście stosunków Unia Europejska–Federacja Rosyjska [The Eastern Partnership in the
context of the EU-RF relations], Rocznik Instytutu Europy Środkowo-Wschodniej [Yearbook
of the Institute of East-Central Europe], T. Kapuśniak (ed.), Year 8 (2010), Vol. 3: UE–USA–
NATO a Federacja Rosyjska [UE-USA-NATO and the Russian Federation], pp. 22-28.
T. Kapuśniak, Miejsce Ukrainy w polityce wschodniej Unii Europejskiej. Perspektywa Polski [The
Position of Ukraine in the Eastern Policy of the EU. A Polish Perspective], Krakowskie Studia
Międzynarodowe [Cracow International Studies], 2009, No. 4 (VI), pp. 95-107.
See: K. Pełczyńska-Nałęcz, A. Duleba, L. Póti, V. Votápek, Polityka wschodnia Unii Europejskiej
– perspektywa krajów wyszehradzkich. Myśląc o Wymiarze Wschodnim [The Eastern Policy
of the EU – the Visegrad Countries’ Perspective. Thinking of the Eastern Dimension], Punkt
Widzenia [Viewpoint] OSW, Warsaw, February 2003.
47
48
Tomasz Stępniewski
called ENP Plus7 during its EU Presidency in the first half of 2007, also
played a crucial role. In December 2007, the European Council accepted
the Polish-Lithuanian proposal of developing the Southern and Eastern
dimension of the ENP, not only bilateral, but also multilateral, which
was another mark of change in the EU’s attitude to the neighbourhood
policy.
The Eastern Partnership draws on the European Neighbourhood
Policy, implemented since 2004. Many Member States regard it as
an extension of their previous efforts to strengthen the ENP in its East
European sector and, at the same time, as a new opening in the EU’s
relations with the Partnership’s addressees. The strong support given to
the initiative also resulted from the changing conditions both inside and
outside the EU. Five years after the EU’s enlargement, the awareness of
challenges and threats in Eastern Europe and South Caucasus was obviously greater among the EU Member States. At present, all the members
are aware that the political tensions, economic destabilisation and frozen conflicts in the region may bear directly on the EU. Moreover, it is
not a coincidence that the work on the Eastern Partnership project accelerated after the Russo-Georgian war and that the co-operation in the
energy sector has been its important element. The lesson learnt over the
several years of enforcing the ENP was that the efficiency of the policy
can be improved if its instruments are adjusted to the specific character
of the countries concerned and that it is imperative that more consideration be given to the aspirations of the EU’s neighbours from Eastern
Europe8.
It should be mentioned now that the premises mentioned above, as
well as the events of the so-called Arab Spring induced the EU to announce, in May 2011, a report with a new rule to guide the European
Neighbourhood Policy saying more for more, which means more funding in return for progress in integration and internal reform (Deliver-
7
8
B. Wojna, M. Gniazdowski, Partnerstwo Wschodnie: geneza, możliwości i wyzwania [Eastern
Partnership: Its Origin, Opportunities, and Challenges], Biuletyn PISM [PISM Bulletin], April
30, 2009, No. 24 (556), www.pism.pl; S. Schaffer, D. Tolksdorf, The Eastern Partnership – “ENP
plus” for Europe’s Eastern Neighbours, CAPerspectives, 2009, No. 4, pp. 1-4.
B. Wojna, M. Gniazdowski (eds.), Partnerstwo Wschodnie – raport otwarcia [Eastern Partnership – Opening Report], Polski Instytut Spraw Międzynarodowych [Polish Institute of International Affairs], Warsaw, April 2009, p. 5; Ch. Hillion, A. Mayhew, The Eastern Partnership
– something new or window-dressing, SEI Working Paper, Sussex European Institute, January
2009, No. 109, http://www.sussex.ac.uk/sei/documents/wp_109.pdf
ing on a New European Neighbourhood Policy, May 15, 2012)9. It is worth
noting that the enforcement of the new rule by the EU may in fact lead
to a decrease in EU funding given to the countries of the Eastern Partnership10.
With reference to its main assumptions, it should be noted that the
Eastern Partnership is a plan for developing the relations between the
EU and the states of Eastern Europe and South Caucasus, which enables
the latter to gradually begin participating in the EU policies and programmes and to integrate with the common market. In a bilateral aspect, it stipulates the signing of association agreements and the creation
of extensive and comprehensive zones of free trade. The initiative also
provides for multilateral cooperation of the EU’s Eastern neighbours,
including regular meetings of heads of states, ministers for foreign affairs, high officials, and experts. It should be a forum to exchange information and experience between the partner countries and a mechanism
to build mutual trust. Ignoring the hard security agenda in the Eastern
Partnership (desecuritisation) is intended to allow the EU’s soft power
and, indirectly, to foster the improvement of international security in
the region. The project itself is not an enlargement strategy although it
does not exclude the possibility for the countries concerned to become
EU members one day. The model of the relation development with the
EU as defined by the EaP seems flexible enough to satisfy the needs of
both the countries only interested in cooperating closely with the EU
(Armenia, Belarus) and those aspiring to directly participate in the process of European integration (Ukraine, Georgia)11.
Additionally, the Eastern Partnership in its bilateral dimension postulates the elaboration of a new basis for the legal relations between the
EU and its Eastern neighbours, in the shape of the aforementioned association agreements. Moreover, the practical implementation of the
project entails the need for action towards a full liberalisation of the visa
9
Delivering on a new European Neighbourhood Policy, Joint Communication to the European
Parliament, the Council, the European Economic and Social Committee and the Committee
of the Regions, Brussels, May 15, 2012, JOIN (2012) 14 final.
10 T. Iwański, A. Ciechanowicz, A. Kwiatkowska-Drożdż, R. Sadowski, Kryzys w relacjach UE –
Ukraina wokół sprawy Tymoszenko [Crisis in the EU-Ukraine Relations due to the Tymoshenko Case], Tydzień na Wschodzie [Week in the East], September 9, 2012, No. 17 (218), www.
osw.waw.pl; ЄС ухвалив нову Програму з інтеграції та співпраці Східного партнерства,
Представництво Європейського Союзу в Україні, July 27, 2012, http://eu.prostir.ua/
news/253736.html
11 B. Wojna, M. Gniazdowski (eds.), Partnerstwo Wschodnie – raport otwarcia [Eastern Partnership – Opening Report]..., p. 2.
49
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Tomasz Stępniewski
regime in the relations with particular partner countries, and a development of cooperation in energy security12.
What is novel about the Eastern Partnership, as compared to the
ENP, is the scope of its implementation (multilateral), which should
contribute to and support political and economic change in the states of
Eastern Europe and South Caucasus, and make it become, in the course
of things, a forum for exchanging information on and experience of,
e.g. democracy, management and stability, economic integration and
convergence within EU policies, energy security and human relations.
Many EU members and some of its partners expect the multilateral political cooperation to play the role of a tool in establishing trust across
the region.
It is worth mentioning that the initiative of the Eastern Partnership
has provoked a discussion among the EU Member States themselves as
to the relations between the Union and Russia in the area of Eastern
Europe and South Caucasus. A majority of the countries have claimed
that its implementation cannot in practice lead to rivalry between the
EU and the RF, nor to an isolation of Russia in the region. In contrast,
a competitive group of Member States have objected to the perception
of EU initiatives dedicated to the Eastern Neighbourhood for Russian
interests. They have claimed that the EaP should serve a kind of rapprochement of the EU entities involved irrespective of the stance of the
Russian Federation, which treats the area of Eastern Europe and South
Caucasus as a exclusive zone of its influence known as near abroad.
All Member States have emphasised the need for a simultaneous development of the Eastern dimension of the ENP and cooperation between the EU and the RF. In order to eliminate potential incongruities
between the goals of the EaP and Russia’s fears, the latter should, as EU
Member States claim, participate in individual projects carried out under the Eastern Partnership13.
12 Ibidem, p. 6; K. Longhurst, Stepping into the geopolitical game. The European Union and its
Eastern Neighbourhood, Analizy natolińskie [Natolin Analyses], 2007, No. 2 (15).
13 B. Wojna, M. Gniazdowski (eds.), Partnerstwo Wschodnie – raport otwarcia [Eastern Partnership – Opening Report]..., p. 8; S. Schaffer, D. Tolksdorf, The EU member states and the Eastern
Neighbourhood – From composite to consistent EU foreign policy?, CAP Policy Analysis, 2009,
No. 1, pp. 1-4.
2.
Key issues of the EU’s Eastern Partnership
The Eastern Partnership assumes that action will be taken by the EU
towards the Eastern states in five main areas known as priority areas:
1) integrated border management programme, 2) support for small and
medium-sized enterprise development (SME Facility), 3) regional electricity markets, energy efficiency and renewable energy sources, 4) environmental management, 5) a system for diminishing the effects of
natural and man-made disasters14. Unfortunately, the implementation of
the priorities and the strengthening of political and economic bonds between the states of the EaP and the EU have encountered serious, mainly political, obstacles. The difficulties boil down to the following issues15:
• internal problems: high corruption, weak state power, problems
with the freedom of the media, limited freedom in forming opposition, organised crime;
• separatist tendencies in, e.g. Georgia – Abkhazia and South Ossetia and ethnic conflicts in, e.g. Nagorno-Karabakh, Transdniestria;
• a negative impact of the global economic crisis on the weak economies of the EaP countries;
• strong influence of the Russian Federation in the area of EaP
(broadly speaking, in the area of the so-called near abroad),
wielded using political, economic, energetic and socio-cultural
instruments;
• strengthening the position of Turkey in the region, which weakens the impact of the EU’s activities, particularly in diversifying
energy supplies as Turkey, like Russia, strives to maintain the status quo in the Black Sea region16.
14 Quoted after: Partnerstwo Wschodnie [Eastern Partnership], Ministry of Foreign Affairs of
the Republic of Poland, Warszawa 2011, http://www.eastern-partnership.pl
15 B. Wojna, M. Gniazdowski, Partnerstwo Wschodnie: geneza, możliwości i wyzwania [Eastern
Partnership: Its Origin, Opportunities, and Challenges], Biuletyn PISM [PISM Bulletin], April
30, 2009, No. 24 (556); T. Kapuśniak, Wymiar Wschodni Europejskiej Polityki Sąsiedztwa Unii
Europejskiej. Inkluzja bez członkostwa? [The Eastern Dimension of the European Union’s
Neighbourhood Policy. Inclusion Without Membership?], Zeszyty natolińskie [Natolin Journals], No. 42, Natolin European Center, Warszawa 2010, p. 103, http://www.natolin.edu.pl/
pdf/zeszyty/Natolin_Zeszty_42.pdf
16 T. Stępniewski, Geopolityka regionu Morza Czarnego w pozimnowojennym świecie [The Geopolitics of the Black Sea Region in the Post-Cold War World]..., p. 39 and following.
51
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Tomasz Stępniewski
When discussing, though only briefly, the internal problems of the
Eastern Partnership, one needs to emphasise that the situation in Belarus is the most difficult. Since his another victory in the presidential
elections in 2010, Alexander Lukashenka has taken measures to curb
the opposition and limit the freedom of speech and association, e.g. the
action against the Polish Association in Belarus and attempts to outlaw
it. In Ukraine, regress in democratisation has been observed since Victor Yanukovych came to power in 2010, visible in pressure on the media and limiting its freedom (using state agencies such as the Ukrainian Security Service), endemic corruption, limiting the freedom of
the opposition’s activities, arresting the opposition leaders on dubious
charges – the trial of Yulia Tymoshenko aroused anxiety of the Western
states as to the internal situation in Ukraine. Among the East European
countries, Moldova is considered the state most intent on integration
although it has to cope with problems such as corruption, instability of
its political system and the separatism of Transdniestria. The internal
situation of the countries in South Caucasus, which are faced with the
problem of lack of territorial integrity, does not look optimistic, either.
Armenia increasingly follows the route of Putinism, while the President
of Azerbaijan, Ilham Aliyev, usurps the entire state power. Georgia,
ruled by Michael Saakashvili, fails to comply with the standards of democracy and thereby is thwarting the little democracy it won during the
Revolution of Roses in 2003. It should be noted that under Saakashvili
Georgia, on the one hand, carried out a number of reforms and reduced
corruption, and on the other hand, due to changes and limitations to
civil rights, its internal situation does not look good. The facts mentioned above testify to a stagnation and/or regress of democratisation
processes, observance of human rights and the rule of law in Eastern
Europe and South Caucasus. The literature refers to this phenomenon
as putinisation, i.e. a reduction of freedom in the manner of the Russian
Federation. Following a report by the Freedom House, we can call Russia, Belarus, Azerbaijan and Kazakhstan preserved authoritarian regimes
where the Putin’s system is maintained17.
17 Cf.: T. Trenkner, Putinizacja: słowo roku 2011 [Putinisation: Word of 2011], Tygodnik Powszechny, June 24, 2012, No. 26 (3285), p. 24.
3.
Effects of the operation of the
EU’s Eastern Partnership
As stated above, the EaP is a young policy with a very short period of
implementation so its success is not much impressive yet. Considering
the specificity of the Eastern and Caucasian entities it is addressed to,
its limited efficiency can hardly be surprising. Despite various impediments, the EaP has succeeded18:
• concluding the negotiations with Ukraine regarding the association agreement (AA), which concerns a comprehensive and
deepened zone of free trade (DCFTA, Deep and Comprehensive
Free Trade Areas) – the ratification of the DCFTA has been suspended due to the trial of the former Prime Minister, Yulia Tymoshenko19;
• opening negotiations of new association agreements (AA) with
Moldova, Azerbaijan, Armenia, and Georgia;
• providing for a start of negotiations on DCFTA with Moldova
and Georgia;
• in Ukraine and Moldova, implementing action plans to liberalise
the visa system (a total abolition of visas is a long-term objective).
Agreements with Georgia on visa facilitation and readmission are
also being enforced;
• making Moldova and Ukraine join the European Energy Community;
• assigning extra funds for the EaP countries; by 2014, the funding
will amount to € 1.8 billion;
• establishing and initiating the operation of the Civil Society Forum, which has launched various programs; aiding the creation
of the European Endowment for Democracy (EED);
18 After: P.M. Jensen, Partnerstwo Wschodnie i duńska prezydencja w Radzie Unii Europejskiej:
między realizmem a rozczarowaniem [Eastern Partnership and the Danish Presidency of the
EU Council: Between Realism and Dissilusion], Analiza Fundacji Batorego [Analysis by Stefan Batory Foundation], Warszawa, March 2012, p. 2, http://www.batory.org.pl; L. Czechowska, Partnerstwo Wschodnie na tle innych regionalnych mechanizmów EPS – wskazania dla
polskiej prezydencji [Eastern Partnership and Other Regional Mechanisms of the ENP. Recommendations for the Polish Presidency], [in:] J. Nadolska, K.A. Wojtaszczyk (eds.), Polska
prezydencja w Unii Europejskiej [Polish Presidency in the EU], Warszawa 2010, p. 270.
19 More about the case of Yulia Tymoshenko, [in:] I. Lyubashenko, Znaczenie sprawy Julii Tymoszenko dla stosunków Ukrainy z Unią Europejską [The Significance of the Tymoshenko
Case for the EU-Ukraine Relations], Biuletyn PISM [PISM Bulletin], July 3, 2012, No. 63 (928),
www.pism.pl
53
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Tomasz Stępniewski
• establishing the EURONEST (EU-Neighbourhood East Parliamentary Assembly), made up of representatives of the partner
states and the European Parliament (launched on May 3, 2011);
• creating a comprehensive programme for institutional development (Comprehensive Institutional Building – CIB), operating
within public administration towards the rule of law and compliance with the EU requirements. The goals will be pursued using
the Twinning and TAIEX programmes;
• launching its flagship projects in integrated border management,
SME, energy efficiency, environment and people protection;
• creating the Conference of Regional and Local Authorities for the
EaP on behalf of the Committee of the Regions;
• forming the EaP Business Forum, the Information and Coordination Group associating countries from outside the EU and the
financial institutions interested in implementing the EaP objectives;
• preparing Comprehensive Programmes of Institutional Building
for five EaP countries, excluding Belarus;
• enlisting the cooperation of other international organisations,
e.g. the OSCE (raising the standards of human rights protection),
the Council of Europe (fighting corruption), EBOR and OECD
(supporting SME).
In spite of the enlisted achievements of the EaP, the partner states
and some EU Member States frequently criticise the EaP for its low efficiency. Regardless of the many initiatives, the lack of sizable financial
resources prevents the situation in the region from improving and thus
negatively affects the assessment of the EaP by the decision makers and
the societies of Eastern Europe and South Caucasus.
Conclusions
The Eastern Partnership is definitely a policy which may bring change
to the situation in the partner countries, providing the countries want
to change and follow the path of democratic reform towards the rule
of law. Stagnation or even regress of the democratisation and stabilisation processes in the EaP countries significantly reduces the efficiency
of the project. It has to be remembered that the rivalry for common unstable neighbourhood (Eastern Europe and South Caucasus) between
the European Union and the Russian Federation has also had its impact
on the efficiency of the EaP. Quite frequently, the Eastern Partnership
is perceived by Russian decision makers as an attempt to compete for
common neighbourhood20. What is more – as Peter Munk Jensen observes – the situation is a consequence of the EU’s approach as it strives
to develop relations with Eastern partners while keeping them at a distance. The Union is trying to make sure, they do not become too distant
but it refuses to admit them as member countries21. The lack of concrete
activities on the part of the EU has not gone unnoticed by the Russian
Federation. Russia has been taking action with a view to maintaining
the post-Soviet states (those included in the discussed EaP programme)
within the area of its influence. Examples of such steps include the war
with Georgia in 2008 and the proposal of creating a Eurasian Union put
forward in October 2011 by the then Prime Minister of Russia, Vladimir
Putin22.
On the one hand, the Eastern Partnership has got some achievements like the launch of a political dialogue in the region, visa facilitations, association agreements, and support for the civil society. On the
other one, problems with the high rate of corruption, obstacles to the
democratisation and stabilisation of the situation in Eastern Europe and
South Caucasus make some scholars believe that the Partnership may
share the fate of the ENP as after a high-flown beginning, enraging Russia, the EU’s initiative proves to be toothless, i.e. devoid of efficiency and
harmless23. Given the current financial crisis in the EU, the sceptical attitude of the old EU Member States towards the enlargement and instability of the Southern neighbours, it seems highly probable that the EaP
states will not be granted EU membership in the short or medium term.
However, the countries of the region should intensify their efforts to
20 T. Stępniewski, Geopolityka regionu Morza Czarnego w pozimnowojennym świecie [The Geopolitics of the Black Sea Region in the Post-Cold War World]..., pp. 87-90.
21 P.M. Jensen, Partnerstwo Wschodnie... [Eastern Partnership...], p. 2.
22 U. Halbach, Vladimir Putin’s Eurasian Union. A New Integration Project for the CIS Region?,
SWP Comments, January 2012, No. 1, German Institute for International and Security Affairs,
www.swp-berlin.org; X. Kurowska, P. Pawlak, The EU’s Eastern Partnership – More for More, or
More of the Same, Annals of Polish European Studies, 2011, Vol. 14, Centre for Europe, University of Warsaw, pp. 119-122.
23 Cf.: P.J. Borkowski, Partnerstwo Wschodnie jako instrument polityki zewnętrznej UE [Eastern
Partnership as an Instrument of External Policy], [in:] A. Szeptycki (ed.), Między sąsiedztwem
a integracją. Założenia, funkcjonowanie i perspektywy Partnerstwa Wschodniego Unii Europejskiej [Between Neighbourhood and Integration. Assumptions, Operation and Prospects
of the EU’s Eastern Partnership], Warsaw 2011, p. 84; also: J. Kulhanek, The Fundamentals of
Russia’s EU Policy, Problems of Post-Communism, Vol. 57, September/October 2010, No. 5,
pp. 51-63.
55
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Tomasz Stępniewski
make the EU leave the door open for them or strive to establish an Eastern economic area connected with the EU24.
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the EU-Ukraine Relations Due to the Tymoshenko Case], Tydzień na
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www.osw.waw.pl.
Jensen P.M., Partnerstwo Wschodnie i duńska prezydencja w Radzie Unii
Europejskiej: między realizmem a rozczarowaniem [Eastern Partnership and the Danish Presidency of the EU Council: Between Realism
and Disillusion], Analiza Fundacji Batorego [Analysis by Stefan Batory
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Paweł Pasierbiak
Nominal Convergence Criteria.
Their significance and fulfilment
by the Central and Eastern
European countries with
a derogation
Abstract: The author examines the significance of the nominal convergence criteria for the new EU Member States from Central and Eastern Europe in 2004-2012
and the extent to which they managed to satisfy these criteria then. In their accession treaties, these countries agreed to adopt a common currency although no
specific time was precisely defined. In order to participate in and benefit from functioning in the euro area, the so-called criteria indicated in the Treaty of Maastricht
need to be permanently satisfied. At first, this should contribute to a smooth introducing of the euro and later to an effective functioning of the entire economic and
monetary union. The study on the degree of compliance with the nominal convergence criteria by Bulgaria, the Czech Republic, Lithuania, Latvia, Poland, Romania,
and Hungary indicates that these countries are not ready to join the euro area now
for none of them meets all of the membership conditions.
Keywords: European Union, Currency Union, Nominal Convergence, Convergence
Criteria, Member States with a derogation
Introduction
The process of European monetary integration dates back to the 1960s
when the first plans for closer cooperation were formulated. Although
Raymond Barre and then Pierre Werner were preparing some proposals
60
Paweł Pasierbiak
to develop monetary integration, their proposals were not implemented
due to the complicated internal and external situation. Since then, however, currency matters have become continually present in the process
of European integration, which has resulted in the European economic
and monetary union. Consisting initially of eleven, the Eurozone comprises seventeen Member States now1.
The participants of the euro area are going to change because the
new European Union Member States committed themselves in their
accession treaties to adopt the common currency2. Actually, the time
when it happens is not specified as it depends on satisfying the conditions (criteria) of convergence.
The enlargement of the European Union in 2004 by ten countries,
including eight from Central and Eastern Europe and in 2007 to include
Bulgaria and Romania led to the situation in which the new Member
States took upon themselves an obligation to replace their national currencies with the euro. Some of the new EU Member States like Cyprus,
Estonia, Malta, Slovenia or Slovakia have already complied with this obligation, while the others sooner or later will need to face this challenge.
This paper analysis and assesses the degree of compliance with the
nominal convergence criteria, or the Maastricht criteria by the Central and Eastern European countries with derogation such as Bulgaria,
Czech Republic, Lithuania, Latvia, Poland, Romania, and Hungary in
2004-2012. This subject area refers to fiscal and monetary convergence
criteria. A descriptive and analytical method was adopted to accomplish
the task formulated.
1
2
United Kingdom and Denmark had negotiated opt-out arrangements before they adopted
the Maastricht Treaty so they do not participate in the third stage of the European Monetary Union, and thus they do not need to fulfil the convergence criteria.
These are known as countries with a derogation. Article 139 (1) of the Treaty on the Functioning of the European Union states: “Member States in respect of which the Council has
not decided that they fulfil the necessary conditions for the adoption of the euro shall
hereinafter be referred to as ‘Member States with a derogation’”. See: Official Journal of the
European Union, C 83/47, March 20, 2010.
Nominal Convergence Criteria
1.
Nominal convergence criteria
In fact, certain economic conditions must be satisfied by member states
in order to ensure a proper functioning of a monetary union. R.A. Mundell, P.B. Kenen, and R.I. McKinnon specified some theoretical determinants of a smooth functioning of the so-called optimum currency area,
usually identified as a monetary union. The researchers could not agree
as to the main criterion for the optimality of a currency area although
they initiated a debate on this issue in economic theory. Consequently,
a set of criteria for defining, establishing and quite smooth functioning
a monetary union have been formulated3.
The Treaty of Maastricht defines a monetary union in accordance
with the concept by E. Appeal who claims that a monetary union can be
formed if certain specific conditions are satisfied: 1) currencies are totally and irreversibly convertible; 2) capital movements between member states are fully liberalised; 3) financial markets between member
states are completely integrated; 4) exchange rate fluctuations without
any margin are irreversibly fixed; 5) a common monetary policy is conducted by a central bank.
Participating in a monetary union involves also some risks faced by
member states when a common currency is introduced. The most serious one is the loss of control over a monetary policy, including an exchange rate which is an important tool to prevent and fight against any
possible economic shocks. Therefore, the authors of the theory of optimum currency areas started with analysing external shocks and the effectiveness of mechanisms of absorbing them4. The factors which can
reduce vulnerability to shocks include a diversified production structure, similar economic structures and rates of inflation. A set of factors
that can increase the ability to absorb shocks includes the mobility of
factors of production, flexible wages and prices, fiscal and political in-
3
4
The theoretical foundations of a monetary union are not widely discussed here for the purpose and limitations of the paper. More on this topic can be found in other publications,
including B. Mucha-Leszko, Strefa euro. Wprowadzenie, funkcjonowanie, międzynarodowa
rola euro [Eurozone. Introduction, Functioning, and International Role of the Euro], Lublin:
Wydawnictwo UMCS, 2007, pp. 15-29 or S. Ładyka, Z teorii integracji europejskiej [From the
Theory of European Integration], Katedra Integracji Europejskiej im. J. Monneta, Warszawa:
Kolegium Gospodarki Światowej SGH, 2001, pp. 162-187.
G. Tchorek, Teoretyczne podstawy integracji walutowej [Theoretical Fundamentals for Currency Integration], [in:] P. Kowalewski, G. Tchorek (eds.), Mechanizmy funkcjonowania strefy
euro [Mechanisms for Functioning the Eurozone], Warszawa: Wydawnictwo NBP, 2010, p. 31.
61
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Paweł Pasierbiak
tegration5. This theory enabled the formulation of a set of criteria to be
met so that the Monetary Union in the European Union could be correctly created and function. The created nominal convergence criteria are
compatible with the new theory of optimum currency areas. The theory
makers claim that a credible currency and stable public finances are key
elements of sustainable economic growth and success of any monetary
union created.
The nominal convergence criteria, known as the Maastricht criteria,
are defined in the Article 140 of the Treaty on the Functioning of the
European Union (TFEU)6. Three of them include the so-called monetary criteria and one, often formulated as two separate criteria, is the
fiscal criterion. The provisions of the Treaty indicate that the member states are evaluated in terms of achieving sustainable convergence,
which means that the following conditions are fulfilled:
1) The achievement of a high degree of price stability. As in Article 1
of the Protocol on the convergence criteria, attached to the TFEU,
the criterion on price stability shall mean that a member state shows
its price performance as sustainable and its average rate of inflation,
observed over one year before the examination, does not exceed by
more than 1.5 percentage points that of, at most, the three best-performing Member States in terms of price stability.
2) The sustainability of the government financial position. This will
be apparent from having achieved a government budgetary position
without a deficit that is excessive as determined in accordance with
Article 126 (6). The Commission shall examine the compliance with
a budgetary discipline on the basis of the following two criteria7:
a) the relationship between the planned or actual general government deficits to gross domestic product – the ratio should not exceed the reference value of 3%.
b) the relationship between general government gross debt to gross
domestic product – the ratio should not exceed 60%.
3) Observance of the normal fluctuation margins provided for by the
exchange rate mechanism of the European Monetary System, for at
least two years, without devaluation against the euro.
5
6
7
Ibidem, pp. 38-41.
See: Official Journal of the European Union, C 83/47, March 20, 2010.
The reference values are specified in Article 1 of the Protocol (no. 12) on the excessive deficit procedure annexed to the Treaty on the Functioning of the European Union. Official
Journal of the European Union, C 83/47, March 20, 2010.
4) The durability of convergence achieved by a Member State with
a derogation and of its participation in the exchange-rate mechanism being reflected in the long-term interest-rate levels. The criterion on the convergence of interest rates shall mean that, observed
over a period of one year before the examination, a Member State
has had an average nominal long-term interest rate that does not exceed by more than two percentage points that of, at most, the three
best-performing Member States in terms of price stability. Interest
rates shall be measured on the basis of long-term government bonds
or comparable securities8.
The formulation of the nominal convergence criteria was not the
main goal in achieving advanced economic convergence between the
Member States. The nominal criteria can be called a kind of measure to
achieve convergence in real terms. The point is that the nominal criteria
need to be met in a sustainable manner, and therefore any changes in
the individual economies should be structural, or long-term rather than
short-term9. Moreover, although a relationship between a fulfilling of
the nominal criteria and a smooth functioning of the Monetary Union
is sometimes questioned in the literature, the existence of such criteria
is undoubtedly a factor contributing to the stability of such a union10.
Thus, the aspiration of the economy to meet the Maastricht criteria in
a sustainable manner will contribute to the relatively mild convergence
with the euro area countries11.
8
Article 4 of the Protocol (no. 13) on the convergence criteria attached to the Treaty of the
Functioning of the European Union. Official Journal of the European Union, C 83/47, March
20, 2010.
9 See e.g.: M. Ochrymiuk, A. Rogut, Konwergencja nominalna w strefie euro. Implikacje dla Polski [Nominal Convergence in the Eurozone. Implications for Poland], Warszawa: Wydawnictwo NBP, July 2010, p. 3; Raport o konwergencji. Maj 2012 [Report on Convergence. May 2012],
European Central Bank, Frankfurt am Main 2012, p. 40.
10 See e.g.: C. Triandafil, The Analysis of the Convergence Criteria. Empirical Perspective in the
Context of the Sustainable Character Highlight, National Institute of Economic Research,
Working Papers, No. 111205, Bucharest 2011, p. 2.
11 See e.g.: R. Kierzenkowski, Preparing for Euro Adoption in Poland, OECD Economic Department Working Papers, No. 790, ECO/WKP(2010)46, Paris, July 15, 2010, pp. 17-22.
63
64
Paweł Pasierbiak
2.
Changes in meeting the fiscal criteria
The period of 2004-2012 shows relatively rapid changes in the conditions of the national economies of the European Union Member States.
The relatively favourable situation between 2004 and 2007 and the later
growing instability of the global economy resulting from the financial
and economic crisis, the high volatility of economic activity of enterprises, and internal factors associated with economic policies, all these
were reflected in macroeconomic indicators that describe a condition
of national economies. In the first decade of EMU, one could observe
that weak fundamentals, an excessively loose macroeconomic stance
at a country level and overly optimistic expectations about the convergence in real incomes posed risks not only for the countries concerned
but also for the smooth functioning of the euro area as a whole12. While
in the early years of membership the majority of new EU Member
States declared their willingness to the rapid adoption of the common
currency, in the later period this was no longer so clearly articulated.
The difficulties faced by the Eurozone during the global financial and
economic crisis and the unstable and often deteriorating internal situation in the countries with a derogation resulted in a flexible approach by
policymakers to the obligation to replace the national currencies with
the euro. This has been reflected in all of the nominal convergence indicators. Table 1 summarises the detailed data on the change in meeting
the nominal convergence criteria in 2004-2012 by the countries under
study: Bulgaria, Czech Republic, Latvia, Lithuania, Hungary, Poland,
and Romania.
Satisfying the fiscal criteria is increasingly important for the countries that have adopted the euro. Unlike a monetary policy, which is
conducted by the European Central Bank at a supranational level, the
Eurozone has no common fiscal policy. In consequence, this threats the
stability of functioning of an economic and monetary union, especially
during serious economic crises. The EMU Member States as well as the
countries with a derogation use the instruments of a fiscal policy to revive their economies and improve the economic situation in their domestic markets.
Based on the current experience of the euro area (2008-2011), the
permanent fulfilling of the fiscal criteria, which reflects the stability of
12 ECB Convergence Report 2012, Frankfurt am Main, May 2012, p. 36.
65
Table 1. Economic indicators of convergence in 2004-2012
Government budgetary position
Price stability
General government General governsurplus/deficit
ment gross debt
HICP
Long-term
Exchange rate
interest
vis-à-vis euro*
rate
2007
3.4
18.2
7.6
4.5
0.0
2008
1.8
14.1
12.5
5.4
0.0
2009
-3.9
14.8
2.5
7.2
0.0
2010
-3.1
16.3
3.0
6.0
0.0
2011
-2.1
165.3
3.4
5.4
0.0
2012
-1.9
17.6
2.7
5.3
0.0
2004
-2.9
30.7
2.6
4.8
-
2005
-3.6
30.4
1.4
3.5
-
2006
-2.7
29.4
2.1
3.8
4.8
2007
-1.6
28.7
3.0
4.3
2.0
2008
-2.7
30.0
6.3
4.6
10.2
2009
-5.9
35.4
0.6
4.8
-6.0
2010
-4.8
38.1
1.2
3.9
4.4
2011
-3.1
41.2
2.1
3.7
2.7
2012
-2.9
43.9
2.7
3.5
-1.8
2004
-0.9
14.5
6.2
4.9
-
2005
0.1
12.1
3.9
3.9
-
2006
-0.2
10.7
6.6
4.1
0.0
2007
0.0
9.7
10.1
5.3
-0.5
2008
-4.1
19.5
15.3
6.4
-0.4
2009
-9.0
36.1
3.3
12.4
-0.4
2010
-8.2
44.7
-1.2
10.3
-0.4
2011
-3.5
42.6
4.2
5.9
0.3
2012
-2.1
43.5
4.1
5.8
1.1
Lithuania 2006
-0.5
18.2
3.8
4.1
0.0
2007
-1.2
17.3
5.8
4.5
0.0
2008
-3.3
15.6
11.1
5.6
0.0
2009
-8.9
29.3
4.2
14.0
0.0
Specification
Bulgaria
Czech
Republic
Latvia
66
Paweł Pasierbiak
Government budgetary position
Price stability
Specification
General government General governsurplus/deficit
ment gross debt
HICP
Long-term
Exchange rate
interest
vis-à-vis euro*
rate
Lithuania 2010
– cont.
2011
-7.2
38.0
1.2
5.6
0.0
-5.5
38.5
4.1
5.2
0.0
2012
-3.2
40.4
4.2
5.2
0.0
2004
-6.5
59.4
6.8
8.2
-
2005
-7.8
61.7
3.5
6.6
-
2006
-9.2
65.6
4.0
7.1
-6.5
2007
-5.5
66.0
7.9
6.7
4.9
2008
-3.8
72.9
6.0
8.2
-0.1
2009
-4.0
78.3
4.0
9.1
-11.5
2010
-4.2
81.4
4.7
7.3
1.7
2011
4.3
80.6
3.9
7.6
-1.4
2012
-2.5
78.5
4.3
8.0
-6.1
2004
-3.9
41.8
3.6
6.9
-
2005
-2.5
42.0
2.2
5.2
-
2006
-3.8
47.6
1.3
5.2
3.2
2007
-2.0
45.2
2.6
5.5
2.9
2008
-3.7
47.2
4.2
6.1
7.2
2009
-7.1
51.0
4.0
6.1
-23.2
2010
-7.8
54.8
2.7
5.8
7.7
2011
-5.1
56.3
3.9
6.0
-3.2
2012
-3.0
55.0
4.0
5.8
-2.4
Romania 2007
-2.5
13.0
4.9
7.1
5.4
2008
-5.5
13.3
7.9
7.7
-10.4
2009
-8.3
23.7
5.6
9.7
-15.1
2010
-6.8
30.5
6.1
7.3
0.7
2011
-5.2
33.3
5.8
7.3
-0.6
2012
-2.8
34.6
4.6
7.3
-2.8
Hungary
Poland
* Average annual percentage change.
Source: ECB Convergence Report 2006, Frankfurt am Main, December 2006, p. 20 (data for 2004-2005); ECB Convergence Report 2008, Frankfurt am Main, May 2008, p. 30 (data for 2006-2007); ECB Convergence Report 2010,
Frankfurt am Main, May 2010, p. 33 (data for 2008-2009); ECB Convergence Report 2012, Frankfurt am Main, May
2012, p. 37 (data for 2010-2012).
67
Figure 1. General government surplus or deficit in Central and Eastern European countries with a derogation
in 2004-2012, in %
Source: Author’s own elaboration based on Eurostat Database. Government deficit/surplus, debt, and associated
data [gov_dd_edpt1]. Date of access: 2012/10/27; ECB Convergence Report, Frankfurt am Main, May 2012, p. 37.
public finances, should be regarded as one of the most important objectives that any future euro area Member States should set for themselves.
In the 2004-2012 period, the budgetary position of the countries
with a derogation changed quite rapidly (see Figure 1). At the beginning
of the period (2004), the Treaty criterion was met by the three countries: Czech Republic, Lithuania, and Latvia. The levels of their budgetary deficits did not exceed the reference value of 3%. The other two
countries13, i.e. Hungary and Poland exceeded the required threshold
considerably, by 3.5 and 2.4 percentage points (p.p.), respectively. These
countries were also subject to the Council Decision on the existence of
an excessive deficit14.
By 2008, the situation was changing for better in Poland (its deficit in
2007 reached 1.9% of GDP) and the Czech Republic. The situation was
relatively stable in Lithuania and Latvia unlike Hungary which deterio-
13 Although the chart in Figure 1 shows the data for Bulgaria and Romania, these countries
will not be examined until the year of their accession to the EU, i.e. 2007.
14 The procedure was introduced by the Council Decision of 5 July 2004. See: Convergence Report. December 2006, European Economy, No. 1/2006, European Communities 2007, pp. 20,
24.
68
Paweł Pasierbiak
rated dramatically (its deficit in 2006 reached 9.6% of GDP). The Commission maintained that Hungary led overly an expansionary fiscal
policy, consisting of huge rises in public spending and lowering taxes
since 200115. The year 2008 began a strong deterioration in the budget
balance in all of the countries analysed. Only two of the seven countries
under scrutiny, namely Bulgaria and the Czech Republic met the budget
criterion. The remaining showed their deficits significantly increased so
they could not satisfy the requirement. In 2009-2010, the budget deficits in all of the countries with a derogation strongly increased because
of the rapid deterioration of macroeconomic conditions. Figure 1 shows
that the relation of budget deficit to the GDP in Lithuania, Latvia and
Romania was close to 10%. When the convergence report was published by the European Central Bank in 2010, all of these countries, except Bulgaria, were included in the Council Decisions on the existence
of an excessive deficit16. In the following months, Bulgaria also joined
this group. The Council established the deadlines for an effective corrective action to be taken, i.e. 2012 for Hungary, Lithuania, Latvia, Poland, and Romania and 2013 for the Czech Republic. In 2011, the ratio
of government deficit for Hungary reached temporarily a positive value
of 4.3% because of ad hoc measures rather than permanent structural
adjustment17. As a result of a negative opinion on the efforts towards the
implementation of Hungary’s actualised convergence program of 2011,
the EU Council decided to suspend commitments of the EU Cohesion
Fund for 2013. The remained countries despite failing to meet the criterion undertook some further efforts involving the consolidation of public finances, which should bring about some effects in 201218.
The second criterion for assessing the state of the public finances
is based on an assessment of general public gross debt in relation to
GDP. Figure 2 gives the relevant data. Analysing the changes between
2004 and 2012, public debt can be said to have performed much better than the budgetary criterion. However, even if all of the countries
except Hungary can be said to have met this criterion, one should bear
15 Convergence Report. December 2006..., p. 21.
16 ECB Convergence Report, Frankfurt am Main, May 2010, p. 34.
17 In 2011, there was a one-off transfer of assets from a private to public pillar of the pension
system. See: Convergence Report 2012, European Economy, No. 3/2012, European Communities 2012, pp. 105-106.
18 The Commission forecasts that the ratio of budget deficit to GDP only in Lithuania will excess the reference value (3.2%), while in Poland both values will be equal and in the other
countries it will be less of it. ECB Convergence Report 2012..., p. 40.
69
Figure 2. Changes in general government gross debt in the Central and Eastern European countries with
a derogation in 2004-2012, in %
Source: Author’s own elaboration based on Eurostat Database. General government gross debt [tsdde410]. Date
of access: 2012/10/27; ECB Convergence Report, Frankfurt am Main, May 2012, p. 37.
in mind that the situation is dynamic and general trends are not optimistic enough. The relatively good situation until 2007 and its subsequent deterioration result from the financial and economic crisis that
became increasingly deep. There is also a direct relationship between
the increase in budget deficit and public debt growth. Since 2008, the
value and share of public debt in relation to GDP have been increasing.
In particular, this is evident in Latvia and Lithuania, but also to a lesser
extent in Romania and the Czech Republic.
The majority of countries achieved high levels of the indicator
which, however, did not exceed 45%. For example, the share of debt in
relation to GDP was steadily increasing in Poland, i.e. up to 55% in 2012
since 2004, whereas in Hungary, it exceeded the reference value since
the very beginning of Hungary’s accession to the EU19.
Bulgaria was the most disciplined country in reducing its public
debt. In the period studied, even under adverse macroeconomic envi-
19 In 2004, the value of the indicator for Hungary amounted to 59.5%.
70
Paweł Pasierbiak
ronment, there was a significant decrease in Bulgaria’s debt, i.e. to 13.7%
of GDP in 2007. In the subsequent years, its public debt did not exceed
18%. The good situation in Hungary in 2011 was only a single improvement thanks to the aforementioned transfer of assets from the private
to the state pension system. The European Commission have predicted
that by 2012 the ratio of public debt to GDP will increase in most of
the countries with a derogation although it will not exceed the reference
value in all of the countries except Hungary.
3.
Changes in meeting the monetary criteria
Based on the data on meeting the inflation criterion, it should be noticed that the inflation rate for the countries of Central and Eastern Europe was different over the entire period. The beginning of the period
witnessed moderate inflation and even a downward trend (see Table 1).
The improved economic conditions after 2005 resulted in a dynamic
Figure 3. Reference value for price stability and long-term interest rate for the period of May 2004 – August
2012, in %
Source: Author’s own elaboration based on Eurostat Database. HICP monthly data (12-month average rate of
change) [prc_hicp_mv12r] and EMU convergence criterion series – monthly data [irt_lt_mcby_m]. Date of access: 2012/10/10.
71
Table 2. Number of months of fulfilling price and interest rate criteria after joining the EU
Specification
Price stability (HICP)
Long-term interest rate
Bulgaria*
7
47
Czech Republic
69
100
Hungary
0
8
Latvia
17
64
Lithuania
23
71
Poland
37
70
Romania*
2
11
* The period for Bulgaria and Romania begins in January 2007 and covers 68 months, while for the other countries the entire period covers 100 months.
change) [prc_hicp_mv12r] and EMU convergence criterion series – monthly data [irt_lt_mcby_m]. Date of access: 2012/10/10.
growth of inflation levels in most of the countries analysed. Inflation
exceeded 10% in some of them or reached even 15.2% in 2008 in Latvia. This year was typical because all of the countries showed the highest
value of the index over the period. The year 2008 was also the year when
the effects of the financial crisis began to be felt. Negative shocks to the
economy experienced by the Central and Eastern European counties as
a result of certain changes in commodity prices on world markets and
a general decline in economic activity decreased inflation as compared
to the year before. The period of 2010-2012 showed a stabilised inflation
at a level ranging from 1 to 6%. Latvia and Lithuania were exceptions as
their level of inflation in 2010 strongly decreased in relation to that of
2009. Actually, even a -1.2% deflation occurred in Latvia in 2010.
The compliance of the inflation criteria by the countries of Central and Eastern Europe reflected any changes in the level of inflation.
Figure 3 presents the data on the course of the actual level of the reference value for the price stability criterion and long-term interest
rate. The line chart clearly shows the periods of stability and volatility.
The reference value was increasing though at a moderate pace in the
years of economic prosperity, i.e. until 2008. Since then, greater variability was noticed. This was reflected in the ability of the CEE countries
to meet this criterion. It should be emphasised that most of the countries under study had difficulties in satisfying the inflation criterion in
the period. A thorough analysis of the monthly data (see Table 2) leads
72
Paweł Pasierbiak
to the conclusion that the Czech Republic achieved the best results in
terms of fulfilling the inflation criterion as it met the criteria in 69 out
of the 100 months analysed. Poland (37/100) and Lithuania (23/100)
ranked second though with much worse results and third, respectively.
In fact, Hungary obtained the worst results as it failed to fulfil the criterion on price stability in all of the months. Romania and Bulgaria were
countries of bad performance, too20.
A better situation was observed for the interest rate criterion. However, the countries with a derogation complied with this criterion in
a varied manner. The level of reference value was stable until the end
of 2009, which means that most of these countries met the criterion.
The exception was Hungary which by April 2010 never fulfilled this criterion and temporarily Poland and Romania. Since April 2010, there
were more dynamic changes in the reference value. Consequently, there
were frequent changes in the fulfilment of interest rate criterion. They
resulted from both the growing diversity of long-term interest rates in
the European Union, which led to a change in the perception of risk associated with particular countries and the frequent changes in the composition of the reference group, which, in turn, caused a stronger variation of inflation in the EU following the intensification of the crisis21.
Additionally, the countries of Central and Eastern Europe could
not easily meet the criteria of interest rate and inflation rate because of
the arbitrary determination of the composition of the reference group.
Actually, the European Commission took quite a flexible approach, giving different arguments for including or excluding the country into/
from the reference group. As a result, there was a significant change
in the reference value, which could mean that they could be included
into the reference group of countries with deflation if the CEE countries failed to meet the criteria; otherwise, they could meet the criterion.
This is illustrated in Figure 4 which shows the evolution of the reference
value depending on the composition of the reference group22.
20 Since its accession to the EU, Romania fulfilled this criterion only in 2 out of 68 months analysed (January 2007 – August 2012).
21 See: Monitor Konwergencji Nominalnej w UE 27 [Official Journal for the Nominal Convergence in the UE-27], Ministerstwo Finansów, Departament Polityki Finansowej, Analiz
i Statystyki [Polish Ministry of Finance, Department for Financial Policy, Analyses, and Statistics], 2011, No. 10, p. 1.
22 As this problem, however important, is not of the main interest in the paper, it will not be
described in detail. More on this see, e.g. M. Ochrymiuk, A. Rogut, Konwergencja... [Convergence...] and convergence reports by the Commission and ECB.
73
Figure 4. Reference value for price stability, May 2004 – August 2012, in %
change) [prc_hicp_mv12r]. Date of access: 2012/10/10.
A stable participation of the currency of the country with a derogation in the exchange rate mechanism of the European Monetary System
(ERM II) is the last monetary criterion to be analysed. As of October
2012, out of the seven countries studied, only two of them, i.e. Lithuania
and Latvia participated in ERM II. Therefore, only these countries managed to meet the criterion in respect of the normal fluctuation margins
rates. Firstly, these countries formally participated in the stabilisation
mechanism and secondly, there was no central exchange rate devaluation of the currencies of the ERM II mechanism in the two previous
years. As for the other countries, the currency of Bulgaria, i.e. the Bulgarian Lev, did not participate in the ERM II but it was linked to the
euro under a currency board arrangement23. The remained countries
pursued different types of policies, which brought about fluctuations
of their currencies. Some of them like Poland and the Czech Republic
implemented inflation targeting strategies combined with the floating
23 Bulgaria introduced its currency board arrangement on 1 July 1997, pegging the Bulgarian
Lev to the German mark and subsequently to the euro. See: Convergence Report 2010, European Economy, No. 3/2010, European Communities 2012, p. 55.
74
Paweł Pasierbiak
exchange rate. In 2001, Hungary took a unilateral decision about tying
its currency exchange rate to the euro, or a unilateral peg of the forint
to the euro, but in February 2008, it moved back to a floating exchange
rate regime with a +/-15% fluctuating bond24.
The data in Table 1 indicate that the exchange rates of individual
countries with a derogation showed relatively significant fluctuations
against the euro except Lithuania, Latvia and Bulgaria. The exchange
rates were particularly strong for the Polish zloty with a depreciation
by 23.2% in 2009, Romania – depreciation by 10.4% and 15.1% in 20082009, and Hungary – depreciation by 11.5% in 2009. Uncertainty on the
international financial markets, adverse economic growth forecasts, increased risk aversion, and investors’ concerns about vulnerability to external threats were the main reasons for the weakening of currencies in
the countries listed. Improving sentiment in the international financial
markets in the second half of 2010 and in early 2011, a relatively high
rate of economic growth and fairly large positive interest rate differentials vis-à-vis euro area assets caused that the currencies of the countries
with a derogation appreciated gradually against the euro25. The second
half of 2011 was unfavourable due to the return of some tensions in the
sovereign debt markets in the euro area. The value of the currencies of
countries using the inflation targeting monetary regime dropped.
Conclusions
The analysis of the changes that occurred while complying with the
nominal convergence criteria by the new EU members from Central
and Eastern Europe provides a basis for formulating some conclusions.
In the initial period, 2004-2007, there was an increasing convergence
of countries in relation to the majority of the nominal criteria. On the
other hand, certain greater variation was noticed since the beginning of
the 2008 crisis. The long-term stability of the interest rate was the criterion mostly satisfied.
The countries with a derogation are recognised by their highly variable compliance of the Maastricht criteria. Therefore, most of the countries have failed to achieve the durability of fulfilment of the criteria
24 ECB Convergence Report 2012, Frankfurt am Main, May 2012, p. 18.
25 ECB Convergence Report 2012..., p. 41.
75
Table 3. Fulfilment of the convergence criteria by the countries of Central and Eastern Europe with
a derogation (as of March 2012)
Specification
Price stability
General budgetary
position
Long-term interest rate ERM II
Bulgaria
Yes
Yes*
Yes
No
Czech Republic
No
No
Yes
No
Hungary
No
No
No
No
Latvia
No
No
Yes
Yes
Lithuania
No
No
Yes
Yes
Poland
No
No
Yes
No
Romania
No
No
No
No
* Council decision abrogating the decision on the existence of an excessive deficit was taken on June 22, 2012.
See: Official Journal of the European Union, L 179/19, July 11, 2012.
Source: Author’s own elaboration based on Convergence Report 2012, European Economy, 2012, No. 3, European Communities 2012, pp. 6-24.
which must be an inherent feature of economies. Table 3 illustrates this
issue well. Thus, at present, none of the countries can adopt the euro.
Many countries need permanently adjust their economic policies because of numerous factors that affect the level of their economic convergence. The most important factors should include26: 1) high public
or private indebtedness, especially in connection to a relatively high
level of external debt, which makes economies vulnerable to contagion
from stress in financial markets; 2) wage growth and productivity fostering to support competitiveness of countries; 3) many countries need
to tackle skill mismatches and encourage labour market participation,
e.g. in an export sector to support their strong, balanced and sustainable
growth; 4) in most countries, improvements in their business environment and measures to strengthen their governance as well as to enhance
the quality of their institutions are required to support their better and
sustainable output growth and make their economies more resilient to
country-specific shocks; 5) as for the financial sector, the banking sector and the risks related to its exposure to other countries, and relatively
26 Ibidem, p. 36.
76
Paweł Pasierbiak
high foreign currency lending need to be monitored; also, funding markets in local currency, especially at longer maturities should be developed; 6) the ability to achieve and maintain price stability on a lasting
basis under conditions of stable exchange rates vis-à-vis the euro remains crucial for the assessment of sustainable economic convergence;
7) sustainable policy adjustments are indispensable to avoid any new
build-up of macroeconomic imbalances; 8) the projected demographic
changes are expected to be rapid and substantial in nature.
These factors are critical for the process of achieving economic convergence by the countries. Therefore, these issues should be the priority
areas in economic policy in the candidate countries. One should also
bear in mind, however, that the nominal convergence is accompanied
by real convergence. Some of the CEE countries show faster progress
in real convergence, which is not yet confirmed by the achievement of
nominal one27.
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Eurostat Database. HICP monthly data (12-month average rate of change)
[prc_hicp_mv12r] and EMU convergence criterion series – monthly
data [irt_lt_mcby_m]. Date of access: 2012/10/10.
27 M.J. Rinaldi-Larribe, Is Economic Convergence in New Member States Sufficient for an Adoption of the Euro?, The European Journal of Comparative Economics, Vol. 5, No. 2, p. 282.
Kierzenkowski R., Preparing for Euro Adoption in Poland, OECD Economic Department Working Papers, No. 790, ECO/WKP (2010) 46,
Paris, July 15, 2010.
Ładyka S., Z teorii integracji europejskiej [From the Theory of European
Integration], Katedra Integracji Europejskiej im. J. Monneta, Warszawa:
Kolegium Gospodarki Światowej SGH, 2001.
Monitor Konwergencji Nominalnej w UE 27 [Official Journal for the
Nominal Convergence in the UE-27], Ministerstwo Finansów, Departament Polityki Finansowej, Analiz i Statystyki [Polish Ministry of Finance, Department for Financial Policy, Analyses, and Statistics], 2011,
No. 10.
Mucha-Leszko B., Strefa euro. Wprowadzenie, funkcjonowanie,
międzynarodowa rola euro [Eurozone. Introduction, Functioning, and
International Role of the Euro], Lublin: Wydawnictwo UMCS, 2007.
Ochrymiuk M., Rogut A., Konwergencja nominalna w strefie euro. Implikacje dla Polski [Nominal Convergence in the Eurozone. Implications
for Poland], Warszawa: Wydawnictwo NBP, July 2010.
Official Journal of the European Union, C 83/47, March 20, 2010.
Official Journal of the European Union, L 179/19, July 11, 2012.
Raport o konwergencji. Maj 2012 [Report on Convergence. May 2012],
Europejski Bank Centralny [European Central Bank], Frankfurt am
Main 2012.
Rinaldi-Larribe M.J., Is Economic Convergence in New Member States
Sufficient for an Adoption of the Euro?, The European Journal of Comparative Economics, Vol. 5, No. 2.
Tchorek G., Teoretyczne podstawy integracji walutowej [Theoretical Fundamentals for Currency Integration], [in:] P. Kowalewski, G. Tchorek
(eds.), Mechanizmy funkcjonowania strefy euro [Mechanisms for Functioning the Eurozone], Warszawa: Wydawnictwo NBP, 2010.
Triandafil C.M., The Analysis of the Convergence Criteria. Empirical Perspective in the Context of the Sustainable Character Highlight, National
Institute of Economic Research, Working Papers, No. 111205, Bucharest
2011.
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Economic convergence in the
regions of the European Union
Member States of Central and
Eastern Europe
Abstract: This paper is an attempt to answer the question of whether economic
convergence occurs across the regions of the Central and Eastern European EU
Member States. Here, convergence is analysed in terms of sigma convergence and
absolute beta convergence and the calculations are based on the Eurostat database
for 1995-2009. This study shows that the diversification of regional GDPs per capita
across the Central and Eastern European EU Member States is, unfortunately, increasing over the period. However, the calculations on the regional convergence
across this group of states show that convergence is proceeding, which may hide
growing divergence among these countries.
Keywords: beta convergence, sigma convergence, Central and Eastern Europe
Introduction
The Central and Eastern European EU Member States are interested
in economic convergence because the EU cohesion policy is being implemented in this region in the 2007-2013 financial perspective. Economic convergence is interesting and significant in practical terms,
especially for a regional policy as these countries have been covered
by the Convergence objective which is to speed up the elimination of
developmental discrepancies in the least developed EU Member States
and regions. The priorities of the cohesion policy are specified in the
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Bartosz Jóźwik
Communication of the European Commission Cohesion Policy in Support of Growth and Jobs: Community Strategic Guidelines, 2007-20131.
The criteria of financial support for individual states (under the Cohesion Fund) and regions (under the Structural Funds) are specified in
the Council Regulation (EC) no. 1083/2006 of 11 July 2006 laying down
general provisions on the European Regional Development Fund, the
European Social Fund and the Cohesion Fund and repealing Regulation
(EC) no. 1260/1999. Qualified for funding from the Structural Funds
under the Convergence objective, the regions of the Central and Eastern
European EU Member States have their per capita gross domestic product (GDP) measured at purchasing power parity and calculated using
the data for 2000-2002, less than 75% of the average GDP of the EU-25
in the same reference period2.
Economic convergence in the regions of the European Union East
and Central Member States is implemented by improving conditions
for their growth and employment, especially increasing investment in
physical and human capital, developing innovation and knowledgebased society, improving their adaptability to economic and social
change, protecting and improving the environment, and enhancing the
efficiency of their administration3. More generally, economic convergence in the EU countries and regions can be considered as nominal
convergence and real convergence. The criteria to assess nominal convergence include price stability, long-term interest rates, fiscal aspects,
and exchange rate stability. Nominal convergence may gradually lead
to real convergence by, e.g. the benefits from macroeconomic stability, a reduced risk of exchange rate or reduced uncertainty about inflation and (long-term) interest rates4, while real convergence will result
in convergent economic variables like production, income, income per
capita or unemployment. Income per capita (GDP per capita) is examined in terms of convergence due to the research objective adopted here.
1
2
3
4
COM (2005) 0299.
Art. 5, Council Regulation (EC) no. 1083/2006 of 11 July 2006 laying down general provisions
on the European Regional Development Fund, the European Social Fund and the Cohesion
Fund and repealing Regulation (EC), no. 1260/1999.
H. Jahns (ed.), Komentarz do aktów prawnych Wspólnot Europejskich w zakresie funduszy
strukturalnych i funduszu spójności na lata 2007−2013, Ministerstwo Rozwoju Regionalnego [Commentary on the legislation of the European Communities as to the Structural
Funds and the Cohesion Fund for 2007-2013, Ministry of Regional Development], Warszawa
2006, p. 23.
E. Marelli, Specialisation and Convergence of European Regions, The European Journal of
Comparative Economics, Vol. 4, No. 2, p. 151.
Economic convergence in the regions of the European Union Member States...
Principally, the paper attempts to answer the question whether
economic convergence occurs across the Central and Eastern European EU Member States. This research objective will be reached by
studying in detail the following issues: are poorer regions across the
Central and Eastern European EU Member States tending to develop
faster than richer regions, which regions have their GDP per capita the most significantly increased, how has the change in GDP per
capita in these regions impacted economic convergence in the Central and Eastern European EU Member States, how has the change in
GDP per capita in these regions impacted the economic convergence
in each of the Central and Eastern European EU Member States.
The literature review has enabled formulating the following research
hypothesis that refers to the neoclassical model of economic growth:
poorer regions across the Central and Eastern European EU Member States tend to grow faster than richer regions, which leads to income convergence.
The paper reviews several recent examinations on economic convergence, mostly on convergence in the EU Member States, relative to
this research hypothesis. Further, the paper describes the main methods adopted here to calculate convergence: sigma convergence and beta
convergence. These are two most common in economic literature methods to measure income convergence. The third part of the paper examines how GDP per capita was developing in the regions of the Central
and Eastern European EU Member States, its magnitude and dynamics in 1995-2009. Then, the research hypothesis is verified by calculations and the examination results on the per capita GDP convergence in
the regions of the Central and Eastern European EU Member States are
provided. The summary includes the conclusions from the study.
1.
Previous studies on the economic
convergence across the regions
Numerous researchers have studied economic convergence across regions of different countries and economic groupings. They were inspired by the previous works on convergence in countries by, e.g.
W.J. Baumola (1986), J.B. De Long (1988), N.G. Mankiw, D. Romer and
D.N. Weil (1992). In the 1990s, convergence in the regions (NUTS 2 level) of old EU Member States was examined by, e.g. H. Armstrong (1995)
81
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Bartosz Jóźwik
and D. Neven. C. Gouyette (1995)5. Simultaneously, economic convergence in the regions of the USA, Japan and Canada was studied by, e.g.
R.J. Barro and X. Sala-i-Martin6. A. Spilimbergo and N. Xingyuan Che
(2012) published their contemporary extensive results on economic
convergence in 32 different countries in the world, including regions in
the European Union, USA, and China7. The authors attempted to prove
that structural reforms influence the pace of economic convergence.
Their results show that the development of the financial market, liberalisation of trade, quality of an institutional infrastructure and labour
market reforms can influence convergence although this impact is unclear for border regions. Interestingly, countries with higher inflation
tend to show faster economic convergence.
The study of economic convergence across the regions of the European Union Member States can be applied to assess how much the EU
cohesion policy is implemented, even if this kind of study is not carried out for this purpose. This challenge was taken on by R. Esposti and
S. Bussoletti (2008) in their paper published in 2008. They applied the
method of conditional beta convergence to examine how the regions
of the European Union are impacted by Objective 1 of the Structural
Funds8. The analysed data referred to 206 regions of the EU-15 before
2004, i.e. 1989-2000. They claimed that convergence occurred across
these regions and was impacted by implementing Objective 1. H. Eckey,
Ch. Dreger, M. Turck (2009) achieved similar results in their research
into the convergence across the EU-23 with 233 NUTS 2 regions in 19952003. They said that there is the process of economic convergence between the regions studied and predict that it may be accelerated by the
regions in the new EU Member States9.
Ph. Monford thoroughly investigated economic convergence in the
regions of the European Union (2009). He fully examined the dispersion of a relationship between economic growth and per capita GDP
5
6
7
8
9
D. Neven, C. Gouyette, Regional convergence in the European Community, Journal of Common Market Studies, 1995, Vol. 33 (1).
R. Martin, P. Sunley, Slow Convergence? The New Endogenous Growth Theory and Regional Development, Economic Geography, Vol. 74, July 1998, No. 3, p. 205.
A. Spilimbergo, N. Xingyuan Che, Structural Reforms and Regional Convergence, IMF Working Paper, WP/12/106, International Monetary Fund 2012, p. 26.
R. Esposti, S. Bussoletti, Impact of Objective 1 Funds on Regional Growth Convergence in
the European Union: A Panel-data Approach, Regional Studies, Vol. 42, March 2008, Issue 2,
p. 170.
H. Eckey, Ch. Dreger, M. Türck, Regional convergence in the enlarged European Union, Applied Economics Letters, Vol. 16, 2009, Issue 18, p. 1806.
across these regions. His results indicate that convergence occurs in
the regions of both the EU-27 and EU-15. He also points out that it is
groundless to claim that divergence will occur in the regions of the
new EU Member States (EU-12) although he says that several indicators show deepening disproportions. This phenomenon results from the
very rapid growth of few metropolitan regions with capital cities and
those with major urban centers as well as the exclusion of the poorest
(peripheral) regions from the process of rapid growth10.
G. Petrakos, P. Artelaris (2009), who studied regional convergence
in the EU Member States in 1990-2000, drew different conclusions11.
They claim that opening the markets as a result of the European economic integration, and thus the intensification of competition there can
lead to greater internal disparities in development. The authors stress
that their results are consistent with the predictions based on the analysis of models developed in accordance with the New Economic Geography and the theory of endogenous economic growth. They also refer to
the studies by many scholars who claim that economic convergence in
the EU may hide emerging disparities across a given country. For example, Ph. Martin (2005) concluded that European integration leads to the
convergence between the Member States but not between regions inside
countries12. Therefore, G. Petrakos and P. Artelaris emphasise the role
of regional policy in the current financial period and regard it as one of
the most important policies of the European Union in the predictable
future. They also provide intriguing comparisons and resultant conclusions about the methods to calculate absolute beta convergence.
M. Smętkowski and P. Wójcik (2008)13 arrived at similar conclusions
in their study on regional convergence across the Central and Eastern
European EU Member States. Having regard to the polarisation of developmental processes at a regional level, which mostly refers just to the
new EU Member States, they examined the processes of regional devel-
10 Ph. Monford, Regional Convergence. Growth and Interpersonal Inequalities across the EU,
Working Paper, Directorate General Regional Policy, European Commission, January 2009, p.
39.
11 G. Petrakos, P. Artelaris, European Regional Convergence Revisited: A Weighted Least
Squares Approach, Growth & Change, Vol. 40, June 2009, No. 2, p. 327.
12 P. Martin, The geography of inequalities in Europe, Swedish Economic Policy Review, 2005,
Vol. 12, p. 83.
13 M. Smętkowski, P. Wójcik, Regiony w Europie Środkowo-Wschodniej: tendencje i czynniki rozwojowe [Regions in Central and Eastern Europe: Trends and Growth Factors], Warszawa:
Centrum Europejskich Studiów Regionalnych i Lokalnych Uniwersytetu Warszawskiego,
2008.
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Bartosz Jóźwik
opment, excluding metropolitan regions, or using data aggregated at the
level of NUTS 3. Their study of the convergence in 1998-2005 measured
by GDP per capita employs, e.g. the method of beta convergence and
sigma convergence. They state that the examined area can feature rather
weak regional convergence and the polarisation of developmental processes tended to be insignificant in most of the countries although it was
quite stable in the smaller countries. A key factor in economic growth was
a rise in labour productivity, especially in industry and market services.
E. Łaźniewska, T. Górecki and R. Chmielewski (2011) comprehensively studied regional development across the Central and Eastern European EU Member States, Cyprus, and Malta. Their analyses indicate
that, e.g. convergence occurred in the area examined but it was accompanied by a higher variance of GDP per capita, i.e. the scope between
the regions with the lowest and highest per capita GDP. Moreover, the
disparities between GDP per capita increased in all of the countries
studied, which may result from the phenomenon frequent in the early
stages of economic development at a national level when several major
regions drive the process of catching-up as a result of strong agglomeration effects14.
These results do not refer to the economic convergence in 2007-2009
so the period when the economic crisis impacted economic development in countries and regions. Based on the latest evolution of GDP per
capita, the examination here refers to this phenomenon. These methods
of analysing convergence will be discussed in the next section.
2.
The method to analyse convergence
The two most common in the literature methods to study convergence:
sigma convergence and beta convergence have been adopted to verify
the research hypothesis. X. Sala-i-Martin introduced first this terminology in his paper in 199015. The criteria of sigma economic convergence are verified by measuring the real dispersion of GDP per capita.
Sigma economic convergence occurs across a group of countries where
14 E. Łaźniewska, T. Górecki, R. Chmielewski, Konwergencja regionalna [Regional Convergence], Poznań: Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu, 2011, p. 2004.
15 X. Sala-i-Martin, 1990.
the dispersion of their real GDP per capita is reduced in the time interval investigated. Dispersion is measured by the standard deviation (or
variance) of the natural log of per capita GDP, and the dispersion of per
capita GDP across a given group of countries is commonly calculated
by the standard deviation16. Hence, sigma convergence is discussed
when the standard deviation of the natural log of per capita GDP across
a given group of countries shows a declining trend over time, which is17:
σ(t+T) < σt
(1)
where:
σ(t+T) – standard deviation of the natural log of GDP per capita across
a group of economies in the last year of examination,
σt – standard deviation of the natural log of GDP per capita across
a group of economies in the first year of examination.
The standard deviation of the natural log of per capita GDP across
a given group of countries over an examined year is calculated as:
(2)
To prove a developing trend of the standard deviation of the natural
log of GDP per capita, the following linear trend equation is followed18:
σt = φ0+ φ1t
(3)
where:
σt – standard deviation of the natural log of GDP per capita among
economies in year,
t – time (t=1, 2, …).
It is a linear function so its parameters are estimated by the classical method of least squares. This method can generate such parameter
assessments at which the theoretical values of a linear trend show the
least deviation from the real values of the standard deviation of the nat-
16 K. Malaga, Konwergencja gospodarcza w krajach OECD w świetle zagregowanych modeli
wzrostu [Economic Convergence in the OECD Member Countries under Aggregated Models of Growth], Poznań: Wydawnictwo Akademii Ekonomicznej w Poznaniu, 2004, p. 170.
17 X. Sala-i-Martin, The Classical Approach to Convergence Analysis, Economics Working Paper,
117 (1995), p. 3.
18 M. Próchniak and R. Rapacki apply this method. Konwergencja beta i sigma w krajach postsocjalistycznych w latach 1990-2005 [Beta and Sigma Convergence in the Post-Socialist
Countries in 1990-2005], Bank i Kredyt, 2007, No. 8-9, p. 44.
85
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Bartosz Jóźwik
ural logarithm of per capita GDP among economies in a given period.
Sigma convergence occurs when parameteris a negative number. Nevertheless, M. Próchniak and R. Rapacki (2007) point out that the method
of a linear trend is not the best one to verify sigma convergence. First,
discrepancies between levels of income can vary non-linearly. Second,
this method does not enable reading the partial dynamics of varied income over each year. Thus, they suggest that the occurrence of sigma
convergence be verified by analysing trends in the standard deviation
of GDP per capita following the visual evaluation of the empirical point
spread19.
Convergence can be determined by the other method known as absolute beta convergence20. It stems from the 1950s and 1960s neoclassical theory of growth of which basic principle is the decreasing marginal productivity of capital per capita and the exogenous nature of
technological progress21. Absolute beta convergence occurs when poor
economies grow faster than rich ones. If the value of GDP per capita
is assumed to reflect the level of economic development, countries (or
regions) with a lower GDP per capita should have a faster rate of growth
than economies (or regions) with a higher level of GDP per capita.
There are at least three reasons for such convergence. Firstly, the development of any economy tend to converge with the path to sustainable
growth, known as steady-state, so poorer economies can be expected to
approach richer ones. Secondly, the rate of growth on capital is slower
in economies with higher capital per worker, which can stimulate capital flow from rich to poor economies, and thus favours convergence
among countries. Finally, the spread of knowledge and technology is
delayed, which arises income discrepancies because there will be always
countries that do not still apply the best solutions. These discrepancies
may disappear as soon as poorer countries gain access to up-to-date
knowledge and technology22. Consequently, there are certain phenomena typical of the well-known in the literature process of imitation23.
19 Ibidem.
20 The literature distinguishes two types of beta convergence: unconditional (absolute) and
conditional. The calculation in this paper employs absolute convergence only.
21 W. Nowak, Konwergencja w modelach endogenicznego wzrostu gospodarczego [Convergence under the Models of Endogenic Economic Growth], Wrocław: Wydawnictwo Kolonia, 2007, p. 68.
22 D. Romer, Makroekonomia dla zaawansowanych [Advance Macroeconomics], Warszawa:
Wydawnictwo Naukowe PWN, 2000, p. 44.
23 K. Kopczewska, Renta geograficzna a rozwój społeczno-gospodarczy [Geographic Location
and Socio-Economic Development], Warszawa: CeDeWu Sp. z o.o., 2008, p. 16.
In order to evaluate if absolute beta-convergence occurs, the relationship between the growth rate of GDP per capita of the studied economies (regions) and the level of their development calculated by GDP
per capita needs to be specified. The growth rate of GDP per capita in
the ith economy in years t – t+T is specified from the formula (4):
,
(4)
where:
γi,t,t+T – logarithm for the growth rate of GDP per capita in the ith
economy in years t – t+T,
γi,t – GDP per capita in the ith economy in the first year,
γi,t+T – GDP per capita in the ith economy in the last year,
t – first year of the examination,
t + T – last year of the examination.
The regression equation is applied to evaluate parameters24:
γi,t,t+T = α0 + α1ln(yi,t) + εi,t
(5)
which enables verifying the hypothesis about the occurrence of absolute beta convergence.
Absolute beta convergence will occur if parameter is a negative number, which means a higher growth rate of GDP per capita in economies
(regions) with a lower GDP per capita in an initial stage than in economies (regions) with higher GDP per capita in an initial stage. The following section of the paper analyses the development of GDP per capita
based on the methods discussed previously.
3.
The level of income and economic growth in the
Central and Eastern European EU Member States
The value and dynamics of GDP per capita development across each
regions of the Central and Eastern European EU Member States was
initially studied before verifying the economic convergence hypothesis.
The Eurostat data on GDP per capita at market prices in the Euro for
NUTS 2 regions for 1995-2009 is employed for this analysis. Conver-
24 X. Sala-i-Martin, The Classical Approach to Convergence Analysis, Economics Working Paper
117, 1995, p. 3.
87
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Bartosz Jóźwik
gence in the regions of the Central and Eastern European EU Member
States was examined for Bulgaria (composed of 6 NUTS 2 regions),
Czech Republic (8 regions), Estonia (1 region), Latvia (1 region), Lithuania (1 region), Poland (16 regions), Romania (8 regions), Slovenia (2 regions), and Slovakia (4 regions). The seven Hungarian regions were not
studied for no comparable data on GDP per capita.
Table 1 shows the GDP per capita for each of the regions related to
the EU average for 27 countries in 1995 and 2009. The level of income
in the regions of the Central and eastern European EU Member States
is one of the lowest in the European Union. Comparing the data can
answer the question whether poorer regions tend to grow faster than
richer regions. Although the results of this examination are not unambiguous, among the poorest regions in 1995, there are the regions of
the highest annual average growth of GDP per capita, e.g. Romanian
regions of Sud-Muntenia, Nord-Vest, Centru and Vest. On the other
hand, among the richest regions in 1995, there are the regions of the
slowest annual average growth of GDP per capita: Zahodna Slovenija,
Vzhodna Slovenija, Czech Republic regions of Severozápad, Jihozápad
and Severovýchod.
Not all of the poor regions featured a relatively high economic
growth, e.g. Bulgarian regions of Severozapaden, Severen Tsentralen
and Severoiztochen. Similarly, not all of the rich regions featured a relatively slow economic growth. The most significant growth in GDP per
capita in 1995-2009 was recorded for: Bratislavský kraj (Slovakia) and
Praha (Czech Republic). The regions of Bucuresti – Ilfov (Romania),
Mazowieckie (Poland), and Eesti (Estonia) rank lower. Capital cities are
situated in all of these regions.
The growing diversity of regional GDP per capita inside countries,
which brings on an extra challenge for the government is another issue discussed by, e.g. E. Łaźniewska, T. Górecki and R. Chmielewski.
For example, the discrepancy between the Slovakian richest and poorest
region in terms of GDP per capita amounted to € 3,900 in 1995 and already € 20,600 in 2009. Similar considerable discrepancies, i.e. € 3,600
in 1995 and € 1,440 were recorded for the Czech Republic25. It is worth
pointing out that this discrepancy has increased in all of these countries. The next section of this paper attempts to answer the question
whether the growing discrepancy in regional GDP per capita in each
25 Author’s own elaboration based on the Eurostat database.
Table 1. GDP per capita in the individual regions of the Central and Eastern European EU Member States
in 1995 and 2009 and the annual average growth of GDP per capita in 1995-2009.
Region
GDP per capita
related to the EU27 in 1995
GDP per capita
related to the
EU-27 in 2009
Average annual
growth of GDP per
capita in 1996-2009
Severozapaden
(BG)
7.5
12.3
8.4
Severen Tsentralen
(BG)
7.5
13.2
8.6
Severoiztochen
(BG)
8.8
15.7
8.7
Yugoiztochen
(BG)
7.5
16.2
10.2
Yugozapaden
(BG)
10.2
33.6
13.1
Yuzhen Tsentralen
(BG)
6.8
13.6
9.2
Praha
(CZ)
49.0
122.6
10.7
Strední Cechy
(CZ)
25.9
51.5
8.9
Jihozápad
(CZ)
27.9
49.4
7.9
Severozápad
(CZ)
27.9
46.8
7.5
Severovýchod
(CZ)
26.5
46.4
7.9
Jihovýchod
(CZ)
26.5
51.9
8.7
Strední Morava
(CZ)
24.5
46.0
8.4
Moravskoslezsko
(CZ)
25.9
47.2
8.3
Eesti
(EE)
13.6
43.8
12.9
Latvija
(LV)
10.2
34.9
13.6
Lithuania
(LT)
9.5
34.0
14.0
Łódzkie
(PL)
17.0
31.5
8.6
Mazowieckie
(PL)
24.5
55.3
10.2
Małopolskie
(PL)
16.3
29.8
8.4
Śląskie
(PL)
22.4
37.0
7.6
Lubelskie
(PL)
15.0
23.4
7.3
Podkarpackie
(PL)
14.3
23.8
7.8
Świętokrzyskie
(PL)
15.0
26.8
8.3
Podlaskie
(PL)
14.3
25.5
8.4
Wielkopolskie
(PL)
18.4
36.6
9.1
Zachodniopomorskie
(PL)
19.7
30.2
7.2
89
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Bartosz Jóźwik
Region
GDP per capita
related to the EU27 in 1995
GDP per capita
related to the
EU-27 in 2009
Average annual
growth of GDP per
capita in 1996-2009
Lubuskie
(PL)
18.4
29.4
7.5
Dolnośląskie
(PL)
19.7
37.9
8.8
Opolskie
(PL)
18.4
28.1
7.2
Kujawsko-Pomorskie
(PL)
19.0
29.4
7.2
Warmińsko-Mazurskie (PL)
15.0
25.5
7.9
Pomorskie
(PL)
19.0
33.6
8.1
Nord-Vest
(RO)
8.2
21.3
11.6
Centru
(RO)
8.8
22.6
11.4
Nord-Est
(RO)
6.8
14.5
9.8
Sud-Est
(RO)
8.8
18.7
9.8
Sud - Muntenia
(RO)
8.2
20.0
11.1
Bucuresti - Ilfov
(RO)
12.2
55.3
16.5
Sud-Vest Oltenia
(RO)
7.5
17.9
10.8
Vest
(RO)
8.8
25.5
12.3
Vzhodna Slovenija
(SI)
46.3
60.4
5.5
Zahodna Slovenija
(SI)
65.3
88.1
5.7
Bratislavský kraj
(SK)
40.8
120.9
12.0
Západné Slovensko
(SK)
18.4
46.4
10.8
Stredné Slovensko
(SK)
15.6
39.6
10.8
Východné Slovensko
(SK)
14.3
33.2
10.1
Source: Author’s own elaboration based on the Eurostat database.
Central and Eastern European EU Member State is accompanied by income convergence in the entire area examined.
4.
Sigma and beta convergences in the regions of
the Central and Eastern EU Member States
To verify the convergence hypothesis, this section of the paper deals
with the calculations in accordance with the two previously discussed
methods. Since general regularity for the occurrence of convergence
are important in this study only, any individual effects typical of individual regions and individual effects in time for particular years of the
examination are not calculated. The first of the methods to measure
convergence, i.e. sigma convergence known as standard deviation illustrates some long-term trends in the degree of discrepancy in wealth or
income across a group of countries (regions). Figure 1 shows the standard deviation of natural log of GDP per capita among the regions in the
nine Central and Eastern EU Member States (no data for the Bulgarian regions) in 1995-2009. The estimated parameter of the equation of
a linear trend (-0.0074 at a degree of adjustment 0.68) proves a trend of
a decreasing value of standard deviation in this period, or a decreasing
discrepancy in GDP per capita across a group of regions, which proves
the convergence hypothesis, i.e. sigma convergence. The detailed analysis of the standard deviation in this period, however, focuses on growing values of the standard deviation in 2007-2009, which follows the
suggestion by M. Próchniak and R. Rapacki to evaluate the occurrence
of sigma convergence by analysing the directions of changes in standard deviation of GDP per capita by means of the visual evaluation of
the empirical point spread. Over these years, and thus in the economic
crisis, there was clear divergence between these regions. Interestingly,
a similar phenomenon of divergence between these regions followed
the collapse of the 2000 economic boom.
One should remember that despite the long-term diversity of regional GDP per capita among the Central and Eastern European EU
Member was decreasing, convergence in the regions in each state proceeded differently. Figure 2 shows the standard deviation of the natural
log of regional GDP per capita in the six Central and eastern European
EU Member States in 1995-2009. This analysis does not refer to Estonia,
Lithuania and Latvia as they are composed of one region only and Hungary due to no data available. Unfortunately, the regional discrepancy in
91
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Bartosz Jóźwik
Figure 1. Regional sigma convergence factor for the Central and Eastern European EU Member States
in 1995-2005
GDP per capita in these countries in this period tended to be increasing, which is indicated by the increasing standard deviation. Thus, it can
be concluded that the regional convergence hypothesis in individual
countries has been not confirmed.
The present phenomenon of regional divergence in the individual
Central and Central European EU Member State may accelerate the
deepening process of European economic integration. The same happened in EEC/EU in 1990-2000. G. Pertakos and P. Artelaris (2009),
mentioned previously, claimed that opening the market due to European economic integration, and thus increasing competition there may
have led to greater internal discrepancies. It is worth emphasising again
that their results were compatible with the predictions based on the
analysed models which had been developed both in compliance with
the New Economic Geography and the theory of endogenic economic
growth. M. Smętkowski and P. Wójcik (2008) noticed a similar phenomenon, i.e. the polarisation of developmental processes.
Figure 2. Regional sigma convergence factors for the Central and Eastern European EU Member States
in 1995-2009
Absolute beta convergence is the other of the methods to calculate
convergence. The research into regional beta convergence for the 47 regions in the Central and Eastern European EU Member States is given
in Figure 3 and Table 2. Figure 3 depicts the relationship between the average growth rate of GDP per capita for 1995-2009 in the regions studied and the level of their development in 1995 (as measured by GDP per
capita). Table 2 shows the estimated parameters for beta convergence
in ten time horizons: [1995-2009] ... [2004-2009]: regression function
parameters α and β, values of tests of significance (tα and tβ) for α and
93
94
Bartosz Jóźwik
Figure 3. Beta convergence for the 47 regions (NUTS 2) of the Central and Eastern European EU Members
States in 1995-2009
Growth rate of GDP per capita in 1995-2009
0,14
0,13
0,12
0,11
0,1
0,09
0,08
0,07
0,06
y = -0.0117x + 0.1703
R² = 0.132
0,05
0,04
6,5
7
7,5
8
8,5
9
9,5
GDP per capita in the individual regions in 1995 (logarithmic scale)
β, level of significance (pα and pβ) for α and β, and determination coefficient R2 (degree of adjustment).
The results of the estimated parameters of absolute beta convergence
for the 47 regions of the Central and Eastern European EU Members
States enable the following conclusions. Firstly, a negative correlation
between the growth rates of GDP per capita and the natural logarithms
of GDP per capita at the initial stage (a negative value of parameter β)
was noticed in all of the time horizons, which confirms the hypothesed
higher growth rate of GDP per capita in regions with lower GDP per
capita at the initial stage than in regions with a higher level of GDP per
capita at the initial stage. Secondly, the results of the analysis depicted in
Table 2 hardly confirm the occurrence of beta convergence. Although
the regression line goes downwards for each period under study, determination coefficient R2 (degree of adjustment) is less than 35% and
the parameter for the initial level of income (pβ) shows similarly low
values. Finally, the degree of adjustment of absolute beta convergence
models to the results obtained ranged from 9% to 35%. The trend to de-
95
Table 2. Beta convergence regression for the 47 regions of the Central and Eastern European EU Members States
α
β
tα
tβ
pα
pβ
R2
1995-2009
0.1703
-0.0117
4.8982
-2.6159
0.0000
0.0121
0.1320
1996-2009
0.2329
-0.0195
7.5821
-4.9757
0.0000
0.0000
0.3549
1997-2009
0.2241
-0.0184
6.6086
-4.3166
0.0000
0.0001
0.2928
1998-2009
0.1941
-0.0148
5.2473
-3.2313
0.0000
0.0023
0.1883
1999-2009
0.2445
-0.0202
6.1298
-4.0945
0.0000
0.0002
0.2714
2000-2009
0.2300
-0.0189
4.9888
-3.3732
0.0000
0.0015
0.2018
2001-2009
0.2453
-0.0210
4.5506
-3.2492
0.0000
0.0022
0.1900
2002-2009
0.2526
-0.0216
4.8875
-3.5108
0.0000
0.0010
0.2150
2003-2009
0.2109
-0.0156
4.5293
-2.8154
0.0000
0.0072
0.1498
2004-2009
0.1849
-0.0127
4.0604
-2.3709
0.0002
0.0221
0.0913
Period
Source: Author’s own elaboration.
crease the degree of adjustment and shortening a time/period horizon
are clear. This trend will be very explicit if the adjustment factor for the
longest period, i.e. 1995-2009 is not covered by the examination on the
evolution of the values of adjustment factors for the ten time horizons
specified in Table 2. With the shortening of the period covered by the
analysis, the regions of the Central and Eastern European EU Member
States were decreasingly following the beta convergence hypothesis. As
said previously, this may come from greater opening the market as a result of closer European economic integration, and rising competition
which may lead to greater internal discrepancies in economic development. On the other hand, this may be a static effect due to a decreasing
number of observations so the quality of estimation will deteriorate.
Conclusions
This examination can answer the research question of whether convergence occurs in the Central and Eastern European EU Member States.
The study of how regional GDP per capita was developing in this area in
1995-2009 indicate both sigma and beta convergence, and thus confirms
the hypothesis formulated in the paper that poorer regions in the Central and Eastern European EU Member States tend to grow faster that
96
Bartosz Jóźwik
richer regions, which leads to income convergence. However, not all of
the regions behave according to the convergence hypothesis, or not of
the poor regions develop faster than richer ones. The examination indicates that in 2001-2002 and 2007-2009, i.e. in the economic crises or
just after them, there was divergence among these regions. These phenomena are intriguing and can be further studied.
It needs to be emphasised that regional divergence in GDP per capita in the individual the Central and Eastern European EU Member
States is, unfortunately, growing. This trend is confirmed by the growing standard deviation of the natural log of regional GDP per capita in
each of the state. G. Petrakos and P. Artelaris (2009) also referred to the
examinations by numerous researchers who prove that the economic convergence of the EU Member States may hide emerging internal
discrepancies in each country. Nevertheless, Ph. Monford in his paper
from 2009 pointed out that the regional divergence in given countries
was then due to on the one hand the very rapid economic growth of few
regions with national capitals and extensive urban centers as well as the
exclusion from the process of rapid growth in the poorest regions.
These results enable evaluating positively the implementation of
an economic policy in the Central and Eastern European EU Member
States, particularly the EU cohesion policy (cohesion) which is implemented in this region but not unconditionally, especially in terms of
bridging the gap in the economic development of the poorest regions.
It should be pointed out, however, that this study applies to economic
convergence in the selected group of countries from all EU Member
States only, and therefore it cannot be the basis for evaluating the efficiency of the cohesion policy in the entire economic group. However,
these results can be used to assess the impact of the cohesion policy
on a regional basis, i.e. the Central and Eastern European EU Member States, and while planning the 2014-2020 distribution of funds to
regions. Undoubtedly, this study should be made more specific, e.g. by
including regional specialisation (economic structure) or extending the
scope of the parameters to test convergence, e.g. unemployment and labour productivity.
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Projected directions of the
CAP Reform post 2013 and
economic convergence in the
European Union
Abstract: The Common Agricultural Policy has been reformed considerably since
its creation. All of the successive reforms have involved an increasing shift from
strongly supported sectoral interventions towards market-oriented policies of
sustainable rural development. The CAP scenario for 2014-2020 indicates that the
past principles favouring unequal distribution of funds will continue to guide the
distribution of assistance under the major CAP tool, i.e. direct subsidy payments.
As a result, the new Member States will still receive less funding to implement
the redefined CAP objectives while making up for the level of agricultural development. Also, modification of the system involves some additional administrative
burden that can weaken the competitiveness of agriculture in the EU. Referring to
these issues, this paper evaluates the future CAP for the significance of the proposed changes for economic convergence in the EU’s agricultural sector.
1
1
Keywords: Common Agricultural Policy after 2013, direct payment scheme, economic convergence in the EU agricultural sector
The author regards economic convergence in an agricultural sector as any kind of activity
to harmonise (approximate) the level of agricultural development across the European Union Member States.
100
Introduction
The Common Agricultural Policy (CAP) is one of the oldest, most controversial and expensive European Union policies. Since its introduction 50 years ago, it has been reformed the most frequently. Originally,
the CAP aimed at supporting agricultural production, which was determined by the situation in agriculture in the six countries – signatories
of the Treaty as well as the insecure global agri-food market, or food
shortage. The structural policy, including the development of rural areas whose functions are also non-productive and non-commercial, e.g.
socio-cultural or environmental, was implemented to a very limited extent. Actually, the CAP and the EEC budget were definitely dominated
by a commercial and price policy until the 1990s. For example, the share
of the CAP expenses in the common budget was about 75% in 1985, including only a few percent for the structural policy, and at the end of the
current financial perspective, it has been less than 40% to be presently
0.45% of GDP.
As a sectoral policy, the CAP has turned out to be not only expensive due to increasing surplus and the resultant costs of intervention,
but also controversial. In fact, this policy has been interfering with free
global trade in agricultural products, has strained trade relations, has
polarised farmers’ income, and most of all has proved to be inconvenient to the environment. These have been the reasons for its numerous
reforms aiming at harmonising economic, social and environmental
aspects of agricultural and rural development and achieve sustainable
development.
The CAP, therefore, has got two periods. The first one known as
a pro-supply policy lasted until the early 1990s. The main focus was then
on reforming agriculture and food self-sufficiency. The 1992 MacSharry Reform started the other period when a clearly pro-demand policy
to support non-productive functions of agriculture was implemented.
The MacSharry Reform was the first important reform to fundamentally change the philosophy of the CAP. Consequently, the objectives
of the CAP were considerably changed to recognise social functions of
agriculture, especially in terms of more equitable income redistribution
in society, environmental protection, and rural development2. Since the
MacSharry Reform, the EU’s agricultural policy has been changed to
2
B. Mucha-Leszko, Ewolucja wspólnej polityki rolnej UE – przesłanki i uwarunkowania zmian
systemowych [The evolution of the Common Agricultural Policy – conditions and prerequisites for system changes], Annales UMCS, Sectio H, Vol. 38, 2004, p. 39.
Projected directions of the CAP Reform post 2013 and economic convergence in the European Union
protect less the market and reduce disorders in trade and agricultural
markets. Its main objective has been to increase agricultural competitiveness. Simultaneously, more attention has been paid to environmental protection and landscape and cultural values of rural areas. This has
resulted in compensatory payments paid to farmers (todays direct payments), which have gradually allowed for reducing institutional prices
and creating internal and external demand for EU farm products, and
also braking undesirably increased production without reducing the
level of support given to the EU’s agricultural sector3.
All of the successive reforms continue and deepen the ideas promoted by the MacSharry Reform (Agenda 2000, Luxembourg Agreement, 2003). The concept of the reformed CAP for the new 2014-2020
budget period is under preparation, which was preceded by the review
of the CAP under the Health Check4 and the debate within the UE over
this policy. On November 2010, the European Commission published
its Communication The CAP towards 2020: Meeting the food, natural resources and territorial challenges of the future. This document announces
a set of redefined objectives and challenges of the CAP. The said proposals and public debate brought about reforming the CAP by the European Commission in October 2011.
The Common Agricultural Policy for 2014-2020 should be considered in terms of the following questions: are these changes a true reform
of the CAP, are they actually responding to major future challenges
faced by the EU’s agriculture, are they supporting real economic convergence in the EU’s agricultural sector.
3
4
J. Małysz, Reorientacja WPR – implikacje dla krajów kandydackich [Reorientation of the CAP –
implications for the candidate countries], Wieś i Rolnictwo, 2010, No. 1.
The 2008 Health Check of the Common Agricultural Policy was to assess the implementation of the EU’s agricultural policy and the development of rural areas in the EU as well as
to indicate some new challenges in the areas of, e.g. climate change, increasing demand
for biofuels or water deficit. The Health Check reviewed the implementation of the provisions of the 2003 Luxembourg CAP reform, especially those which were to simplify and
improve of the efficiency of the system of direct payments and strengthen the EU’s rural
development policy. Podsumowanie przeglądu WPR [Summary of the CAP Health Check],
Ministerstwo Rolnictwa i Rozwoju Wsi [Ministry of Agriculture and Rural Development],
Warszawa 2008.
101
102
1.
The CAP and the expectations of each
group of the EU Member States
While analysing the situation of the European Union Member States,
one should remember that the EU-15 Member States have belonged to
the EU structures since the early stage of EU’s existence, i.e. until the
1990s, and thus a period of reforming agriculture. The EU-12 Member
States joined the EU when the CAP was more advanced, or when nonproductive functions of agriculture were of primary importance and reforming the EU’s agricultural sector was second in meaning. Actually,
the agricultural sector in the countries with a command economy differed significantly from that in the EU-15 Member States. Thus, there
was a different perspective and different expectations about a common
agricultural policy. Additionally, a difficult economic situation of the
agricultural sector in the years prior to accession needs to be regarded.
In 2004, the new EU Member States were in a different economic and
institutional environment, which required many adjustments while carrying out delayed agricultural modernisation and restructurisation5.
Without denying the economic benefits achieved by the Member
States after their accession to the EU, it should be noticed that agricultural modernisation and restructurisation are slow in many countries,
e.g. in Poland6. Hence, the new financial perspective is expected to deal
with this issue. The EU-12 Member States care about making the reformed CAP transparent and fair; otherwise the economic convergence
in the EU agricultural sector will be hard to achieve. It should be emphasised that any reform of the CAP has got a multidimensional impact
on a single farm in the Member States. It is not just about the magnitude of direct subsidies given to farmers, but also the conditions of agricultural production like production management, structure, intensity
5
6
The authorities in numerous countries of Eastern and Central Europe imposed collective
farming. This type of agricultural production, however, was not adopted in Poland or Slovenia so farming there is still extensive. Poland faces overemployment in its farming, which
is related with its extremely low productivity as compared with European standards as well
as the problem of scattered farming land. One fifth of the total labour force in the EU refers
to Polish agriculture (employment in agriculture amounts to 18% of the total employment).
This overemployment reflects the gap in Poland’s GDP which could be bridged by the employed in Polish agriculture. More than 50% of Polish farms have their agricultural acreage
up to 5 hectares.
K. Pawlak, W. Poczta, Potencjał polskiego rolnictwa pięć lat po akcesji Polski do UE jako
przesłanka jego konkurencyjności [The potential of Polish Agriculture after five years of Poland’s EU membership as a factor of its competitiveness], Wieś i Rolnictwo, 2010, No. 1.
or modernisation. Therefore, any changes in the CAP may stimulate or
hinder structural transformation in agriculture, affecting also the structure of agricultural production7.
The EU-12 Member States need substantial funds to carry out both
their agricultural policy and cohesion policy. Any delays in agricultural
and rural development cause that a number of countries regard the instruments included in the two pillars of the CAP, i.e. Pillar 1 involves
the market policy, including direct payments whereas Pillar 2 refers to
the structural policy. Thus, it is critical to maintain the current level of
support and the balance between direct support, measures to modernise agriculture and to protect the environment. On the other hand, the
countries with more developed agriculture and a better agrarian structure tend to increase the scope of rural policy at the expense of agricultural policy.
The importance of the CAP for the EU-12 in the new 2014-2020 financial perspective can be studied in terms of:
• financial benefits for agriculture, i.e. possible net financial benefits related to the EU budget, which is a narrow approach;
• supporting the modernisation of agriculture and rural areas, i.e.
area of modern economic growth, which is a broad approach.
2.
Assumptions and objectives for the CAP
Reform post-2013 – policy scenarios
In November 2010, the European Commission issued its Communication The CAP towards 2020: Meeting the food, natural resources and
territorial challenges of the future as a result of a public debate on the
CAP’s future beyond 2013. The Communication opened a discussion on
reforming the CAP which as the European Commission claims should
become more balanced, better targeted, simpler as well as more effective in
and responsive to the needs and expectations of the citizens of the European Union. Therefore, reforming the CAP should involve certain long-
7
J. Kulawik (ed.), Dopłaty bezpośrednie i dotacje budżetowe a finanse oraz funkcjonowanie
gospodarstw i przedsiębiorstw rolniczych [Direct payments and governmental subsidies versus finance and the functioning of farms and agricultural enterprises], No. 20, Warszawa:
IERiGŻ, Państwowy Instytut Badawczy, 2011, p. 9.
103
104
term strategic decisions about the future of the EU agriculture and rural
development and lead to a more effective implementation of the Europe
2020 strategy. On 12th October 2011, the European Commission proposed the CAP reform, pointing to the same objectives and challenges
for the CAP as in the 2010 Communication, though emphasising considerable simplification, higher flexibility between the pillars and more
efficient solutions.
The new objectives for the CAP are as follows:
1) viable food production – focusing on agricultural income, agricultural productivity, price stability, and the improved competitiveness
of an agricultural sector;
2) sustainable management of natural resources and climate action –
focusing on the effective management of natural resources to ensure
high sustainability, in particular reducing greenhouse gas emissions,
promoting biodiversity, protecting soil and water (to ensure the provision of the environmental public goods);
3) balanced territorial development – focusing on employment, promoting diversification, reducing poverty in rural areas.
The reformed CAP needs to face many challenges like food security, sustainable development, improved competitiveness, strengthened
social and territorial cohesion, equitable distribution of aid under the
CAP, and thus reducing disparities between countries. The latter issue
directly refers to the process of economic convergence in the EU agriculture sector.
The European Commission has elaborated three scenarios for the
CAP:
1) adjustment scenario – is largely a continuation of the current CAP
while highlighting the need to reduce the inequitable distribution of
direct payments under the current CAP. This scenario is doubted to
sufficiently deal with environmental and climate challenges;
2) integration scenario – is the most likely option for the future CAP,
which can be supported by the conclusion that this scenario is the
most consistent with the EU’s strategic objectives. Its primary idea
consists in greening the CAP, which basically should improve the
sustainability of agriculture and rural areas. Strengthening the previous cross-compliance8 by additional greening restrictions that condi-
8
Introduced by the Luxembourg Agreement of 2003 (Fischler CAP Reform 2003), cross-compliance means an obligation to comply with the environmental and hygienic minimum as
a condition to claim direct payments.
tion part of direct payments means also that Pillar 2 becomes less
important for the EU’s environmental policy;
3) refocus scenario – limits the scope of financial support and market
intervention. As specified in the EC proposal, it would increase the
level of risk in agriculture, and no relationship between payments
and cross-compliance would foster negative environmental external
implications despite reallocating funds for environmental needs. At
the same time, this least protectionist scenario should result in some
structural changes in agriculture, which would generate social costs,
e.g. higher unemployment in rural areas.
The integration scenario is preferred because of the present circumstances and the fact that the adjustment and refocus scenarios lack detailed assumptions.
3.
Reforming the CAP and economic convergence
in the EU’s agricultural sector
The changes proposed follow a long-term financial framework that as
proposed by the European Commission assumes the expenditure for
the CAP at the 2013 level, or the last year of the current financial framework. The total spending for the CAP amounts to € 435.5 billion, including almost 73% for Pillar 1, 23% for Pillar 2, and 4% for additional
needs. Defined by the European Commission in the draft resolution on
the principles of new direct payments, the national financial limits are
lower than those currently in force9.
The following three issues should be examined to assess the significance of the CAP reform post 2013 for the economic convergence of the
EU’s agricultural sector. The first one refers to the future direct payment
system. Given the fact that public goods are provided through agriculture, e.g. mitigating climate change, biodiversity, bio-energy, soil conservation and regeneration, contributing to cultural values, shaping the
landscape mostly by using land for production, agricultural land should
actually be a primary allocation criterion for direct payment limitations.
9
As calculated, the limit for Poland for 2014 will be lower by € 5,549,000 than planned as in
the present resolution (€ 3,038,969,000). This discrepancy across the EU is nearly € 3 bn;
M. Zagórski (ed.), Wspólna Polityka Rolna 2013 plus. Zmiany w systemie wsparcia [Common
Agricultural Policy 2013 plus. Changes in the support scheme], Warszawa: Europejski Fundusz Rozwoju Wsi Polskiej, 2010.
105
106
These subsidy payments are a kind of compensation for farmers for delivering public goods, social and environmental, but for which they are
not remunerated by the market, so different rates for individual countries are invalid. Therefore, a flat rate for direct payments across the
EU is justified10, and national limitations should result from a common
subsidy payment model following objective criteria to ensure equitable
distribution. However, it turns out that in the 2014-2020 financial perspective, the level of subsidy payment and equitable distribution of direct assistance will not be completely uniform11. Thus, today’s payment
disparities will be continued. The average rate, calculated per 1 hectare
of arable land in 2019, may vary by over € 500, i.e. € 141 in Latvia and
€ 669 in Malta. Figure 1 shows the 2019 direct payment rates.
The previous Single Payment Scheme12 and Single Area Payment
Scheme13 are to be replaced by a new Basic Payment Scheme based on
subsidy entitlement related to eligible land14. Although the principle of
this new payment scheme seems to be a novelty, major assumptions for
the Basic Payment Scheme resemble the SPS scheme applied so far to
the EU-15. Thus, these countries doubt whether introducing this new
scheme instead of modifying the previous ones is reasonable.
10 The payment distribution model can cause certain discrepancies because of objective criteria such as production and labour costs.
11 Proposal for a Regulation of the European Parliament and of the Council establishing rules for
direct payments to farmers under support schemes within the framework of the Common Agricultural Policy, developed by the European Commission (COM (2011) 625/3) does not define
the date for offset rates of direct payments in the entire EU. It specifies only that all payment rates in a given Member State or in the EU-15 Member States need to be standardised
(of the same value) before 2019; Article 22 (5) of a draft of this Resolution.
12 SPS (Single Payment Scheme) – direct payment scheme was introduced by the 2003 Fischler
Reform. Its main idea is to replace most of the current direct payments that are specific to
particular types of agricultural production by a single payment scheme independent from
production. This scheme has been adopted by the old EU-15 MS, Malta and Slovenia (they
implemented this scheme in 2007).
13 SAPS (Single Area Payment Scheme) – simplified Single Area Payment Scheme, adopted by
the new Member States (except Malta and Slovenia). The scheme involves direct payments
and complimentary national payments (coupled to an area or production).
14 Pillar 1 assumes: basic payment, environmental payment (greening – 30% of the national
envelope), a simplified system for small farms (up to 10%), production-related assistance
(5-10%), payment for areas with natural constraints (up to 5%), premium for young farmers (up to 2%). The assistance under Pillar 1 is addressed only to active farmers, or those
whose income from direct payments is no less than 5% of their entire revenues (this does
not apply to farmers who receive payments of less than € 5,000). The level of payment will
be limited to € 300,000 per household (camping), and the reduction in payments is to be
gradual (from € 150,000) with the possible deductions, e.g. due to practices beneficial to
the climate.
The European Commission suggests financial limitations for Pillar 1
be calculated upon the previous budgets created upon the past data on
the intensity of agricultural production. This solution means that the
direct payment scheme developed upon the previously calculated production payments will be maintained15. This is contrary to the principle of the reform that a subsidy payment system should not be related
to production, or decoupled. Nevertheless, the European Commission
suggests limiting to some extent today’s disparities in allocation of resources because it assumes that these disparities in the countries with
an average subsidy payment rate per hectare lower than 90% of the EU’s
payments are to be reduced by one third by 2017. However, subsidies are
to be analogically reduced and approximated to the average level in the
countries with a higher level of payment.
It should be mentioned that a 25% national payment envelope for
the EU-12 defined in 2004 as a result of the parameters negotiated by
these countries is assumed to be achieved as a standard value only in
2013 (phasing-in). This means that the maximum agricultural assistance
in these countries will be reached in 2013, whereas it will be 75% of the
average level of agricultural subsidies in the EU agriculture for Poland.
Also, differentiated ecological subsidy rates, resultant from uneven
base subsidy rates, are controversial. All farmers in the EU need to satisfy the same subsidy requirements for practices beneficial for the climate
and the environment, i.e. greening. However, a relevant subsidy payment which is calculated as an average value per hectare due to its linear
separating upon national limitations will be different for each country.
The discrepancy under this part of subsidy payment may amount to
more than € 150 per hectare (Figure 1). Ecological farms would be exempt from this type of payment unlike farms in the areas under Natura
2000 even if they have been implementing safety practices due to Plans
of Protection Tasks, e.g. in Poland, 14% of agricultural land is qualified
under Natura 200016.
15 The current financial envelopes for each Member State, and thus the tax rates are determined in about 60% by the past base area and past reference yields, in about 20% by the
past amount of cattle; Model płatności bezpośrednich po 2013 r. [Model of Post-2013 Direct
Payments], Departament Programowania i Analiz MRiRW [Department for Programming
and Analysis in the Ministry of Agriculture and Rural Development], Warszawa 2010.
16 A. Bołtromiuk, M. Zagórski, Natura 2000 – dobro publiczne, problem prywatny [Natura 2000 –
a public good though a private problem], Warszawa: Europejski Fundusz Rozwoju Wsi Polskiej, 2011.
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108
Figure 1. Diversification of rates under the direct payment scheme per 1 hectare in 2019 (as indicated in the
EC’s proposal)
Source: Prepared by the author.
Direct subsidy payments are particularly important for all Member
States simply because such payments strongly impact on the stability of
agricultural income, i.e. about 60% of farmers’ income comes from subsidies and their share in the EU budget amounts to 30%, which is more
than three fourth of the all funds allocated for implementing the CAP
objectives. The EC’s proposal will result in some further disparities in
final subsidies to farmers as most of them will receive a basic rate and
greening payments only. Consequently, these rates will be lower than the
current ones received under the SAPS.
Another issue relates to the forecast simplification of the assistance
mechanisms and adjustment costs. New solutions to direct payments like
mandatory pro-environmental practices17, in particular, impose new requirements and thus further constraints on the agricultural producer.
The present system seems to offer a set of fairly good pro-environmental
mechanisms, e.g. cross-compliance or special rules to manage the Natura 2000 areas. The greening plan, complicated and difficult for benefi-
17 Farmers can claim their payment if they implement three mandatory greening activities:
crop diversification; retaining areas under permanent grassland; maintaining an ecological
focus area of at least 7% of their farmland, e.g. land left fallow, terraces.
ciaries, may decrease the competitiveness of EU agriculture and weaken
the implementation of the CAP objective, or assuring the profitability of
agricultural production.
Additionally, restructuring the Integrated Administration and Control System (IACS) and IT systems in the countries that convert from
the SAPS into the BPS, i.e. verifying authorisation, an active farmer
status, greening, etc. is expensive and time-consuming. There is also
a question as to whether beneficiaries are well enough prepared to claim
payments.
The assistance system for small farmers has been simplified indeed.
Nearly 58% of the total EU farms are estimated to be of 5-hectare farms
in the EU-12. A true convenience for these farmers is that they are not
obliged to submit annual payment applications and have been relieved
from complying with stringent environmental requirements. Oddly
enough, the final payment per hectare at the base rate increased by 25%
may be higher in the countries with lower than the EU average rate of
direct payments than for the other farms obliged to satisfy all of the
CAP requirements. This system of assistance is, therefore, social by nature, which is valid though it can hinder such a necessary land reform.
Finally, the rural development policy implemented under Pillar 2 of
the CAP needs to be considered here. No radical changes are expected
here, and the two-pillar CAP is assumed to be continued in the new financial perspective. This approach is beneficial for the countries that
considerably need to restructure their agricultural sector and to develop
their rural areas18. Substantial funds, including those to develop technical and social infrastructure and to create new jobs outside agriculture
are indispensable to improve conditions for agricultural infrastructure.
Since European integration implies striving for consistency, the number
of employees in agriculture and labour productivity should be included
in the projected Common Agricultural Policy. This issue is, in fact, related to agricultural income. The high level of employment in the EU12 Member States makes the amount of CAP funds by per capita low.
Moreover, farmers may lose some payments already received because of
the changes in the criteria and the re-established areas in the EU hard to
cultivate19.
18 Having its allocation of nearly 14% of the total Pillar 2 funds, Poland has been the greatest
beneficiary of Pillar 2 under the CAP in 2007-2013.
19 More than 50% of the total area of Poland is occupied by the areas of unfavourable farming
conditions. This area may decrease even by one third as a result of the CAP reforms.
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110
Shifting funds between the pillars, i.e. up to 10% from Pillar 1 to Pillar 2 and 5% from the Rural Development Programme to direct payments20 as well as the necessity to correspond to the other EU funds are
a novelty in the rural policy. Additionally, it is possible to create topical
sub-programmes. The rural policy has been suggested to be excluded
from Pillar 2 and shifted to the EU cohesion policy in the new financial
perspective21. However, this is fairly unlikely, given its nature and other
mechanisms for implementing these policies.
Conclusions
The assessment of the EU’s proposal as to the CAP reforms after 2013
shows that their major drawback is an inequitable distribution of assistance under direct payments, determined by the previous principles.
Consequently, the terms and conditions for fair competition between
farmers who operate on the open market will be disturbed, and thus
there will be no equal developmental opportunities. The basic condition
to effectively implement the EU’s policies of economic and social cohesion consists in waiving the previous conditions for agricultural assistance but supporting activities that focus on agricultural and rural development in the less developed countries.
The diversified greening payment rates are also controversial. If environmental requirements for each country are identical, there should
be a single rate, calculated upon a separate part of the overall budget for
direct payments. Excluding the limitation for greening and defining the
target limit of average payments per hectare (under the other componential amounts of the payments) constitute a prerequisite for reducing
disparities in the distribution of funds and a step to develop a fair target
model of direct payments in the EU.
There is also a question about the validity of mandatory greening
payments which are additional burden for farmers, while exempting
small farmers from this requirement. The binding principle of crosscompliance and requirements for carrying out an agricultural activity in
20 This refers to the selected countries, including Poland.
21 Ł. Hardt, Wspólna polityka rolna a polityka spójności w kontekście przeglądu budżetu UE
[Common Agricultural Policy and Cohesion Policy in the context of the EU budget’s review], Wieś i Rolnictwo, 2008, No. 4.
the areas protected by Natura 2000 seem to be sufficient to achieve the
CAP environmental objectives.
Actually, it is difficult to comprehensively assess the impact of these
changes because the EC has not proposed any national envelopes. Undoubtedly, the CAP assumptions are correct but the instruments are
questionable. It should be remembered that each CAP reform brings
about multidimensional implications for single farms across the Member States, and thus affects not only the magnitude of direct financial
assistance, but also the conditions of agricultural production. The unequal distribution of funds and the necessity to apply costly adjustments
to the revised CAP instruments in 2014-2020, especially in the EU-12
Member States, may limit economic convergence in the EU’s agricultural sector.
Bibliography
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prywatny [Natura 2000 – a public good though a private problem],
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Hardt Ł., Wspólna polityka rolna a polityka spójności w kontekście
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ish agriculture after five years of Poland’s EU membership as a factor of
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2010.
Cultural convergence as
an element of Cohesion Policy
Abstract: Regarded as a form of Europeanisation, cultural convergence is discussed in this paper as a system of values to be applied while deciding on how to
execute EU Cohesion Policy. At the same time, this notion justifies any integration
processes in Europe and complements traditional concepts of economic growth
and development. Cultural convergence also refers to accumulated social virtues,
administrative rationality, processes of innovation, and the creation of innovative
regions. Moreover, this concept is a prerequisite for successful regional economies
in the European Union. Hence, cultural convergence plays a key role in building
a strategy and implementing Cohesion Policy. However, the ideas to standardise
certain processes or to implement Europeanisation may make people anxious for
fear of losing their specific culture and eliminating tradition perceived as a hindrance to economic development and growth.
Keywords: convergence, cultural convergence, Cohesion Policy, cultural background
Introduction
It is difficult to define how cultural factors actually impact on economic
development and all the more formulate such a thesis. As social virtues
are increasingly crucial to generate wealth from innovation and technological progress, cultural background are critical for local and global
economic polarisation. On the other hand, social, economic and territorial convergence is promoted in the EU regions. Therefore, it is justified to introduce the notion of cultural convergence as the raison d’etre
of the integration processes in Europe. The convergence of European
economies and regions is facilitated by a common system of values,
114
norms, behaviors which is distinguished regardless the great diversity
in Europe. As an important element of Cohesion Policy, cultural convergence almost directly refers to the objectives pursued under this process.
European integration should result in a coherent and uniform area of
economy, society, territory based on European cultural diversity definitely perceived as a competitive advantage.
The primary objective of EU Cohesion Policy is to diminish considerable disparities in social and economic development in EU regions
and the Member States. They, in turn, result from substantial differences in social and economic development of the Member States and
even more significant disparities in regional development. These are
often structural due to a peripheral location of the regions, their harsh
climate, poorly developed infrastructure, unfavourable economic structure, and poorly qualified inhabitants. Thus, to find shared cultural values to achieve the objectives of Cohesion Policy, especially in today’s
economic crisis is a real challenge. This paper, therefore, focuses on cultural convergence referred to as a form of Europeanisation, or a system
of values necessary to make specific decisions to implement Cohesion
Policy. Simultaneously, this concept justifies the European integration
processes and complements traditional ideas of economic growth and
development. Cultural convergence refers to accumulated social virtues,
administrative rationality, the process of innovation, and the creation of
innovative regions. Moreover, this concept is a prerequisite to achieve
economic success in the EU regions.
1.
Cohesion Policy
Basically, Cohesion Policy is to correct imbalances in living standards
and economic development between the poorest and richest regions
of the Member States. A widespread view that excessive discrepancies
hinder integration in the European Union or may even threaten its existence is referred to here. This means that public authorities should
act intentionally to rebuild regional economic structure and to stimulate regional economic growth1. Thus, they should define trends in regional developmental specialisation, develop a programme to activate
the underdeveloped regions, reduce any current developmental disparities, and determine the rules of regional cooperation. Cohesion
Policy, therefore, refers to political, fiscal and financial measures to improve the economic and social situation in the European Community2.
In particular, any disparities in the regions can be deepened by factors
such as low mobility of capital and labour, harsh environmental conditions, institutional and bureaucratic impediments, underdeveloped infrastructure, especially in transport3. However, regional disparities can
also be defined by criteria like population density, an age structure, levels of economic activity, levels of production and income, population
changes due to migration, economic and consumption structures, and
unemployment4. It should be noticed that regional development, besides economic issues, should focus on the management of social development related to cultural dissemination, education, R&D centres and
institutions, the development and improvement of health care, tourism
and physical culture, the impact of specialisation and cooperation on
development and growth, and the stimulation of the underdeveloped
regions. EU Cohesion Policy needs to guide regional development, to
deal comprehensively with the way this spatial configuration functions
as a whole or as individual and separate entities, and to specify consequences and proposals for regional approaches following the economic
development of the European Community.
1
2
3
4
T.G. Grosse, Polityka regionalna Unii Europejskiej i jej wpływ na rozwój gospodarczy, przykład
Grecji, Włoch, Irlandii i wnioski dla Polski [EU Regional Policy and Its Impact on Economic
Growth. The Study Cases of Greece, Italy, Ireland, and the Conclusions for Poland], Warszawa: Instytut Spraw Publicznych, 2000, p. 7.
B. Ekstowicz, M.J. Malinowski, Polityka Strukturalna Unii Europejskiej stymulatorem procesów
modernizacji i rozwoju społeczno-ekonomicznego Polski w latach 2007-2015 [EU Structural
Policy as a Stimulus to the Modernisation and Social-Economic Development of Poland in
2007-2015], Toruń: Wydawnictwo Adam Marszałek, 2010, p. 10.
K. Delis-Szeląg, Polityka regionalna Unii Europejskiej i perspektywy jej realizacji Polsce [EU Regional Policy and Prospects to Execute It in Poland], [in:] A. Adamczyk, J. Borkowski (ed.),
Regionalizm, polityka regionalna i fundusze strukturalne w Unii Europejskiej [Regionalism,
Regional Policy, and Structural Funds in the European Union], Warszawa: Centrum Europejskie UW, 2005, p. 7.
P. Jasiński, Europa jako szansa: polityka regionalna Unii Europejskiej i perspektywy jej instrumenty, a władze lokalne i regionalne [Europa as an Opportunity: EU Regional Policy and the
Prospects of Its Instruments versus Local and Regional Authorities], Warszawa: Wydawnictwo Elipsa, 2000, p. 11.
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116
Thus, significant disparities and a low capacity to overcome them
force the European Union to quickly overcome these difficulties because
of probable resultant economic, social and political tensions5. Consequently, means and their supporting measures are mostly to reduce any
unfavourable disparities and to intensively promote convergence in society, economy, and territories. On the other hand, the convergence of
social culture, called by the author a kind of cultural convergence, involves cultural dissemination.
Establishing the European Community, the Treaty of Rome has become its legal basis. The wording in the preamble to the Treaty indicates
the objectives pursued by the Member States under Cohesion Policy as
to be anxious to strengthen the unity of their economies and to ensure
their harmonious development by reducing the differences existing between the various regions and the backwardness of the less favoured regions6. Therefore, the fundamental mission of Cohesion Policy consists
in reinforcing internal cohesion within the Community. In fact, too appreciable regional disparities not only are detrimental to the poorer regions but also dangerous for the entire Community.
The concept of Cohesion Policy as well as its objectives and principles evolved while it was developing. For 2007-2013, its three objectives,
i.e. convergence, regional competitiveness and employment, and European territorial cooperation were formulated. The activities under these
objectives are supported by the European Regional Development Fund,
the European Social Fund and the Cohesion Fund. The programmes
carried out within the first objective, i.e. convergence focus on improving regional competitiveness by:
• supporting innovation and development of a knowledge-based
economy, i.e. production investment, the development of services
for SMEs, including promoting innovation and R&D, the promotion of enterprise development, direct investment aid, local infrastructure, information society, and investment in tourism and
culture;
• improving the accessibility of the regions and the quality of basic
services, i.e. networks of transport, telecommunications and energy, including the trans-European networks, secondary network
distribution systems or social infrastructure;
5
6
J. Borowiec, K. Wilk, Integracja europejska [European Integration], Wrocław: Wydawnictwo
AE, 2005, p. 410 and farther.
Dziennik Ustaw [Journal of Laws] 04.90.864 referred to as TWE.
• environmental protection and disaster prevention, i.e. supporting
the Member States in the complete alignment of their national
legislation to that of the Community, supporting the development of businesses involved in environmental protection, reconverting industrial areas, supporting any efforts to avoid natural
disasters and their effects, promoting ecological transport systems, developing and using renewable energy sources;
• strengthening the administration responsible for implementing
the Structural Funds and the Cohesion Fund.
Under the European Structural Fund, Objective 1 includes the programmes that support employment:
• supporting education and labour market institutions, enhancing
labour market institutions, education, training, social services
and care;
• improving the quality of human resources and training, supporting active labour market and making it accessible to all, eliminating social exclusion;
• enhancing administrative and institutional capacities to make administration flexible in the changing situation on the labour market7.
The major EU objectives are generally based on a pursuit to achieve:
social cohesion measured by rates of unemployment and employment;
economic cohesion measured by GDP per capita or verified purchasing
power parity; territorial cohesion measured by an accessibility indicator to specify the time needed by the underdeveloped regions to catch
up with the regions economically important. Cultural aspects should be
considered here because only an interdisciplinary approach that combines economic analysis with a broad sociological, historical, anthropological, ecological context can describe Cohesion Policy in the modern
economy. This approach is adopted in the programmes the European
Community institutions offer under the Convergence Objective. The interest in the process of convergence also results from the objectives followed by international institutions8.
It should be pointed out that EU Cohesion Policy is a critical success factor for European integration, and most of all a kind of cultural
7
8
Z. Bajko, B. Jóźwik, M. Szewczak, Fundusze Unii Europejskiej w Polsce na lata 2007-2013 [EU
Funds in Poland in 2007-2013], Lublin: Wydawnictwo KUL, 2009.
The meaning of the process of convergence in the contemporary world is discussed in detail in G. Kołodko, Wędrujący świat [Wandering World], Warszawa: Prószyński i S-ka, 2008,
p. 73 and farther.
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convergence, which will be discussed later in this paper, needs to be its
principle. Basically, the reduction of any inter-regional disparities requires a lot of effort to find common values that could serve as a basis
for sustained and coherent development in the European Community.
2.
Cultural convergence
The core of the convergence offered by the European Union institutions
is to support growth and job creation in the least developed Member
States and regions. Their economic acceleration is to be achieved by improving conditions for economic and employment growth, stimulating
innovation, and building a knowledge-based society. Any activities to
enhance capabilities to adapt to socio-economic changes must be undertaken in accordance with the rules for environmental protection.
Divergence, or differentiating macroeconomic variables is the opposite
of convergence.
The pursuit of cultural conditions of economic processes already
began in the works by M. Weber. He attempted to find the relationship between the way of thinking determined by Protestantism and the
ethics of economic life, which is not discussed here9. The ambiguity of
the concept justifies the need to create varied approaches to the theory
of economic development and growth, which was already clear in the
works by A. Smith, J. Schumpeter, J. Keynes, V. Pareto, and many other
contemporary economists, particularly from France. Consequently, this
concept needs to be accurately interpreted; otherwise it may be applied
discretionarily. In order to avoid this kind of risk, the author adopts as
a starting point F. Braudel’s definition of culture perceived as the whole
of intangible and tangible cultural heritage which is geographically expressed and passed on by individuals10. It should be noted that Cohesion
Policy has always taken into account the still undisputed cultural context which can justify European integration. The main difficulty in de-
9
More in: M. Weber, Etyka protestancka a duch kapitalizmu [Protestant Ethics and Spirit of
Capitalism], Warszawa: Wydawnictwa UW, 2011; M. Weber, Gospodarka i społeczeństwo:
zarys socjologii rozumiejącej [Economy and Society: Outline of Understanding Sociology],
Warszawa: PWN, 2002.
10 F. Braudel, Gramatyka cywilizacji [Grammar of Civilisation], trans. by H. Ingalson-Tygielska,
Warszawa: Oficyna Naukowa, 2006, p. 36.
fining cultural convergence consists in the interpretation of symbols and
the ascribed to them system of values for specific decisions made to implement cohesion policy. The use of the concept of cultural convergence
can be regarded as an element of the process of Europeanisation because it proceeds through spreading standards, identities and patterns
of behaviour across European countries as a result of EU membership
and implementing Cohesion Policy. The essential question, therefore,
concerns the relationship between the subjective and objective. Also,
this can provoke thought on to which the extent this relationship may
be the result of cognitive processes. Cultural factors can, in fact, be regarded as a justification of the activities that intensify and deepen integration by building the common market, introducing the mechanisms
for economic and monetary unions. Moreover, the cultural context can
significantly help overcome any hindrances to development, and thus
bridge faster the gap in economic growth expressed in GDP. Given that
human needs can be indirectly satisfied by growth in GDP, one can
claim that they are basically determined by cultural factors11. The issues
of the cultural context of human needs and the use of natural resources
are also regarded by a new idea of wealth which includes cultural components of wealth production12. Implemented under the first objective
of Cohesion Policy, the programmes on environmental protection or
the development of social services and social care perfectly correspond
with this idea.
Cultural convergence can be basically distinguished by the value-systems of Greco-Roman culture which decided on the future of Europe.
If the enormously rich culture of ancient Greece which has become European heritage were not taken into account, it would not be possible
to analyse the transformations that are proceeding even now in Europe.
In fact, ancient Rome, just like ancient Greece, had got the same function, especially for its legal culture as a cornerstone and a model of any
modern legal system. Moreover, the Roman model of the development
of material, administrative, political culture is noteworthy. Another important element underlying the cultural system in Europe is Christianity or actually ancient Judeo-Christian tradition which has determined
European development for the next millennium. One also cannot miss
Renaissance humanism whose ideas were well reflected in an intellectu-
11 This issue is discussed in detail in: J.K. Galbraith, Economics, Peace and Laughter, Boston:
Harvard University Press, 1973.
12 D. Meda, Qu’est-ce que la richesse?, Paris: Flammarion, 1999.
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120
al evolution which significantly influenced the development of Europe
from the Middle Ages until present times. Europeans from all social
classes have a strong interest in a quality of life and pay attention to progress that should satisfy people’s needs.
This approach is reflected, for instance, in the programmes implemented under the convergence objective and discussed in the first part
of this study. Innovation and knowledge-based economy enhancement
is a programme that refers to the theory of regional innovation systems
which were designed to find the sources of success in some regions.
According to this theory, innovations arise just where the systems generating innovations are. The main distinctive features of such a system
are enterprises, R&D institutions, and regional authorities. The extension of this approach is the theory of learning regions which says that
sustainable innovation and capabilities to adapt to ever-changing market conditions are the main driving force behind development13.
It is worth noticing that the concept of cultural convergence justifying the process of European integration is a necessary condition for social peace and order that could be disrupted by uneven growth (both in
the countries with significantly higher GDP growth rate and the countries with a lower one). Thus, if there is no real cultural convergence that
means as the author claims the pursuit for common values, there will be
the Europe of two or more speeds, which can destroy the idea of integration. Since the beginning and now even more, the objectives pursued
under Cohesion Policy have been impacted by this type of particularism so the need to take into account socio-cultural factors means aiming for cultural convergence.
It should also be noticed that cultural convergence enables to distinguish different types of cultures during their rapid development, i.e.
their foundation, development, and even decline. If approached in this
way, cultural convergence may be subject to specific changes that result
from internal transformations, i.e. within its own cultural space as well
as external ones that result from an external impact, i.e. foreign cultural spaces. Moreover, cultural convergence seems to allow for asking
the question of the continuity of a given, for example European, cultural
space. Accordingly, there is the issue of cultural convergence regarded as
a result of a developmental process as well as the pursuit for a turning
point where it ceases to fulfil this role as it loses its autonomy. As specified in the assumptions for Hegel’s idealism, the very essence of being
13 W. Morawski, Socjologia ekonomiczna [Economic Sociology], Warszawa: PWN, 2001, p. 111.
is evolutionary, which is manifested in achieving increasingly complex
forms14. G. Hegel’s philosophy of culture includes the theory of history
which is based on the principle of evolution and logics. Therefore, any
form of culture was regarded by Hegel as a transitory though necessary
stage of development that logically results from the previous one. Hegel
adopted a holistic approach so he paid much attention to general properties of the process, disregarding particular ones. In fact, only a holistic
approach can ensure consistency and rationality of the process. He highlighted volatility as a source of plurality of forms or varieties of culture.
Perceiving cultural convergence through its homogeneous features
just leads to singling out different types or varieties of culture which enable finding specific homogeneous cultures. This process applies to both
tangible heritage and social virtues, which may result in developing
models of cultural convergence. Actually, these models can be useful to
create Cohesion Policy strategies and management systems.
Therefore, the aim consists in developing a given formal type of culture, described by the author as cultural convergence, which can be applied in the theory of economic development and growth. This is true
for the issues related to Cohesion Policy that is covered by these concepts. Thus, a French economist’s claim that apart from GDP and unemployment, analyses on economic growth should include product social
utility and consumption seems to be plausible15. It is also worth noticing that the Human Development Index (HDI) which has been adopted
under the United Nations Development Programme since 1990 refers to
the level of education, average life expectancy, which reflects quality of
life and health care.
Cultural convergence can be a preliminary stage to execute Cohesion
Policy because, as determined in Hegel’s concept of culture, it strives
for permanent structural changes to bridge the gap between more and
less developed countries, and thus reduce disparities in development
and prosperity. In addition, cultural convergence is more associated with
practical considerations. There is, however, no direct relationship with
any institutional context. In fact, an institutional approach describes
economic convergence, especially in terms of monetary and fiscal policies, which is reflected in the Maastricht Treaty convergence criteria to
form a reliable economic basis for the monetary union.
14 More in: G. Hegel, Wykłady z historii filozofii [Lectures on the History of Philosophy], trans.
by Ś.F. Nowicki, Warszawa: PWN, Biblioteka Klasyków Filozofii.
15 D. Meda, Qu’est-ce que la richesse?...
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Intercultural studies indicate that a certain level of economic underdevelopment indirectly depends on culturally shaped perceptions of reality, patterns of thought, ethical standards and regulations. It may also
result from culturally shaped systems to achieve prosperity and consumption, tendencies to take risk and avoid uncertainty16.
It should also be noticed that the programmes to support the administration responsible for implementing the Structural Funds and the
Cohesion Fund and to adjust government administration to an unstable market situation are carried out under the Convergence Objective.
These programmes need special attention because they develop a type
of administrative culture and are responsible for the relationship between entities acting mostly in the market and the skills necessary to
efficiently manage the state. The unified legal systems of the Member
States bring about convergence in this territory; and the starting point is
the development of administrative and social cultures which enable undertaking any activities to support economic, social and territorial cohesion. Hence, cultural convergence on an administrative level is a powerful symbol and a method to achieve the objectives of Cohesion Policy.
Considering the transformation of public administration, Europeanisation
can be defined as the homogenisation of administration cultures as a result of EU membership17. The administrative context of cultural conver-
16 M. Weber, Gospodarka i społeczeństwo: zarys socjologii rozumiejącej [Economy and Society: Outline of Understanding Sociology], Warszawa: PWN, 2002; D.S. Landem, Bogactwo
i nędza narodów. Dlaczego jedni są tak bogaci, a inni tak ubodzy [The Wealth and Poverty
of Nations. Why Some Are So Rich and Some So Poor], Warszawa: Muza, 2000; G. Hofstede, G.J. Hofstede, Kultury i organizacje [Cultures and Organisations], Warszawa: PWE, 2007;
Ł. Sułkowski, Kulturowa zmienność organizacji [Cultural Diversity of the Organisation], Warszawa: PWE, 2002; Ch. Hampden-Turner, A. Trompernaars, Siedem kultur kapitalizmu. USA,
Japonia, Niemcy, Wielka Brytania, Szwecja, Holandia [The Seven Cultures of Capitalism:
Value Systems for Creating Wealth in the United States, Japan, Germany, France, Britain,
Sweden, and the Netherlands], Warszawa: Wydawnictwo ABC, 1998; F. Fukuyama, Kapitał
społeczny a droga do dobrobytu [The Social Virtues and the Creation of Prosperity], Warszawa–Wrocław: PWN, 1997; R.J. House, P. Ganges, A. Ruiz-Quintanilla, Globe. The Global
Leadership and Organizational Behavior. Effectiveness: Research Programme, Polish Psychological Bulletin, Vol. 28, 1997, No. 3; E. Bogalska-Martin, Wprowadzenie do teorii kulturowych
uwarunkowań rozwoju gospodarczego [Introduction to the Theory of Cultural Conditioning
for Economic Development], [in:] R. Piasecki (ed.), Ekonomia rozwoju [Economy of Development], Warszawa: PWE, 2007; R. Inglehart, Modernization and Postmodernization: Cultural,
Economic, and Political Change in 43 Societies, New Jersey: Princeton University Press, 1997;
K. Gadomska-Lila, Charakterystyka i uwarunkowania proinnowacyjnej kultury organizacyjnej
– wyniki badań [Characteristics and Conditions for Pro-innovative Organisational Culture.
Study Results], Przegląd Organizacji, 2010, No. 2.
17 S. Mandes, Administracja publiczna w procesie europeizacji [State Administration in Europeanisation], [in:] J. Kochanowicz, M. Marody (ed.), Kultura i gospodarka [Culture and Econo-
gence has, therefore, a strong impact on the efficiency of institutional
solutions which serve regional development.
3.
European integration versus cultural convergence
Given the foregoing, it should be emphasised, as postulated by the theorists of the Frankfurt School, that some dimensions of culture are utilitarian and exchangeable. Therefore, cultural convergence regarded as
an attempt to find common values for the European countries as well
as a method to spread standards and unify desired behaviours while reducing disparities in economic growth or social and territorial development in certain regions serves this purpose at least in terms of ecology,
administration, unified legal systems. Simultaneously, the prospect of
standardisation of certain processes or Europeanisation may cause anxiety as a result of the loss of specific cultural traditions and elimination of
tradition treated as a hindrance to economic development and growth.
Nevertheless, one must remember that such perception of cultural convergence is the effect of European integration. However, its very essence
brings about its evolutionary nature, manifested in achieving increasingly complex forms of integration, which has been discussed previously. This issue is associated with the relationship between the whole of
the European Union and its particular Member States. However, Cohesion Policy impacts on the regions. Cultural convergence seems to aim at
a kind of unity reflecting at the same time cultural diversity in Europe.
It means a kind of pursuit within a complex and diverse entity of the
European Union for principles and cultural rules to maintain a certain
level of growth, economic development and social order. Thus, cultural
convergence can be regarded as the effect of merging various cultural elements that are integrated into a complete cultural system, only when
this process is completed. European cultural archetypes are the foundation of this merging, or European integration. The starting point of
cultural convergence is, therefore, the case of many European cultures
that having common roots may be correlative. So, this stands for the
natural capability of the regions or Member States to be interrelated but
still respect independence and individuality. It is noteworthy that when
my], Warszawa: Wydawnictwo Naukowe Scholar, 2010, p. 2006.
123
124
individual cultures begin to interact, their autonomy and independence
change in favour of an emerging community structure which can be
treated as a new entity.
This analysis indicates that cultural convergence and cohesion policy
as the culmination of the idea of European integration is undoubtedly
related to the emergence of new opportunities and prospects.
It seems that any ethnic, national, linguistic, and religious differences enhance, not spoil the common heritage of Europe. Thus, it is clear
that the process of cultural convergence is none of the other opportunities, but it is a kind of destiny according to which Europeans need to
accomplish a certain mission. If they failed, it would mean that Europe
rejected its own tradition, which would be accompanied by difficult to
determine consequences.
Mindful of the evolution of convergence, the following possible solutions should be determined:
• striving to maintain the status quo;
• striving to change the present status by adding new elements, and
thus to accept a new level of integration;
• emerging the process of internal contradictions that unfortunately lead to disintegration and thus to reducing the current level of
integration, or actually disintegration.
Given the present, complicated situation in Europe, one can notice
that Europeans are disappointed due to the fact that even if convergence
mechanisms function correctly, they cannot create the expected positive effects on their own or these effects are not as satisfying as expected
in terms of the funds involved. Moreover, there is a widespread opinion that there is no single concept that could define the future shape
of the Community to which convergence could be subordinated. Therefore, one can simply ask a question where Europe is generally heading
for, deliberately or aimlessly. However, one should consider European
cultural heritage which can assess positively European integration and
solidarity in bridging any gaps in Europe. It is worth noticing that European identity has always manifested extreme tendencies. On the one
hand, a shared vision of belonging has been strongly manifested; on the
other hand, European common heritage has always meant different cultures so that it might have seemed at first glance that this unity was unjustified.
European integration needs to be constantly implemented. It is actually a real necessity, not merely an option. On the other hand, this
means rejecting the ideal of identity which functions in a way as a unifying principle, i.e. cultural convergence that can affect social relation-
ships. One should remember that the autonomy and independence of
a group is a prerequisite for European integration. This process is actually temporary, whereas integration is a gradual process with cultural
convergence as one of its stages. Both integration and disintegration is
an inherent component of social life. As social relations are complex,
a number of grounds can be distinguished, and one of them is just cultural convergence.
While analysing cultural convergence, the following issues were not
discussed here for the lack of space but need to be addressed:
• the development and basic trends of cultural convergence and the
resultant systems of values and solutions;
• the importance of nationality as a factor in regional development
and its impact on developing Cohesion Policy;
• the impact of the system of values on socio-economic transformations as well as integration as such.
The description of the process of European integration should necessarily include the complexity of elements because this process refers
to different areas and affects the development of complex networks that
involve various regions. The analysis of integration deals with many
aspects like the development of trade, the creation of complex international structures, the development of institutional instruments and solutions to support economic, social and territorial cohesion. Therefore,
this study is comprehensive and many factors that influence its scope
and institutional forms need to be addressed.
The analysis of cultural convergence refers both to the existing legal
documents and to specific institutions and bodies of the European Union, capable of implementing Cohesion Policy and making decisions
which are obligatory for the Member States. Such analysis needs to relate to general conditions like a socio-cultural sphere and its impact on
the way the European Union functions.
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Monika Banaś
Nordic Federation as a state
– a challenge for European
integration?
Abstract: The article examines a concept of a new federation state constituted by
all members of the Nordic dimension. The new united political body would have
one government, one parliament, one currency, common institutions for fields
such as: foreign and internal policy, international security, higher education, research and science, labour market, and infrastructure. The common areas would be
complemented with individually managed sectors, all together serving to increase
competitiveness and security of the Nordic region.
Keywords: Norden, Nordic Federation, integration, Europe
Introduction
The notion that Norden – a Nordic federal state – can and should become a part of the European political landscape by 2040 was introduced
by Gunnar Wetterberg, a Swedish historian. In 2009, he presented it
twice in Dagens Nyheter1, the most prominent daily in Sweden. The bold
idea stirred controversy; while some were puzzled and incredulous;
others expressed approval and endorsed his far-reaching plans to form
a new, unified state. The rediscovery of the notion which once formed
the basis of the Kalmar Union calls for a closer examination, especially
1
Dagens Nyheter, October 27, 2009, http://www.dn.se/debatt/de-fem-nordiska-landernabor-ga-ihop-i-en-ny-union [retrieved 2012-09-01].
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Monika Banaś
considering that it produced some serious responses. Suffice to say, the
Nordic Council and the Nordic Council of Ministers devoted an entire
yearbook to the topic (Nordiska Rådet i Nordiska Ministerrådets årsbok
2010)2.
G. Wetterberg claims that the new federation would comprise the
five states, i.e. Denmark, Finland, Iceland, Norway, and Sweden as well
as the three autonomous areas of the Åland Islands, the Faroes, and
Greenland. The union would evoke historical integration efforts such as
the Kalmar Union or some of the more recent quasi-integrated unions
rooted in political Scandinavism and Nordism but also draw from contemporary experiences of states such as Germany, Switzerland, Spain,
Brazil or the USA.
Norden – the official name for the new entity – would have a single
government, parliament and currency, common institutions to oversee
the harmonisation of its economy, a common foreign and security policy, and a single head of state to represent the federated states3.
According to G. Wetterberg, the federation would create a unique
environment in which the potential of its members – now spread across
the entire Nordic market – would converge and lead to a more efficient
use of human, economic, political and geographic resources. The theories by Paul Krugman, who won the Nobel Prize in Economics in 2008,
seem to support this proposal. P. Krugman demonstrates that the pace
and scope of economic development (and, later on, of civilisational progress) correlate directly with the geographical environment of a given
state and the position of its neighbours: their identity and level of development. Furthermore, a federation might be a better alternative to
a union, given that unions are prone to extensive protectionism, which
damages free trade, free markets and house budgets alike4.
The Nordic countries take different positions on the European Union, and this fact demonstrates that they do not share a common vision of integration or its forms and scope. Finland, Sweden and Denmark became member states, but Norway and Iceland saw integration
2
3
4
The United Nordic Federation, TemaNord, 2010:583, Nordic Council of Ministers, Copenhagen
2010 and Förbundsstaten NORDEN, TemaNord, 2010:582, Nordiska Ministerrådet, Köpenhamn 2010.
The original full name is Förbundstaten Norden. It should be pointed out that the term Norden is widespread in the Nordic discourse and is used to refer to the entire Nordic community, i.e. the five Nordic states and the three autonomous territories. Thus, it refers not only
to the territory but also politics, economy, culture, and history of the Nordic societies.
G. Wetterberg, Förbundsstaten Norden, TemaNord, 2010:582, Nordiska Ministerrådet, Köpenhamn 2010, p. 39.
as a threat to their interest (chiefly to their natural resources and fishing
industries). The autonomous areas had similar reservations and resorted to special relationship agreements with the EU. G. Wetterberg points
out that the presence of the three Nordic states in EU structures is not
reflected in their ability to fully and proportionally influence opinions
within the Community. The historian sees the Nordic EU members as
second- and third-rate players who have less power on the international
forum than a hypothetical Federation of the future5. The Copenhagen
climate summit fiasco in 2009 seems to support this thesis. Therefore,
the call for the unification pursuant to the Nordic lines could lead to
more control over the world order.
The ideas presented in Förbundsstaten Norden refer to the rhetoric
and arguments used in the Soltenberg Report which tackles international security. Thorvald Stoltenberg, Norwegian Minister of Foreign Affairs
in 1987-1989 and 1990-1993, suggested in 2009 a common foreign and
security policy be introduced in all Nordic states as a move that would
streamline costs, improve efficiency of the defence forces and guarantee
that the Nordic standards of air force, navy and army defence were up
to date6. One should remember that both of these documents were first
published at the same time, i.e. in the late 2000s and are certainly evidence that the Nordic theories of unification are experiencing a revival,
attracting increasing attention from the elite and broader public.
One technical aspect of the Federation concept has to be highlighted. Förbundsstaten Norden, originally published in Swedish, was readily comprehensible to all the members of the Nordic cultural sphere.
Scandinavian languages generally foster easy communication because
they belong to the same family and are very similar7. The English translation introduced some qualifications which, albeit small, significantly
changed the text’s meaning. The title itself provides the most striking
example. The original title Förbundsstaten Norden literally means The
Federal State of Norden. However, in English the document is entitled as
The United Nordic Federation. As seen, the word state has been removed
in translation.
The term federation has several meanings and is used in the context
of political sciences, administration or to refer to organisations. If we
5
6
7
Ibidem, pp. 38-39.
Ibidem, p. 37; see also: T. Stoltenberg, Nordic Cooperation on foreign and security policy, Oslo
2009.
Except for Finnish, Greenlandic and the languages of the Sami people.
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Monika Banaś
define politics as the ability to create a state and interstate8 order, federations which operate outside its sphere will include Trade Union Federations, Federation of Digital Libraries, Polish Federation for Women and
Family Planning, Consumers’ Federation or International Federation of
Association Football. As the English translation does not refer directly
to the statehood of the new political entity, it can be suggested that the
organisation will not aspire to statehood at all, which is obviously incorrect. The original text speaks of a new state and does so explicitly by using the word staten (state)9.
1.
The new state
Gunnar Wetterberg, the author of the concept, admits that social cohesion and integration in Europe require time and energy and is a longterm effort that may bear fruit only after several dozen years, provided
that the community does not experience any adversities or falling-outs10.
Today’s actions will deliver distant results, but in the meantime the
states should take steps to create an entity which could bring political
and social benefits in the shorter run. G. Wetterberg’s proposal follows
this line of thought by calling for the creation of a new federal state capable of meeting the challenges of modernity and tackling some of the
emerging problems in the near future. For example, the 2008 financial
crisis has affected the global economy and individual societies. The EU
recovery plans have raised questions about their cost and efficiency.
G. Wetterberg maintains that the Nordic EU members lacked enough
strength to effectively influence EU policies. Consequently, he sees the
need for a parallel platform, namely the Nordic federation which could
unite the social, political and cultural potential of its five member states
8
I use the term interstate instead of international on purpose to stress the primary agent,
i.e. the state (its government/administration) rather than the nation, which can be defined
and understood broadly and implies chiefly a broader sociological or socio-anthropological context.
9 The United Nordic Federation and Förbundstaten Norden (in Swedish) were both published
under the auspices of the Nordic Council by the Nordic Council of Ministers, Nordiska Ministerrådet, Köpenhamn 2010.
10 G. Wetterberg, Putting our eggs in the Nordic basket, Presseurop, November 2, 2009, http://
www.presseurop.eu/en/content/article/129141-putting-our-eggs-nordic-basket [retrieved
2012-09-06].
and become a major European and global player. If this is the goal, what
is the correct course of action?
The analysis of the Norden concept reveals four outstanding elements, or four basic building blocks. These cornerstones of the new
state which would be subject to federal control include common policies on foreign affairs, defence, trade, and immigration.
The four policies are as follows:
1) Foreign policy – as one of the most important attributes of the new
state is rooted in similar culture, history, civilisation, and a language.
It is shaped by prior experiences, which suggests that the federated
state could benefit more from a common effort than individual action. A joint federal policy would be a powerful force capable of
securing a rightful place for Nordic political thought, values, and
global and regional solutions on the international forum. This crucial point achievement would consolidate and enhance the international status of the Nordic countries. Today, Nordic leaders do not
have adequate power over the decision-making processes of highstakes international communities of the developed world like the
G2011. By pursuing their interest through a unified political front of
common institutions and representatives (e.g. the diplomatic corps),
Nordic countries would present the federation as a larger, stronger
actor, a partner and an entity responsible for decisions regarding the
world order. In diplomacy, this philosophy applies to the Pan Nordic
Building of the Nordic Embassies in Berlin whose design combines
Nordic diversity and originality12.
2) Defence and security policy – its key ideas and directions were already presented in the Stoltenberg Report. The Federation draws
from the document, while emphasising the functionality, feasibility
and cost-efficiency of its solutions (lower costs related to purchase
of modern equipment, cheaper R&D, and joint training and manoeuvres). By combining their armed forces, the Nordic countries
would significantly increase their strategic power and improve their
efficiency through more careful logistics, tapping the diverse geopolitical realities of federated states. Their joint defensive efforts could
also help secure their particular interests, detached as they may be.
11 G. Wetterberg, Förbundsstaten Norden..., p. 36.
12 The design, which is very interesting, invokes Nordic values but it denotes individual qualities of the five countries. The idea is reflected in its architecture, centred around the body
of five interwoven embassies. More information is available at: http://www.nordicembassies.org/
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Monika Banaś
Indeed, Iceland and Norway are more Atlantic-oriented; Finland
and Sweden put emphasis on cross-Baltic relations; and Norway
and Denmark focus on the Arctic Ocean. Without a joint command,
these forces are spread thin and their potential is wasted, especially
in the face of new issues arising in the Arctic or problems related to
strategic natural resources, new sea routes or protection of marine
resources13.
3) Trade policy – constitutes an important facet of any political system. Trade policy is based on several key elements such as human
resources (the workforce, its quality and quantity), geographical and
climate conditions, and geopolitics. Paul Krugman claims that the
latter has the most effect on the pace of economic development and,
consequently, on social and technological change14.
The Northern economies are well diversified and tend to specialise in different fields: Finland and Sweden have the strong timber
industry for obvious reasons; Norway and Iceland put strong emphasis on the fishing industry; and Denmark has developed a food
industry based on intensive cattle and pig farming. These traditional
areas have been augmented by new fields of economic activity such
as the oil industry (Norway), vehicle manufacturing and telecommunications (Sweden and Finland) or pharmaceutical industry and
biotechnology (Denmark and Iceland). This diversity would be a key
advantage of the federation. In the current economic environment,
business cycles are a constant, but the magnitude of their impact can
differ depending on a field, industry or region; they can also appear
out of sync. A diversified economic portfolio boosts the joint economy’s chances for a quicker response to a market in crisis. The common trade policy of the federation would only expand on existing
economic relations between the member countries. The region could
also become highly attractive to external trade partners, given that
the new area would constitute an expanded market with several major specialist industries and a population of over 25 million.
4) Immigration policy – in the age of constant human traffic in search
of employment, education, better life quality, freedom of speech,
healthcare and life security, global migration, patterns become an increasingly salient point in Nordic political debates. Nordic countries
13 Ibidem, p. 37. See also: Stoltenberg Report, 2009.
14 P. Krugman, The Increasing Returns Revolution in Trade and Geography, American Economic
Review, Vol. 99, 2009, No. 3.
have open immigration policies, especially for refugees, and accept
a large number of immigrants relative to the size of their populations15. Given that major portions of migrant populations hold significantly different cultural values from the host culture, integration
can be difficult. Over time, the experience of the entire region – and
Sweden in particular – led to a working, sustainable, yet admittedly
imperfect model of social cohesion. As existing inclusion policies
still require constant effort and supervision, they understandably depend on substantial resources, especially funding16.
Seeing how both Europe and the global market are volatile environments, creating a strong workforce to meet present and future market
needs will require a careful approach to a common immigration policy.
This area should and must become a major driving force of the newly
unified Nordic economy.
2.
Common areas
Common areas under joint supervision of the federation and the federated countries would include legislation, labour market, R&D, higher
education, and infrastructure. Each of these areas would be controlled
by relevant bodies operating from both levels, as the central administration and secondary (member state) administration.
Common legislation, or rather a common legislative framework,
follows from their shared history, traditions and similar – if not identical – set of values fostered by Nordic societies. Finance and banking,
workforce mobility and citizenship are the three areas that require joint
regulation. Common banking law created by mutual consent of the federated states would protect the union, enabling timely prevention of potential irregularities. The Icelandic crisis of 2008 underscored this legis-
15 Norway: http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48ed26&submit=GO
Sweden: http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48f056&submit=GO
Denmark: http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48e376&submit=GO
Finland: http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48e4f6&submit=GO
Iceland: http://www.unhcr.org/cgi-bin/texis/vtx/page?page=49e48e8a6&submit=GO
[retrieved 2012-09-20].
16 See also: M. Banaś, Szwedzka polityka integracyjna wobec imigrantów [Swedish Integration
Policy towards Immigrants], Kraków 2010.
135
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Monika Banaś
lative gap, and its disastrous consequences convinced many to support
proposals introducing uniform regulations into the banking and financial systems, especially as regards control and supervision17.
Financial policy, on the other hand, should also be subject to joint
regulations imposed by the federation and member states. The individual states would finance their expenses from taxes imposed at a secondary (member state) level, but the central government would have
the final say in terms of federal expenses such as financial aid for crisis-stricken member or members. To ensure security, the Nordic Federation would have to give priority to financial liquidity and balanced
budgets at both levels.
In terms of workforce mobility, the common legal system would
guarantee that workers would be provided with equal access to material
and symbolic goods. In this way, law could foster free flow of human
capital which is the driving force behind a competitive economy in the
current market environment.
Citizenship is somewhat similar. A common citizenship granted to
all Norden citizens, giving them equal symbolic and actual rights, privileges, and duties would have positive psychological, social, political and
economic consequences. This Northern citizenship – a term I coined for
the sake of convenience – would not necessarily rule out the possibility
of having an EU citizenship, if such an institution ever becomes a fact.
Wetterberg explains this by stating that sooner or later the states and
the EU will become complementary not only in terms of identity but
also the labour market, education etc. Thus, there is no alternative to
integration and system convergence if the Nordic states are to become
a competitive European economy capable of challenging major players
for the position of a global leader in charge of the rules of the game.
One of the most basic elements of any competitive strategy is a more
flexible labour market with a potential to promptly follow global trends.
Such a market requires relevant regulations and management models,
ensuring a favourable environment for entrepreneurs, workers who
wish to start or change employment, and collective agreements executed between employees and employers. In Scandinavia (or, broadly
speaking, the Nordic countries), these relations are based on a set of
covenants between the two groups involved. In the North, this is considered standard practice, but continental Europe does not foster these
17 R. Boyes, Meltdown Iceland. How the Global Financial Crisis Bankrupted an Entire Country,
London 2009.
traditions. Wetterberg stresses this fact and suggests that for the benefit
of the entire formation, EU members might consider abandoning this
obligatory, inflexible legal form and adopt more pragmatic agreements
and covenants, rooted not in legal obligation but consensus and negotiations.
No competitive economy could exist without higher education and
scientific research, the two strategic facets of any modern state. Knowledge-based society and technology-driven economy are born from systemic planning covering all stages of education, and not only tertiary
institutions. They are shaped by bold, united and forward-looking visions that usually require cooperation and insight into individual needs.
The EU itself is no stranger to such efforts, as evidenced by a unified
higher education system and programmes fostering cooperation between researchers from different member states. However, the Nordic
model is unique because of its ability to tailor these two areas to the
needs of the federation through a policy that provides federated states
with an active – not just declaratory – choice and respects their opinions and capabilities18.
The final key area subject to joint regulation at a federal and member state level is the infrastructure. The choice is obvious and requires
no particular explanation. Political, social and cultural development is
heavily dependent on the quality and comprehensiveness of infrastructural solutions. The theory is backed by firm evidence: the transnational Danish-Swedish region of Öresund experienced a boom in creative
and science-based industries after a bridge between Copenhagen and
Malmö had been constructed across the strait. The local residents have
become more mobile, travelling for work and moving from one city to
another. A substantial group of Danes decided to move from Copenhagen to Malmö which offered cheaper real estates and the same, high
standard of life. Commuting is not a problem because quick, efficient
and convenient public transport fully satisfies any regional needs. Similar examples of multi-modal passenger transport come up at every turn
and appear to be related to a focus on value, a pragmatic approach to
sustainable development and, last but not least, a shared sense of environmental protection.
18 When a model is purely theoretic, it can hardly be real as its full character can only unfold
in action. Despite these reservations, it can be said that pragmatic solutions are among key
elements defining the culture of Nordic states.
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Monika Banaś
Apart from traditional communication, telecommunications also
play a vital role in modern economies. The speed of information flow
determines development. Clearly, the quality of information and its
availability also has to be considered. The Nordic countries meet all
three criteria of quality, speed and availability, setting a benchmark for
a social organisation. State-of-the-art telecommunication technology
paired with universal access to the Internet allows even the most remote
regions to maintain regular contact with the centre. Physical distance
is a non-issue as it can be easily overcome by video calls, which allows
companies to save time and money on business travels.
As a priority, Wetterberg’s Nordic federation should focus on setting
up an extensive communication and telecommunication network but
maintain its goals related to sustainable development and environmental protection.
3.
Member state level
The federated states would have sole command over social policies,
state-level taxes, primary and secondary education, and cultural life.
There is little doubt that social policies of the Nordic states are
among the best in the world19. While much has been said about their
high cost, it is important to note that the expenses incurred on social
policies yield double benefits. Firstly, they create a level playing field in
education, support personal development and provide healthcare coverage for the less well-off. In this way, people in need get to unlock their
potential and use it later on, during their professionally active years.
Secondly, social benefits are a way of thanking the retired population
for their efforts and participation in the welfare state. The wide range
of high-quality services offered to senior citizens ensures their wellbeing and prolongs their physically and mentally active years. Consequently, the society incurs lower costs of geriatric care. These savings
are particularly important in light of the current demographic trends
which demonstrate a strong shift in populations of developed countries
19 According to the Human Development Index, Nordic countries rank among 22 most developed countries in the world. See: Human Development Reports UNDP, Statistical Annex
2011, p. 127, http://hdr.undp.org/en/media/HDR_2011_EN_Tables.pdf [retrieved 2012-09-22].
towards older ages. This fact cannot be ignored; moreover, we must not
forget that the Nordic welfare state is centred around the individual and
all of its policies are formulated with the people in mind – an idea that
is neither cheap, nor easy to implement20.
This kind of social policy cannot exist without an effective tax system. Only a well-designed and properly implemented tax policy can pay
for a welfare state. Taxes which are charged at a primary and secondary level (by the commune, region, and state) enable the efficient use of
raised revenue. The communes and regions are particularly important
as they know local and regional needs best. Thus, a decentralised tax
system is more conducive to a fiscal order than a centralised system.
Primary and secondary education should follow the same pattern.
Schools should be rooted in local traditions but also use novel solutions. For decades, Finland has had one of the best education systems
in the world, setting an example for other members of the future federation21. In Finland, elementary schooling takes place at small centres
which have been designed with the students’ physical and psychological
comfort in mind. For this reason, some of the schools resemble private
houses. Pupils immersed in such safe environments acquire new skills
easily, develop their natural sense of curiosity and have an opportunity
to cultivate their individual talents. Because the classes are small, teachers can evaluate children’s performance and discover the areas in which
they do particularly well. In Finnish schools, talent is not a rare gift. It is
a common feature which emerges through a close teacher-student cooperation.
Strong primary education background reflects in secondary school
performance. At this level teachers build up and expand students’
knowledge, preparing them for higher education. As we can see, Finnish architects, engineers, doctors and lawyers are not shaped merely by
universities, but by the entire system of education, starting from kindergarten and primary schools.
Culture is the final area which, according to Wetterberg’s concept,
should be left to the discretion of member states. For reasons that do
not require explanation, any federal bodies should not be in charge of
20 Nordic welfare states tax income from social benefits, G. Wetterberg, Förbundsstaten Norden..., p. 52.
21 What students know and can do: Student performance in reading, mathematics and science,
http://www.oecd.org/pisa/46643496.pdf [retrieved 2012-09-22]. See also: Are Finnish schools
the best in the world?, The Independent, http://www.independent.co.uk/news/education/
schools/are-finnish-schools-the-best-in-the-world-2289083.html [retrieved 2012-09-22].
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Monika Banaś
it. Similar, if not identical values underlying social and individual behaviour stimulate mutual understanding and communication between
Nordic societies. Almost any text, idea, intellectual solution, work of
art or artistic creation can circulate freely among those countries as
they bear strong cultural resemblances. Because of this flow of mutual
inspirations, the cultural life in the region remains dynamic. However, this process could be enhanced if more funds were devoted to the
study of all Nordic languages. Citizens of the federated states should
be encouraged to learn the languages of their closest and more distant
neighbours. Language is the key to communication. Language learners
acquire communication skills, but also enjoy other advantages such as
superior cognitive skills, more efficient brain processing or slower pace
of age-related brain deterioration22.
4.
Challenge for European integration?
In many ways, a Nordic federal state can be an alternative to the European Union. The author of the concept is openly sceptical about some of
the EU solutions such as excessive bureaucracy, protectionism leading
to high prices of goods and services, lack of power to cope with key issues (as evidenced by the recent financial crisis), inadequate solutions
concerning immigration policies or introduction of the idea that different parts of Europe should integrate at different paces. The solution,
dubbed multi-speed Europe, justified as it may be by varying levels of
economic development in Europe, seems to contradict the egalitarian
notions of a unified European Community.
The organisational shortcomings of the EU by no means erase its advantages. In a way, the Nordic Federation would complement the process of pooling the pan-European potential. Due to its nature, it would
serve as an example of best practices based on solutions that do not
rely on an extensive and constantly growing bureaucracy, but depend
on a system of easy rules established through cooperation between the
22 Learning languages ‘boosts brain’, BBC News, http://news.bbc.co.uk/2/hi/health/3739690.
stm [retrieved 2012-09-22]; A.R. Damasio, H. Damasio, Brain and Language, Scientific American, Vol. 267, 1992, No. 3, pp. 88-95; A. Pate, Language, music, syntax and the brain, Nature
Neuroscience, Vol. 6, 2003, No. 7, pp. 674-681.
government and the governed. However, such an organisation requires
mutual trust; and trust is gained from experience. Scandinavian and
Nordic countries made trust-based cooperation a natural part of their
culture. This phenomenon is attributable to their traditions, upbringing
and education, but also to simple pragmatism: Northern societies know
that a common effort is cheaper, faster, and cost-effective. Short cultural
distances between the societies certainly make it easier to conceptualise,
execute and implement an idea into social reality. Shared values, common outlook, similar ways of communicating, acting or making decisions can help form bonds and spark the discussion about a common
federal state. Indeed, as we can see, the notion has moved past closed
circles of scholars and theory and entered the Nordic social discourse.
In G. Wetterberg’s opinion, the Nordic federation understood as
a single political entity would not be a threat to the EU as the two organisations are not meant to compete in an either/or environment.
The federation should – at least according to its originators – inspire the
EU and offer functional solutions in the area of organisation and communication, for example as regards transparency and end-user clarity.
In this particular case, the federation would face a different challenge: it would have to balance opposing interests of its members who
do not necessarily share opinions on NATO and EU membership or
adoption of a single currency. The process of finding a common answer
to these questions will not be quick or easy. It will require even greater cooperation of its future member states. Assuming the goodwill of
all interested parties, this process should result in a federal framework
which, of course, cannot exist without extensive public consultation,
sustained effort of expert teams, and continued partnership between
subsequent generations.
Convergence, going hand in hand with such transformations, becomes inherent and crucial to integrating political, economic, social
and cultural systems. The latter is particularly important as culture is responsible for paradigms we use to give meaning to the world we live in.
The emergence of a Nordic Federation would affect Europe but also
form a new element of the global order, a strong and stable point of reference in the increasingly global world.
Conclusions
Although the notion presented above is still quite bold or too improbable to become reality, it is important to note that every now and then
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Monika Banaś
the idea re-enters the political, economic and social discourse of the
Nordic countries, coming and going in more or less regular waves.
Harald Bluetooth (in Danish: Harald Blåtand Gormsen), the king of
Denmark and Norway (albeit for a few years), strongly supported the
unification of Denmark and south-eastern Scandinavia under a single
rule. His unification policy was at least partially adopted by his direct
and indirect successors and returned under the guise of the Kalmar
Union (1397-1523) or by means of subsequent quasi-union entities (between Denmark and Norway – in 1536-1814, and Sweden and Norway
– in 1814-1905)23. It has also found its way into contemporary life, this
time returning not as a political concept but as technology. Rather symbolically, the king who united Denmark – Harald – shares his name and
appellation – bluetooth – with a wireless technology used for exchanging data over short distances.
Clearly, unification is always a popular topic. This time, it was Gunnar Wetterberg who presented his vision to the general public of the
Norden region. He managed to win the support of the Nordic Council
and the Nordic Council of Ministers by voicing local sentiments, feelings, wishes, and needs. Without those feelings, the dream of a Nordic state would have never been born, or possibly would have failed to
achieve official recognition.
Bibliography
Are Finnish schools the best in the world?, The Independent, http://www.
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Integration Policy towards Immigrants], Kraków 2010.
Boyes R., Meltdown Iceland. How the Global Financial Crisis Bankrupted
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Dagens Nyheter, October 27, 2009, http://www.dn.se/debatt/de-femnordiska-landerna-bor-ga-ihop-i-en-ny-union [retrieved 2012-09-01].
Damasio A.R., Damasio H., Brain and Language, Scientific American,
Vol. 267, 1992, No. 3.
23 I use the term quasi-union entity to stress the fact that in both cases (Denmark-Norway and
Sweden-Norway) the states did not act as equals but based their relations on unilateral
dominance. The best example of this policy of subjugation was Finland which survived
centuries under the Swedish rule only to fall under Russian policies.
http://www.nordicembassies.org/.
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Aleksandra Dyba
The knowledge-based economy
in the Central and Eastern
European countries
in view of the World Bank
ranking
Abstract: The paper presents the results of the latest research by the World Bank
on the development of the knowledge-based economy (KBE) in the selected countries, including the EU Members from Central and Eastern Europe (CEE). The paper
is also an attempt to study the level of development of the KBE in those countries in
relation to the other EU Member States.
Keywords: knowledge-based economy, European Union, Central and Eastern
European Countries
Introduction
It has been frequently stressed that the modern world has entered a new
era of knowledge recognised as a potent tool for economic development. A country’s pursuit of the knowledge-based economy (KBE) is
said to be reflected in its level of socio-economic development.
Therefore, the World Bank’s research on the subject is worth delving
into. The paper chiefly discusses the performance of the EU Member
States from Central and Eastern Europe in the KBE. It also poses the
question whether there is any major disproportion between the devel-
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Aleksandra Dyba
opment of knowledge-based economy in the Central and Eastern European countries in comparison with the other EU members and it is
possible to pinpoint any differences or similarities in the development
of KBE among the CEE countries.
Since the knowledge-based economy is a multi-faceted issue, the paper focuses only on certain aspects of KBE development in the selected
countries.
1.
The concept of knowledge-based economy
In the process of building a knowledge-based economy, knowledge is
a fundamental driving force behind economic development. Knowledge has also become a commodity which has its price. To gain a competitive advantage increasingly relies on the ability to create, acquire and
exchange knowledge. It is extremely difficult to create an unambiguous
and accurate definition of knowledge. However, it is possible to point out
certain attributes of knowledge such as dominance (competitiveness depends on using knowledge effectively), inexhaustibility, simultaneity and
mobility (the same knowledge can be used by several people, companies
etc. in different places at the same time), complexity (knowledge can be
practical, theoretical, etc.), learning (knowledge is connected with the
process of learning), applicability (knowledge becomes valuable when it
is applied), expensiveness (knowledge is expensive to create)1.
Similarly, defining the term of knowledge-based economy is far from
straightforward. It is hardly possible to come up with a single comprehensive and generally acceptable definition of a knowledge-based
economy. The term of KBE was first coined by the OECD and defined
as “economies which are directly based on the production, distribution and use of knowledge and information”2. In one of its documents,
the Polish Ministry of Economy has defined the KBE as an economy in
which knowledge is the key factor in productivity and economic development (ahead of work, capital, raw materials and energy), and where
information, education and technologies (especially information and
1
2
C. Olszak and Z. Ziemba (eds.), Strategie i modele gospodarki elektronicznej [Strategies and
Models for a Digital Economy], Warszawa: PWN, 2007, p. 25.
OECD (1996).
The knowledge-based economy in the Central and Eastern European countries...
communication technologies) play a crucial part3. Both definitions
emphasise the role of knowledge in a modern economy. Knowledge is
a complex resource which also constitutes an altogether new quality in
the process of economic development. Knowledge is the driving force
behind a competitive advantage.
Knowledge (especially science and innovation) is often considered as
an important stimulus of economic development and growth in the European Union. The European Council launched the Lisbon Strategy in
2000. Its aim was to make the EU “the most competitive and dynamic
knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”4. However, most of the Lisbon Strategy goals were not achieved. Its principles
were endorsed in the next European Strategy known as the Europe 2020
strategy for smart, sustainable and inclusive growth. The Europe 2020
sets out a vision of European social market economy in the 21st century.
In one of the three mutually reinforcing priorities, i.e. smart growth, the
European Commission explains the importance of developing an economy based on knowledge and innovation for the EU5.
The KBE is defined as follows6:
• it has a very powerful technological driving force;
• it is stimulated by a rapid growth of ITs with telecommunication
and networking which have penetrated all spheres of human activity, forcing the ITs to work in a new mode and creating new
spheres;
• it focuses on intangible resources rather than tangible ones.
L. Bătăgan explains that “(…) the KBE is characterised by the rapidity of change in information and knowledge in services and products
fields. In this economy, it is important to remark that the barriers of
communication and the physical distance are the lowest, the value of
knowledge and information depends on the situation they are used in
3
4
5
6
ePolska – Plan działań na rzecz społeczeństwa informacyjnego w Polsce na lata 2001-2006
[The Action Plan for 2001-2006 on Developing Information Society in Poland], Ministerstwo
Gospodarki [Ministry of Economy], 2001, p. 63.
The Lisbon Strategy, Presidency conclusions, Lisbon European Council, 23 and 24 March,
2000.
Communication from The Commission – EUROPE 2020. A strategy for smart, sustainable and
inclusive growth, COM (2010) 2020 final, Brussels, 3 March, 2010.
Knowledge-Based Economy and Intellectual Capital: The Impact of National Intellectual and
Information Capitals on Economic Growth in Korea, International Journal of Business and Information, Vol. 1, 2006, No. 1, pp. 28-52.
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Aleksandra Dyba
but the mode in which they are understood by the citizen is important
too”7.
In order to understand the meaning of the KBE, it is worth focusing on its attributes, which, as K. Porwit claims, consist of the meaningful role of intellectual services, significant role of R&D investment,
a suitable infrastructure necessary to implement high technologies, legal system to ensure transactional security, economic policies to ensure
a stable macroeconomic base (low inflation, stability of public finances
etc.)8.
The knowledge-based economy is generally believed to consist of
several key elements or pillars such as an innovation system, education system, information and communication systems, regional aspect,
institutional and business environment, knowledge management at
an organisational level9. For an effectively operating KBE, all these elements have to work together harmoniously. G.T. Kafela explained that
“to become successful knowledge economies, countries must act simultaneously on their education base, their innovation systems and their
information and communication technology infrastructure, while also
building a high-quality economic and institutional regime”10.
2.
Knowledge Assessment Methodology (KAM)
Knowledge for Development (K4D) is one of the World Bank’s programmes meant to assist countries in identifying the challenges and opportunities they face in making the transition to the knowledge-based
economy. The KAM is a benchmarking tool for assessing the level of de-
7
L. Bătăgan, Indicators for Knowledge Economy, Informatica Economică, No. 4 (44)/2007,
pp. 60-63.
8 K. Porwit, Cechy gospodarki opartej na wiedzy, ich współczesne znaczenie i warunki
skuteczności [Attributes of the Knowledge-based Economy, Their Contemporary Relevance,
and Conditionality for Their Efficiency], [in:] Antoni Kukliński (ed.), Gospodarka oparta na
wiedzy jako wyzwanie dla Polski XXI wieku [Knowledge-Based Economy as a Challenge for
Poland in the 21st Century], Warszawa: KBN, 2001, pp. 111-137.
9 T. Kamiński, J. Fryca, B. Majecka (eds.), Efektywność gospodarki opartej na wiedzy – teoria
i praktyka [The Efficiency of the Knowledge-Based Economy. Theory and Practice], Gdańsk:
The University of Gdańsk, 2007, p. 23.
10 G.T. Kefela, Knowledge-based economy and society has become a vital commodity to countries, International NGO Journal, Vol. 5 (7), 2010, pp. 160-166.
velopment of the KBE in a given country. KAM 2012 was created on the
basis of 148 structural and qualitative variables11 which are then normalised on a scale of 0 (weakest) to 10 (strongest) relative to other countries
in the comparison group. Hence, the higher the value is recorded, the
more developed KBE becomes.
In view of the derived index is standardised, a change in the position
of a country may be due to its actual improvement or deterioration (absolute values) or a relative improvement or deterioration of other countries (higher or lower standardised values). Classified into 7 regional
groupings, i.e. North America, Europe and Central Asia, East Asia and
the Pacific, South Asia, Latin America and the Caribbean, the Middle
East and North Africa, Sub-Saharan Africa, 146 countries are currently available in the KAM. The KAM is an interactive tool which allows
comparisons on global or regional scales as well as by 4 income categories, i.e. high income, upper middle income, lower middle income, and
low income12.
The Basic Scorecard as the simplest version of the KAM consists
of 12 variables (Table 1). Those variables attempt to capture a country’s
readiness for the KBE and are used to calculate its overall Knowledge
(KI) and Knowledge Economy (KEI) Indexes. The Knowledge Index
measures a country’s ability to generate, adopt and diffuse knowledge.
The Knowledge Economy Index is used in international comparisons
and illustrates whether the environment is conducive for knowledge to
be used effectively in economic development. The KI is a simple average of country’s normalised performance scores by the key variables in
three pillars, i.e. education, innovation system, and information and
communication technology (ICT). The KEI index is made up of the
same three pillars as the KI and the fourth pillar, or the economic and
institutional regime.
Besides its own databases, the World Bank uses other publicly accessible data sources in the KAM: Freedom House, Heritage Foundation,
International Labour Organisation, International Telecommunication
Union, U.S. Patent and Trademark Office, UNESCO Institute for Statistics, and World Economic Forum. It is not possible to obtain data for all
11 For example, in 2001 the KAM contained data for only 60 indicators for 40 countries. KAM
2008 included 83 indicators for 140 countries.
12 Income groups are classified by the World Bank estimates of Gross National Income (GNI)
per capita.
149
Source: World Bank, KEI and KI indexes (2012).
• Average years of schooling (ag• Tariff & Nontariff Barriers (the
gregate measure of the educational
analysis of tariff and non-tariff
stock in a country)
barriers to trade such as import
bans and quotas, and strict label- • Secondary Enrolment (ratio of total
enrolment, regardless of age, to the
ling and licensing requirements)
population of the age group that
• Regulatory Quality (measurement
officially corresponds to the level of
of the incidence of marketeducation shown)
unfriendly policies such as price
• Tertiary Enrolment (ratio of total
controls or inadequate bank
enrolment, regardless of age, to the
supervision, etc.)
population of the age group that
• Rule of Law (indicator includes
officially corresponds to the level of
several indicators to measure
education shown)
the extent to which agents have
confidence in and abide by the
rules of society)
VARIABLES
Education system
Economic and institutional
regime
PILLAR
Information and
communication
• Royalty and License Fees • Telephones per 1,000
people (sum of telPayments and Receipts
ephone mainlines and
(US $ millions)
mobile phones)
• Patent Applications
Granted by the US Patent • Computers per 1,000
people (indicator of
and Trademark Office,
personal computer
• Scientific and Technipenetration and use)
cal Journal Articles
• Internet Users per 10,000
(This indicator refers to
people
scientific and engineering
articles published in the
following fields: physics,
biology, chemistry,
mathematics, etc.)
Innovation system
Table 1. Four pillars of the knowledge economy to the KAM (Basic Scorecard)
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Aleksandra Dyba
the indicators referring to the same period of time, hence the KAM uses
the most recent data from any given source.
3.
The knowledge-based economy in Central and
Eastern Europe compared with the European Union
The results of the World Bank’s KAM 2012 concerning the level of development of the KBE in 146 countries show Sweden, Finland and
Denmark (EU countries) ranked as number 1. Poland, Romania and
Bulgaria were the worst among the EU members in the global ranking
(Table 2). Estonia ranked 19th in the global ranking was the best Central and Eastern European country. Among the CEE EU Member States
that improved their global position were: Slovakia, the Czech Republic, Estonia, Bulgaria, Lithuania, and Hungary. Romania’s performance
improved by 9 places. Slovenia and Latvia stayed the same. Some of
the countries like Greece, Austria, Portugal, France, Italy, Cyprus, and
Poland moved down the ranking. Importantly, a majority of the CEE
countries improved their rankings.
The thorough analysis shows that among the CEE countries, Estonia and Bulgaria achieved the best and worst results (likewise in the
KI index) in the KEI, respectively. Still, some significant improvement
since 2000 cannot be ignored. In both the KEI and KI indexes, all the
countries made progress (except for Poland and Slovenia – KI Index,
Table 3). However, a significant increase in the standardised value of indexes is clear even if the latest KAM results are compared with those for
1995; this tendency is hardly noticeable over the whole period. The data
for 1995 and 2000 shows that the values of these indexes deteriorated
in the Czech Republic (from 5.66 to 5.23), Slovakia (from 5.06 to 4.66),
Bulgaria (from 4.18 to 3.37), and Romania (from 3.54 to 3.02)13.
Comparing the results achieved by the CEE countries, Estonia not
only scored the highest in this group but it was also slightly above average in the entire EU (Figure 1). The remaining countries failed to obtain
the EU average. Countries like Slovakia, Latvia, Poland, Romania, and
Bulgaria scored lower than the EU and CEE averages. The most significant development gap (nearly 1.4 points) is for Bulgaria (6.8), Romania
13 World Bank, http://info.worldbank.org/etools/kam2/KAM_page7.asp [accessed 2012-10-01].
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Table 2. The EU Member States in the Global Ranking (KAM 2012)
Global Rank
Country
Change in the rank since 2000
KEI
KI
1
Sweden
0
9.43
9.38
2
Finland
6
9.33
9.22
3
Denmark
0
9.16
9.00
4
Netherlands
-2
9.11
9.22
8
Germany
7
8.90
8.83
11
Ireland
0
8.86
8.73
14
United Kingdom
-2
8.76
8.61
15
Belgium
-1
8.71
8.68
17
Austria
-4
8.61
8.39
19
Estonia
7
8.40
8.26
20
Luxembourg
2
8.37
8.01
21
Spain
2
8.35
8.26
24
France
-3
8.21
8.36
26
Czech Republic
7
8.14
8.00
27
Hungary
2
8.02
7.93
28
Slovenia
0
8.01
7.91
30
Italy
-3
7.89
7.94
31
Malta
8
7.88
7.53
32
Lithuania
2
7.80
7.68
33
Slovak Republic
7
7.64
7.46
34
Portugal
-4
7.61
7.34
35
Cyprus
-3
7.56
7.50
36
Greece
-5
7.51
7.74
37
Latvia
0
7.41
7.15
38
Poland
-3
7.41
7.20
44
Romania
9
6.82
6.63
45
Bulgaria
6
6.80
6.61
Source: World Bank, KAM 2012.
153
Table 3. Central and Eastern European Countries – Over Time Comparison (KEI and KI Indexes)
Country
Knowledge Economy Index
Knowledge Index
Most recent (2012)
2000
Change
Most recent (2012)
2000
Change
Bulgaria
4.22
3.37
+0.85
3.77
3.60
+0.17
Czech
Republic
6.54
5.23
+1.31
6.28
5.41
+0.87
Estonia
7.09
6.60
+0.49
6.84
6.31
+0.53
Hungary
6.26
5.76
+0.50
6.05
5.77
+0.28
Latvia
5.22
4.88
+0.34
4.69
4.48
+0.21
Lithuania
5.95
5.02
+0.93
5.73
4.60
+1.13
Poland
5.14
4.83
+0.31
4.72
4.90
-0.18
Romania
4.34
3.02
+1.32
3.92
2.85
+1.07
Slovak
Republic
5.72
4.66
+1.06
5.37
4.87
+0.50
Slovenia
6.25
5.91
+0.34
6.11
6.22
-0.11
Source: World Bank, KEI and KI indexes (2000 and 2012).
(6.82), and the EU (8.17). The KBE development in the CEE countries
varies both in relation to the EU and within the group itself.
Figure 2 shows the very interesting results for the CEE countries in
particular KE pillars. According to KAM 2012 in the Economic Incentive
Regime pillar, the best results were reported by Estonia (8.8), the Czech
Republic (8.5), Slovenia (8.3), whereas in the EU the leaders were Finland (9.6), Denmark (9.6), and Sweden (9.5). The best CEE countries in
the Innovation System pillar were Slovenia (8.5), Hungary (8.15), and the
Czech Republic (7.9), while the EU leaders were Sweden (9.7), Finland
(9.6), and Denmark (9.4). However, Lithuania (8.6), Estonia (8.6), and
Hungary (8.4) scored the highest in the Education pillar. Greece (8.9),
Sweden (8.9), and Ireland (8.8) also performed very well in this area.
The best results in the 4th pillar (ICT) belonged to Estonia (8.4), the
Czech Republic (7.9), and Slovenia (7.8), whereas Sweden (9.4), Luxembourg (9.4) and the Netherlands (9.4) were leaders in the EU14.
14 http://info.worldbank.org/etools/kam2/KAM_page5.asp [accessed 2012-09-25].
154
Aleksandra Dyba
Figure 1. Central and Eastern European Countries – KEI and KI (KAM 2012)
9
8
KEI
7
Index score
6
5
KI
4
3
EU - average (KEI)
2
1
Central and Eastern
European Countries average (KEI)
0
A comparison of all of the results in the Knowledge Economy pillars
shows certain tendencies. Firstly, Estonia’s results were above the EU average in three out of four pillars, i.e. Economic Regime, Education, and
ICT. Secondly, the CEE countries reported the best normalised values
in Education with as many as four countries, i.e. Lithuania, Hungary,
Estonia, and the Czech Republic that performed better than the EU-27.
Thirdly, Bulgaria and Romania not only performed the worst in almost
all of the four pillars within their group but also in the EU.
Interestingly, despite their relative poor general performance, Bulgaria and Romania reported significant improvement in all of the four
pillars (Economic Regime, Innovation, Education – only Romania – and
ICT) compared to 2000 (Table 4). In the Economic Regime and Innovation pillars, all these countries showed progress though this tendency
did not occur in the remaining two pillars. Relative to 2000 as many as
four countries showed a decrease in Education and ICT.
Table 5 presents a breakdown of data by the basic indicators. It can
be concluded that Estonia exceeded the EU average for all of the four
indicators. Secondly, Bulgaria as the only CEE country failed to exceed
the EU average in any of the areas and demonstrated the poorest KAM
2012 performance. Thirdly, the CEE Member States reported the best
155
Figure 2. Knowledge Economy Pillars (KAM 2012)
10
9
8
Index score
7
6
5
4
3
2
1
0
Economic Incentive Regime
Innovation
Education
ICT
EE
CZ HU
8,81
7,75
8,60
8,44
8,53
7,90
8,15
7,96
8,28
8,15
8,42
7,23
SI
LT
SK
LV
PL
8,31
8,50
7,42
7,80
8,15
6,82
8,64
7,59
8,17
7,30
7,42
7,68
8,21
6,56
7,73
7,16
8,01
7,16
7,76
6,70
RO BG EU*
7,39
6,14
7,55
6,19
7,35
6,94
6,25
6,66
8,52
8,21
7,91
8,05
EUR
O*
8,57
8,46
7,90
8,24
* EU – EU average
* EURO – Eurozone average
* CEE – Central and Eastern European countries – average
results in the Education pillar; as many as 7 countries obtained comparable or better results than the EU average. The Education System pillar
appears to be strong in these countries’ pursuit of a knowledge-based
economy. Finally, the normalised results for individual countries prove
that the CEE countries should put special emphasis on implementing
changes in the Innovation and ICT pillars.
Conclusions
Knowledge increasingly influences the economic competitiveness of
countries. The key elements of the KBE like education, innovation, ICT
or operational institutions are indispensable for creating the KBE but
also for countries’ economic development as such. Hence, a thorough
study of KBE-related research results appears extremely stimulating.
Having analysed the results of the World Bank’s research with reference to the CEE countries, it is worth pointing out that:
CEE
*
8,12
7,32
7,79
7,34
8.53
8.81
8.28
8.21
8.15
8.01
7.39
8.17
8.31
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Republic
Slovenia
7.35
7.43
6.51
5.46
7.04
7.81
7.67
7.81
8.57
7.18
4.25
+0.88
+1.66
+1.93
+0.97
+0.34
+0.54
+0.47
+0.24
+1.35
+3.10
8.50
7.30
6.14
7.16
6.82
6.56
8.15
7.75
7.90
6.94
Most recent
Change
INNOVATION
2000
ECONOMIC REGIME
Most recent
Bulgaria
COUNTRY
8.21
7.08
5.24
6.86
6.42
6.31
8.03
7.17
7.50
5.76
2000
+0.29
+0.22
+0.90
+0.30
+0.40
+0.25
+0.12
+0.58
+0.40
+1.18
Change
7.42
7.42
7.55
7.76
8.64
7.73
8.42
8.60
8.15
6.25
Most recent
EDUCATION
Table 4. Over Time Comparison – the four pillars
7.72
7.06
6.37
8.11
8.00
7.72
8.17
8.61
7.56
7.31
2000
-0.30
+0.36
+1.18
-0.35
+0.64
+0.01
+0.25
-0.01
+0.59
-1.06
Change
7.80
7.68
6.19
6.70
7.59
7.16
7.23
8.44
7.96
6.66
Most recent
ICT
8.23
7.46
5.56
6.92
6.78
7.09
7.25
8.22
7.62
6.24
2000
-0.43
+0.22
+0.63
-0.22
+0.81
+0.07
-0.02
+0.22
+0.34
+0.42
Change
156
Aleksandra Dyba
7.76
8.14
7.05
5.68
7.26
6.61
5.1
7.02
8.14
5.07
6.76
Rule of Law, 2009
Royalty Payments and receipts (US$/pop), 6.24
2009
7.31
Regulatory Quality, 2009
S&E Journal Articles / Mil, People, 2007
Patents Granted by USPTO / Mil, People,
avg 2005-2009
Average Years of Schooling, 2010
Gross Secondary Enrolment rate, 2009
Gross Tertiary Enrolment rate, 2009
Total Telephones per 1,000 People, 2009
Computers per 1,000 People, 2008
Internet Users per 1,000 People, 2009
7.88
9.3
Tariff & Nontariff Barriers, 2011
8.14
8.01
7.72
7.73
6.97
9.76
7.81
8.42
9.3
Bulgaria
Variable/Country
Czech
Republic
8.62
6.78
9.93
8.16
8.21
9.45
7.67
8.21
7.36
8.22
8.9
9.3
Estonia
8
6.78
6.9
8.01
7.86
9.37
7.95
7.93
8.56
7.47
8.08
9.3
Hungary
7.79
6.44
8.55
9.29
8.14
8.5
7.33
7.52
5.6
7.4
7.74
9.3
Lithuania
8.21
7.26
6
8.51
6.41
8.27
6.78
6.9
6
7.53
7.81
9.3
Latvia
Table 5. Comparison by key variables (KAM 2012)
7.79
5.82
6.48
8.65
7.93
6.69
6.64
7.86
6.96
7.12
7.6
9.3
5.86
6.1
6.62
8.37
6.55
7.72
5.62
6.41
6.4
5.96
6.92
9.3
Poland Romania
8.9
8.63
5.52
7.23
6.28
8.74
7.05
7.79
7.04
7.05
8.15
9.3
Slovak
Republic
8.14
7.81
7.45
9.72
7.59
4.96
8.29
8.97
8.24
8.15
7.47
9.3
8.33
7.95
8.05
7.75
8.21
7.63
8.14
8.32
8.16
8.28
8.47
8.98
Slovenia EU-27
157
158
Aleksandra Dyba
• significant disproportions within the CEE group as well as between the CEE group and the EU refer to the development of
a knowledge-based economy,
• EU countries such as Finland, Sweden and Denmark are leaders
in creating the KBE; these countries achieved the best results on
the EU and global scales,
• Estonia is an unquestionable CEE leader in building the KBE,
• the level of KBE development is the lowest in Bulgaria and Romania (forecast for these countries looks still promising as they
are undergoing dynamic changes),
• a large majority of countries saw a continuous upturn in both the
KEI and KI indexes, which is very optimistic,
• the best results were achieved in the Education pillar.
While building their knowledge-based economies, the CEE countries should focus on the Innovation and ICT pillars as they report worse
results there than in the others. Their good performance in Education is
their strength, which looks promising in the long run because education is the driving force behind innovation and ICT. An effective education system may stimulate development in these two areas and the other
way round. A healthy KBE cannot operate effectively without a successful interplay between all of the pillars.
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159
Key factors in the Spanish
economic crisis
Abstract: The aim of this paper is to analyse the determinants behind the crisis
in Spain that made it deeper and longer than in the previous instances and which
reflected some significant obstacles to emerging from the recession. The experience
of over the past four years allows some lessons to be drawn on the external sector,
the real estate market, fiscal policy and the labour market. These lessons point in
particular to the need to avoid complacency in economic policy management in
boom periods and urgent adapting the structure of goods and factor markets and
the behaviour of economic agents in Spain to the requirements imposed by participation in the Monetary Union.
Keywords: Spanish economy, economic crisis, competitiveness, real estate market, debt
Introduction
Based on the results of the research work by Eloisa Ortega and Juan
Peñalosa from the Bank of Spain, the paper adopts a selective approach
to this matter to focus on macroeconomic developments and non-financial economic policies. Responding to these issues, the author pays
particular attention to developments that acted as catalysts of the recession or the subsequent adjustment, or that shed light on the effective
possibilities of stabilisation by means of the economic policies implemented.
Since 2007 the world economy has undergone a phase of marked
instability. This has been characterised by successive shocks, feedback
162
effects between the financial and productive sectors, a rapidly deteriorated fiscal position of many countries, the difficulties faced by many
of them in creating jobs once more and, lastly, the worsening euro area
sovereign debt crisis. Undoubtedly, all of these factors are retarding the
pace of emerging from the recession than initially expected and are
heightening uncertainty considerably, especially in Europe.
The Spanish economy was affected much by these developments as
the imbalances which had been accumulated in the boom period made
it particularly vulnerable to changes in macroeconomic and financial
conditions, and expectations about the continuity of the upturn. The deterioration of the macroeconomic scenario and, most particularly, in
employment bore most adversely on public finances and the position of
financial institutions whose balance sheets showed greater exposure to
real estate risk. Spain went into recession in the second quarter of 2008
and remained there until the first quarter of 2010, when a modest recovery ensued that came unstuck in the second half of 2011 as the sovereign debt crisis heightened and spread to an increasingly large number
of countries.
Finally, mention should be made of the enormous uncertainty, still
clouding the outlook for the Spanish and European economies more
than four years after the international financial crisis broke in light of
the forceful strains prevailing on financial markets and the doubts surrounding the outcome of the sovereign debt crisis. Actually, such uncertainty restricts the prospective nature of the analysis that follows, one
which mostly turns on the lessons that may be drawn from the experience of recent years.
1.
Stylised facts of the periods of contraction
(2008-2009) and stagnation (2010-2011)
As one of the countries that experienced the most marked expansion in
the previous period, Spain is now characterised by its heavy fall in employment, the difficulties in the recovery and the greater risks posed by
a double-dip recession.
1.1. The 2008-2009 contractionary cycle
The employment adjustment was virulent and protracted (employment
decline began in early 2008 and continued apace in late 2011) while productivity followed the same countercyclical pattern as in the previous
recessionary episodes1. The scale of the contraction in 2008 and 2009
did not differ greatly from that in the main European countries.
Exports and imports also suffered to a greater extent in the latest
recession, which was related to the intensity of the adjustment in the
Spanish national demand and the international nature of the 2009 crisis. On the supply side, the three episodes analysed were characterised
by a strong decline in gross value added (GVA) in construction and
a scant impact on services meaning that the differentiating factor of the
latest recession was the significant fall-off in industrial GVA2.
1.2. The 2010-2011 stagnation
The sluggishness of the recovery resulted from the continuing process
involving the absorption of the imbalances built up in the upturn, which
meant that residential investment continued to shrink and that private
consumption was flat, given households’ deleveraging needs and the
uncertain economic outlook3. Adding to these was the fiscal consolidation process which required cutting public investment and halting the
previous expansion of government consumption as well as raising certain taxes. Thus, although GDP ceased to fall in late 2009, the national
demand has continued adjusting downwards since, and might continue
to do so in the near future. Accordingly, the pick-up in expenditure in
this period was underpinned exclusively by the external demand with
strong momentum in exports and some containment of imports, which
provided for a substantial correction of the current account deficit from
1
2
3
L.J. Álvarez, A. Cabrero, The cyclical behaviour of residential investment: some stylised facts,
Economic Bulletin, Banco de España, June 2010.
Banco De España, Annual Report 2008. Chapters 1 and 2. Annual Report 2009. Chapter 1. Annual Report 2010. Chapter 2.
J.M. Campa, Á. Gavilán, Current accounts in the euro area: an international approach, Documento de Trabajo, No. 0638, Banco de España, 2011.
163
164
10% of GDP in 2007 to estimated 3.5% for 20114. As with the national demand in 2011, a contraction in the labour market did not end; employment was falling for 15 quarters, with a cumulative loss of around 10% in
the jobs existing at the start of 2008.
By productive branch, the Spanish employment in services showed
a more moderate cumulative decline of 3%, given the weight of publicsector employment in this sector where the adjustment began only recently5. The pattern of weakness is apparent in the behaviour of all the
productive branches: the rebound in industry – underpinned essentially
by the expansion of exports – is not very different from that seen following the recession in the early 1990s although the starting point was
a lower level of output then, whereas value added in construction continued falling and that in services was practically flat. The intensity of
the effects of the crisis in Spain was scarcely tempered by the behaviour
of prices and wages which, in fact, contributed insufficiently to absorbing the shocks and the adjustment of the economy.
The average level of compensation per employee increased by around
5% in cumulative terms since 2008, while over the same period productivity rose by almost 10%, meaning that unit labour costs (ULCs) slowed
down only modestly in the three years. However, this relative price and
wage moderation was far from allowed for a substantial improvement in
competitiveness. In terms of the real effective exchange rate (REER) visà-vis the developed countries, calculated on the basis of relative ULCs,
a depreciation of 8% was brought about between 2008 and 2011, while in
the 1992 crisis the figure amounted to 23% in a period of scarcely three
years. In any event, the past experience of a large number of advanced
economies and Spain’s own experience in the recent decades show that
countries with a flexible exchange rate – and which, therefore, have the
possibility of devaluing their national currency – are no more successful in maintaining or increasing their medium- and long-term competitiveness than those adopting a fixed exchange rate regime6.
4
5
6
F. Castro, A. Estrada, P. Hernández de Cos, F. Martí, Una aproximación al componente transitorio del saldo público en España, Boletín Económico del Banco de España, June 2008.
F. Castro, Á. Estrada, P. Hernández de Cos, F. Martí, Una aproximación al componente transitorio del saldo público en España, Boletín Económico del Banco de España, June 2011.
P. Cuadrado, P. Hernández de Cos and M. Izquierdo, Wage adjustment to shocks in Spain,
Economic Bulletin, Banco de España, April 2011.
2.
Determinants of the crisis and the
macroeconomic adjustment in Spain
The intensity of the effects of the Spanish economic crisis and the sluggishness in the present crisis are related to the scale of the imbalances accumulated and the virulence of the shocks undergone, including
most notably the protracted euro area sovereign debt crisis, which is
giving rise to powerful contractionary effects on financing conditions
and confidence.
Furthermore, the adjustment phase is actually being influenced by
certain idiosyncratic developments in the Spanish economy, whether
for its exposure to shock that affected it asymmetrically compared with
other European countries or for certain institutional characteristics
bearing on some adjustment mechanisms. Indeed, the interaction of the
slowdown in activity in the residential construction sector with the effects of the financial crisis prevented real estate excesses from being corrected more gradually. On the contrary, all the channels through which
developments in the real estate sector spread to the rest of the economy
were activated, contributing to amplifying the recession7. The slowdown
in the household demand for housing in response to tighter financing
conditions and the downturn in confidence prompted a decline in housing starts and residential construction, and a turnaround in house prices which began to fall in the second quarter of 2008. The subsequent
economy-wide reduction in output and employment coupled with the
fall in real estate prices had a direct contractionary effect on disposable income and wealth. This triggered a series of second-round effects
on the residential investment, activities in the sector and its ancillary
industries, and, once more, employment8.
Furthermore, the particular characteristics of the residential construction sector, which is strongly leveraged and where the housing
production period is prolonged (no less than two years), meant that, in
2008 and 2009, housing started before the beginning of the crisis continued to be built and real estate firms took on heavy debt as they could
not – following the usual cycle – free themselves of their financial burden through the sale of this real estate. As a result, a large stock of un-
7
8
Á. Estrada, J.F. Jimeno, J.L. Malo de Molina, The Spanish economy in EMU: the first ten years,
Documentos Ocasionales, No. 0901, Banco de España 2009.
C.L. Freund, Current account adjustment in industrialized countries, International Finance
Discussion Papers, No. 692, Board of Governors of the Federal Reserve System, December
2000.
165
166
sold housing emerged in those years, which depressed prices and erased
prospects of a prompt recovery in the sector, leading to a collapse in
the number of housing starts9. These circumstances saw a substantial
increase in real estate company defaults and the bankruptcy of some,
while balance sheets of certain banks were impaired. The adjustment of
house prices was proving greater than the one recorded in the cycles of
the late 1970s and early 1990s. The strong volatility of residential investment and house prices, along with the cyclical implications entailed, are
key aspects for drawing lessons about the future. The workings of the
labour market are also an essential factor for understanding the dynamics and depth of the crisis.
Obviously, the Monetary Union in Europe has a single monetary
policy and currency, limits on fiscal policy discretion and frictions in
the area-wide functioning of the factor and product markets10. Against
this background, adjustment channels must work efficiently to correct
the potential disequilibria that may arise as a result of the misalignment
of competitiveness or absorb the emergence of shocks with the least
possible upheaval.
The pressing task to correct this imbalance involved the immediate
activation of the adjustment channel through which competitiveness
operates. Consequently, in the Monetary Union the countries with the
highest inflation will undergo losses in competitiveness that ultimately
reduce exports and increase import penetration.
3.
Lessons from the crisis
Spain persistently posted an external deficit of some size related to the
sustainable external deficit in the Monetary Union. This was due, at
least in part, to the fact that the Spanish economy was less developed
than that of its main European peers, which meant greater investment
opportunities in the country (or a bigger return on such investment
projects) and a shortfall in its national saving to cover these investment
9
A. Gavilán, P. Hernandez de Cos, J.F. Jimeno, J.A. Rojas, Fiscal policy, structural reforms and
external imbalances: a quantitative evaluation for Spain, Moneda y Crédito, 2011, No. 232.
10 P. Hernández de Cos, The reform of the fiscal framework in Spain: constitutional limits and the
new public spending growth rule, Economic Bulletin, Banco de España, October 2011.
possibilities11. Yet, at the same time, the Spanish external deficit reflected
the Spanish economy’s inability to avail itself of a sufficient degree of
macroeconomic stability, which led to a regular loss of competitiveness
in upturns and an increase in its external deficit, which had to be corrected with likewise regular devaluations of the peseta, the mechanism
for temporarily re-balancing the external shortfall. Spain’s accession to
EMU in 1999 involved in this respect two fundamental elements. Firstly, Spain joined the union with a single currency and fully liberalised
capital movements, leading to the anticipation that investment opportunities arising in Spain would more readily take advantage of through
resort to external saving, since the euro would provide for confidence in
the Spanish economy by eliminating the possibility of devaluation.
Therefore, the external constraint would not be as demanding as
when the peseta was in place, nor would there be such an evident external deficit limit which, once exceeded, was to set in train speculative attacks or pressures on the national currency. Secondly, the Spanish EMU
membership removed the possibility of regularly correcting the country’s competitive position through resort to devaluations.
Accordingly, the financing of any future external deficits in the Monetary Union would be more straightforward; but it needs to be borne
in mind that if such deficits reached a high level, if the competitiveness
worsened substantially or if the net external demand detracted significantly from growth, the exchange rate could not be used as an instrument to swiftly improve the competitiveness of domestic production,
correct the external deficit and promote export-led activity12. Thus, the
absence of this instrument would require flexible cost and price developments to ensure the competitiveness of domestic production.
Nonetheless, subsequent events could show that the external constraint remained fully operative in the EMU. The fact that the higher
external deficit during the expansion as a result of the real estate boom
and, in general, the sharp increase in household and corporate debt is
key to understand this turnaround in the markets’ perception of risk.
Analysis of the breakdown of the nation’s net borrowing in terms of the
contribution of each institutional sector shows that the external deficit
was basically due to the strongly increased net borrowing of non-finan-
11 P. Hernández de Cos, E. Moral-Benito, Endogenous fiscal consolidations, Documentos Ocasionales, No. 1102, Banco de España, 2011.
12 E. Leamer, Housing is the Business Cycle, Federal Reserve Bank of Kansas City, Jackson Hole,
Wyoming, September 2007.
167
168
cial corporations and the fact that the traditional creditor position of
the household sector became a debtor position in the expansion years13.
Admittedly, the role of the general government sector offset this to
some extent, but insufficiently so to contain the external deficit and, as
it is analysed later, to ensure the sustainability of public finances when
the extraordinary income underpinning that position petered out.
The global financial crisis, the Spanish real estate collapse which deteriorated its fiscal positions and growth prospects, and, finally, the inadequacy of European governance to confront the severe difficulties that
arose in several countries as a result of the crisis spread shaped a scenario in which high debt, both vis-à-vis the external sector and on the
part of the national private sector vis-à-vis banks, emerged as a considerable source of risk. Indeed, a change in the means to finance the external deficit began to be seen since 2008, with the funds obtained through
the sale of government securities and short-term funds accounting for
a greater weight relative to the resources raised through the issuance of
covered bonds and asset securitisations which were predominant during the years of the economic expansion. In parallel, the external financing moved on a progressively more costly trajectory which left Spain
vulnerable to the gridlock in funding flows that would arise recurrently
thereafter.
The scale of the external deficit overshot in Spain during the expansion and the difficulty of reversing it within the Monetary Union validates the recommendations pre-emptively formulated. To assume the
constraints imposed by membership in the Monetary Union, which are
a logical counterpoint to the enormous benefits accruing, firstly, such
an acute deterioration in the external deficit should have been prevented and, secondly, greater leeway to manage domestically controlled economic policy instruments in the event of tensions or the risks of a crisis
arising was necessary14. A more restrictive fiscal policy and greater liberalisation of the goods and factor markets would have been of fundamental assistance in tackling the events unleashed by the crisis: on the
one hand, because they would have reduced national demand pressures,
leading to a more balanced foreign trade account with lower prices
and higher wages and more favourable developments in competitive-
13 P. L’Hotellerie, J. Peñalosa, El diagnóstico del déficit exterior español dentro de la UEM, Cuadernos de Información Económica, 2008, No. 192.
14 C. Martínez Mongay, L.A. Maza, J. Yániz, Asset Booms and Tax Receipts: The case of Spain,
1995-2006, European Commission, Economic Papers, November 2007, No. 293.
ness; and on the other hand, because during the crisis the room for manoeuvres of fiscal policy would have been greater and market flexibility
would have provided for a better response to recessionary pressures,
with a greater price adjustment rather than a volume-based adjustment
as it was actually observed.
Finally, the mark left by the recent crisis in Spain in the form of
a burgeoning unemployment rate and a pressing need to resolve major imbalances such as the fiscal deficit should change the way we address future expansionary phases, paying greater heed to macroeconomic constraints and the demands for forming part of the Monetary
Union. Looking ahead and judging by the events over the recent years,
the possibilities of such situations recurring have lessened considerably.
First, because the financial markets are probably going to introduce, on
a permanent basis, an element of discipline into economic policy conduct, discipline which was practically absent during the upturn. Second,
because a procedure for monitoring macroeconomic imbalances in the
euro area has been included in European governance mechanisms; and
here, the external deficit, price-competitiveness indicators, the budget
deficit and private-sector debt will play a key role.
4.
The real estate market
Two features of the housing market are essential: investment in this
market is susceptible to show the most substantial changes since market
expectations (in prices and in activity) may exert a considerable influence on market dynamics.
Furthermore, it is the most employment-intensive sector and is
linked to other productive branches and to other economic decisions,
meaning that, when it goes into the crisis, it not only has very powerful direct effects but also drags down certain industrial and services
branches, and adversely affects household spending decisions. This
form of adjustment means that, in short term, a large quantity of labour
is driven out the market. And this gives rise unfailingly to a hike in the
unemployment rate in the absence of buoyancy in other productive sectors, extensive labour market flexibility or a sufficient level of training
on the part of the labour affected (pre-requisites which Spain clearly
failed to meet). At the same time, these periods of traumatic adjustment
have the most adverse financial consequences in that residential con-
169
170
struction is a highly credit-intensive activity. This form of adjustment
means that, in a short time, a large quantity of labour is driven out the
market.
This originated in the US housing market and spread through financial systems which play a key role in underpinning residential activity
and which today still face serious difficulties in the context of the euro
area crisis. But, in any event, even in the absence of the severe international shocks that broke in 2007, Spain would likely have ultimately undergone a real estate crisis, simply because the trajectory of prices and of
real and financial resources concentrated in the sector was not sustainable. Once this dynamic has unwound, there is a risk that the excesses
will be absorbed chaotically since this is a market where expectations,
the behaviour of other agents and confidence play a vital role. And these
latter variables are liable to change very quickly, triggering sharp movements in spending decisions and, in short, in the main macroeconomic
variables, such as activity and employment. In sum, the events in this
crisis show a key role of the real estate market in generating macroeconomic imbalances.
Along with these, and as it was the case with the external deficit,
measures to make the labour market more flexible would be beneficial,
enabling the potential labour surpluses in one sector to be relocated
with greater flexibility into others and having wages transmit a clearer
signal of relative labour shortages or surpluses in different sectors.
5.
The role of fiscal policy
The budgetary policy stance has shown a relatively high degree of synchrony in recent years across the European countries, with a markedly
expansionary thrust in the early years of the crisis that turned contractionary since 2010, once the sovereign debt crisis began in Europe. This
should not, however, mask the fact that the debate continues to surround the actual stabilising the capacity of fiscal policy, the debate that
has been rekindled owing to the scale the debt crisis has reached. Questions such as the size of the fiscal multipliers, the measures that boost
the stabilising capacity of fiscal policy and the conditions under which
fiscal consolidations are the most successful, are not free from controversy.
The experience from the past recessions in Spain has suggested that
a budgetary policy going beyond the use of the automatic stabilisers
would ultimately bring about a rapid deterioration in the status of public finances. In this respect, the deficit recently overshot has revealed the
existence of certain fragilities in institutional arrangements and of errors in the diagnosis of the stabilising capacity of fiscal policy. It would
be worth considering these in order to prevent their future recurrence15.
Nor were potential differences in the channels through which the
crisis spreads, and, therefore, in the scale and persistence of the contraction, taken into account. In Spain, a not-inconsiderable portion of the
tax revenue raised in the expansion years was known to be due to the
buoyancy of real estate activity, but it was difficult to estimate the scale
of such revenue with the usual fiscal balance breakdown techniques.
Indeed, the difficulty in accurately measuring the structural component
of revenue led to the risks underlying the public finances position to be
minimised and limited the primary-expenditure-adjustment drive during the expansion years.
The experience of the recent years has confirmed the factors of vulnerability underlying the functioning of the labour market. While the
essentially endogenous nature of the changes, closely linked to the
boom under way, had been anticipated, the buoyancy of employment
during the upturn had led to an overestimation of the real improvement
in its fundamentals and, in particular, of its adjustment capacity in the
face of shocks. There were serious consequences to this mistaken perception. For one thing, the scale of the contraction in employment that
might accompany the adjustment of the real estate sector was underestimated, regarding both the size of the cut in employment in the sector
and the indirect effects that the cut could trigger. Likewise, the role that
employment as a whole could play as an amplifier of the effects of the
crisis might have been underestimated.
15
J.L. Malo de Molina, La financiación del auge de la economía española, Economistas (2006),
No. 108.
– La complejidad de la salida de la crisis en España, Economistas (2010), No. 123.
– El papel y los límites de las políticas económicas: fiscal, monetaria y macroprudencial, Economistas (2011a), No. 128.
– La crisis y las insuficiencias de la arquitectura institucional de la moneda única. Información
Comercial Española, Revista de Economía (2011b).
– La crisis de la deuda soberana y la recaída de la economía española, Economistas (2012).
171
172
But, above all, this view of the functioning of the labour market detracted from the importance of the need to see through the unfinished
institutional and structural changes that smooth participation in the
EMU required. Even when the scale of the problem unfolding in terms
of unemployment was evident, the aforementioned mistaken view led
to a delay in acknowledging the need to adopt sufficiently ambitious
measures. In June 2010, the first steps were taken to attempt to address
the underlying problems, when a reform of hiring arrangements was
approved, followed in July 2011 by that of collective bargaining. In both
cases what was involved were partial reforms of a very limited impact,
although their entry into force came about at a time the economic and
financial climate was deteriorating notably. In any event, they illustrate
the scant effectiveness of partial and fragmentary reforms. Compounding the labour market inefficiency problems were the changes in the
pattern of behaviour of labour supply, which clearly moved into a slowing phase and saw its possibilities of future expansion reduced16. This is
largely due to the response to the cyclical change by immigration, the
rate of increase in which was drastically cut in the past, to the point of
declines in net migratory flows being recorded in 2011. Lastly, the abundant availability of unskilled labour during the expansion years helped
entrench a pattern of productive specialisation that was very unbalanced and which, as indicated, would prove unsustainable.
The development of this labour-intensive model of specialisation
muffled the signals stemming from the far-reaching transformation of
the productive structure at a global level and delayed the adjustments
to processes required in our increasingly globalised and competitive
world.
Conclusions
In Spain, the emergence from the recession is conditional upon the imbalances previously built up being absorbed and the virulence of the
shocks. The adjustment of the real estate sector is ongoing and the deleveraging of households and firms is moving ahead, albeit slowly, in
a financial environment severely affected by the sovereign debt crisis,
which reflects, for example, shortcomings in the euro area’s initial in-
16 J.M. Marqués, L.A. Maza, M. Rubio, A comparison of recent real estate cycles in Spain, the United States and the United Kingdom, Economic Bulletin, Banco de España, January 2010.
stitutional design17. In addition, the adjustment of the Spanish economy continues to evidence a series of distinctive features – especially
in price- and wage-setting – that reveal the insufficient adaptation of
agents’ behaviour to the macroeconomic stability required by EMU
membership. Finally, the need to redress the vulnerable public finances
situation calls for ambitious fiscal consolidation plans, which also conditions the exit trajectory from the crisis.
The Spanish economy’s experience over the past four years allows
certain lessons to be drawn on the external sector, real estate market,
fiscal policy and labour market. The external deficit is a variable of singular importance in the Monetary Union18. The events of the recent
years show that the accumulation of excessive deficits will ultimately be
punished by financial markets which, under certain circumstances, may
re-establish country risk and, by this means, hamper the financing of
deficits. And this is all the more so if the external deficits were largely
the consequence of a strong increase in private-sector debt geared essentially to residential investment, alongside persistent losses in competitiveness vis-à-vis the external sector19.
The Spanish case reveals, moreover, the difficulties of digesting
household and business deleveraging processes that are strongly linked
to real estate activities. And the latter ones, in turn, have adverse effects
on bank balance sheets and, in general, on the financing conditions under which the economy necessarily operates.
In sum, the Spanish economy faces an extremely complex task that
requires, along with resolute measures in the European arena to push
forward the reform of the institutional framework of the Monetary Union and the design of crisis-management mechanisms, compliance with
the unavoidable commitment to fiscal consolidation and the introduction of ambitious reforms on various fronts20. This would allow, on the
one hand, confidence to be restored and, on the other hand, the economic adjustment to be accelerated, having the adjustment channelled
more through changes in prices and costs, and minimising its impact
on employment and activity. The long expansion until 2007, the severity
17 L.Á. Maza, J. Peñalosa, The residential investment adjustment in Spain: the current situation,
Economic Bulletin, Banco de España, December 2010.
18 G. Nuño, The process of economic adjustment following financial crises: a historical perspective, Economic Bulletin, Banco de España, October 2011.
19 J. Pisani-Ferry, A. Sapir, G.B. Wolff, An evaluation of IMF surveillance of the euro area, 2011.
20 P. Rother, L. Schuknecht, J. Stark, The benefits of fiscal consolidation in uncharted waters, Occasional Paper ECB, 2010, No. 121.
173
174
of the crisis and the difficulties in kick-starting the economy have left us
several lessons. These warn, in particular, of the need to avoid complacency in economic policy management in boom phases and the urgency of adapting the structure of the goods and factor markets and agents’
behaviour in Spain to the requirements the Monetary Union imposes21.
Bibliography
Álvarez L.J., Cabrero A., The cyclical behaviour of residential investment:
some stylised facts, Economic Bulletin, Banco de España, June 2010.
Banco De España, Annual Report 2008. Chapters 1 and 2. Annual Report
2009. Chapter 1. Annual Report 2010. Chapter 2.
Campa J.M., Gavilán Á., Current accounts in the euro area: an international approach, Documento de Trabajo, No. 0638, Banco de España,
2011.
Castro F., Estrada A., Hernández de Cos P., Martí F., Una aproximación
al componente transitorio del saldo público en España, Boletín Económico del Banco de España, June 2008.
Castro F., Estrada Á., Hernández de Cos P., Martí F., Una aproximación
al componente transitorio del saldo público en España, Boletín Económico del Banco de España, June 2011.
Cuadrado P., Hernández de Cos P., Izquierdo M., Wage adjustment to
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España 2009.
Freund C.L., Current account adjustment in industrialized countries, International Finance Discussion Papers, No. 692, Board of Governors of
the Federal Reserve System, December 2000.
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structural reforms and external imbalances: a quantitative evaluation for
Spain, Moneda y Crédito, 2011, No. 232.
Hernández de Cos P., Moral-Benito E., Endogenous fiscal consolidations,
Documentos Ocasionales, No. 1102, Banco de España, 2011.
Hernández de Cos P., The reform of the fiscal framework in Spain: constitutional limits and the new public spending growth rule, Economic Bulletin, Banco de España, October 2011.
21 J. Suárez, The Spanish crisis: Background and policy challenges, Discussion Paper Series, No.
7909, CEPR, London 2010.
L’Hotellerie P., Peñalosa J., El diagnóstico del déficit exterior español dentro de la UEM, Cuadernos de Información Económica, 2008, No. 192.
Leamer E., Housing is the Business Cycle, Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, September 2007.
Malo de Molina J.L., El papel y los límites de las políticas económicas: fiscal, monetaria y macroprudencial, Economistas (2011a), No. 128.
Malo de Molina J.L., La complejidad de la salida de la crisis en España,
Economistas (2010), No. 123.
Malo de Molina J.L., La crisis de la deuda soberana y la recaída de la
economía española, Economistas (2012).
Malo de Molina J.L., La crisis y las insuficiencias de la arquitectura institucional de la moneda única. Información Comercial Española, Revista
de Economía (2011b).
Malo de Molina J.L., La financiación del auge de la economía española,
Economistas (2006), No. 108.
Marqués J.M., Maza L.A., Rubio M., A comparison of recent real estate
cycles in Spain, the United States and the United Kingdom, Economic
Bulletin, Banco de España, January 2010.
Martínez Mongay C., Maza L.A., Yániz J., Asset Booms and Tax Receipts:
The case of Spain, 1995-2006, European Commission, Economic Papers,
November 2007, No. 293.
Maza L.Á., Peñalosa J., The residential investment adjustment in Spain:
the current situation, Economic Bulletin, Banco de España, December
2010.
Nuño G., The process of economic adjustment following financial crises:
a historical perspective, Economic Bulletin, Banco de España, October
2011.
Pisani-Ferry J., Sapir A., Wolff G.B., An evaluation of IMF surveillance of
the euro area, 2011.
Rother P., Schuknecht L., Stark J., The benefits of fiscal consolidation in
uncharted waters, Occasional Paper ECB, 2010, No. 121.
Suárez J., The Spanish crisis: Background and policy challenges, Discussion Paper Series, No. 7909, CEPR, London 2010.
175
Book Reviews
Henryk Ponikowski
Book review: Polityka kohezji
i konwergencja gospodarcza
regionów Polski oraz krajów
Unii Europejskiej. Wybrane
zagadnienia
Sławomir I. Bukowski (ed.), Polityka kohezji i konwergencja
gospodarcza regionów Polski oraz krajów Unii Europejskiej.
Wybrane zagadnienia [Cohesion Policy and Economic
Convergence in the Regions of Poland and EU Member States.
Selected Issues], Warszawa: Difin, 2011.
Giving aid to the countries and regions which suffer from developmental problems is certainly a principal objective of European integration.
Therefore, any developmental delays determine the main directions of
the EU’s regional policy. A variety of economic integration mechanisms
and objectives can be employed under this policy. Both the literature
and practice of economic activities give priority to the need to integrate
economic structures that could create synergy.
The continuing debate about whether this policy is efficient enough
at reducing regional disparities has resulted in publishing another book
on the EU cohesion policy in terms of the effect of economic convergence. Can the imitation of economic, technological, social, institutional, cultural or political processes be still called as convergence? This imitation is often top-down. Although such an approach may reduce the
180
Henryk Ponikowski
developmental gap, it does not create added value, and thus the Lisbon
Strategy has not proved true.
While studying economic convergence, the capabilities of endogenous potential of central and peripheral areas of development should
not be the only issue examined. It is important to remember that the
process of leaching resources from peripheral areas into central ones is
possible after all. The functions of these areas are also significant for the
process of convergence. The literature recognises the concept of three
types of capital: economic, social and cultural which just generate disparities. The economic (and political) capital is prevailing in central areas of development, whereas the cultural one generally plays a compensating role in peripheral ones.
The phenomenon of separating politics from causative power, as
Z. Bauman said, is not also negligible in economic convergence. Politics
is typical of a local, regional, national or even EU level, whereas causative power of a global level. Transnational corporations of their fuzzy
location possess causative power. Regional policy-makers are incapable
of competing with global players’ power. The ideal situation for convergence processes would be to combine activities by these two players who have completely divergent interests. The essential question refers, therefore, to the causative power of convergence processes, or who
should do this and not about politics as we know what should be done.
The six-chapter collective work was written by four authors:
Sławomir I. Bukowski (one chapter), Danuta Mokrosińska (three
chapters), Eliza Frejtag-Mika (one chapter) and Szymon Jędraska (one
chapter). They are academic staff at the Faculty of Economics and Engineering at Bolesław Markowski Higher School of Commerce in Kielce.
S.I. Bukowski and E. Frejtag-Mika are also representatives of the Faculty
of Economics at Kazimierz Pułaski University of Technology and Humanities in Radom. The monograph is 184 pages long.
The book is composed of two distinct parts, i.e. theoretical and empirical. The first chapter by S.I. Bukowski, making the theoretical part,
deals with the issues of the Economic and Monetary Union in terms of
the theory of international economic integration. The author focuses
on the effects, benefits and costs of this union referring to both country and regional problems discussed in view of the concept of the new
economic geography. In the second chapter, D. Mokrosińska describes
the origins, evolution, dimensions, objectives and functions of the European Union cohesion policy. Also, some financial instruments, the assessment of efficiency and possible directions of the change in the policy in the new programming periods are discussed. The sixth chapter
Book review: Polityka kohezji i konwergencja gospodarcza regionów Polski oraz krajów UE
by E. Frejtag-Mika deals with the place of Europe in a globalised world
dominated by an uncertain global order. The concern for the future of
Europe results from pervasive economic imbalances and insolvency,
and the need to create special packages to help the Eurozone states. This
situation is not favourable for the processes of economic convergence.
The third and fourth chapter by D. Mokrosińska and fifth one by
Sz. Jędraska make the empirical part of this book. The convergence of
1999-2007, i.e. before the 2007-2013 EU programming period is empirically analysed here. The economic activity, employment and unemployment, and enterprise structure are examined by classifying economic
activities in sections for Poland and some selected countries such as the
Czech Republic, Spain, Germany, Slovakia, and Italy. Unfortunately, the
authors focus less on the regional dimension in the empirical part. Actually, these issues are presented in two appendixed tables only. These
regional aspects are the core of the EU cohesion policy; hence the processes of regional convergence seem to be more intriguing.
The analyses relating to a national level prove that Poland, the Czech
Republic and Slovakia as countries with the lowest GDP were quickly
coming up with developmental delays and reached much more dynamic
development. If the dispersion of nominal GDP per capita in NUTS 1
regions in these six EU Member States in 1999-2007 is examined, regional disparities turn out to have increased just in the countries with
a lower level of development. This phenomenon is supported by the increased value of the coefficient of variation in 2007 as compared to 1999
in the Czech Republic – from 38% to 51%, Poland – from 19% to 22%,
and Slovakia – from 56% to 66%. Simultaneously, regional differentiation decreased in Spain – from 23% to 20%, Germany – from 29% to
28%, and Italy from 30% to 29%.
To sum up, regarding the results provided by the authors and the
experience gained in the 2007-2013 programming period, though not
covered by this monograph, it should be stated that balancing the levels
of development and development efficiency remains a current dilemma
of the EU’s regional policy. The authors raise this issue already in the
introduction, claiming that both the EU cohesion and efficiency of economic convergence processes still arouse controversy; and these dilemmas are also discussed in the last chapter.
181
Jarosław Kuśpit
Book review: Europejska
polityka sąsiedztwa Unii
Europejskiej wobec państw
Europy Wschodniej
Igor Lyubashenko, Europejska polityka sąsiedztwa Unii
Europejskiej wobec państw Europy Wschodniej [The European
Neighbourhood Policy towards the East European States],
Toruń: Dom Wydawniczy DUET, 2012.
The European Neighbourhood Policy (ENP) is an initiative run within
the European Union’s external policy. Its launch is closely linked to the
territorial EU enlargement in 2004 and 2007 and, as the author rightly notices, this enlargement was followed by a number of factors that
inhibited the dynamics of accession of new member states. The Community, therefore, recognised the need for an active policy towards
its neighbouring countries though with no clear perspective for their
membership. For its geographical location, economic and political interests, Poland finds the relationship between the EU and the East European States pivotal. It should be noticed that the ENP refers to Poland’s
relationship with the Republic of Belarus, the Republic of Moldova, and
Ukraine.
As an area of research, the European Neighbourhood Policy has
been hardly studied in detail and discussed in Polish research literature.
The monograph successfully and comprehensively presents this instrument. It should be noticed that the aspects of the ENP are studied as
184
Jarosław Kuśpit
broadly as possible here unlike in the previous works which basically
have focused on the ENP policy and energy security.
This five chapter monograph opens with an introduction and closes
with a summary. The first introductory chapter dedicated to the origin
and essence of the European Neighbourhood Policy examines the theoretical foundations of the EU’s ability to be internationally influential.
The political and economic situations in Belarus, Moldova and Ukraine
before launching the ENP are studied here, which can be called a kind
of opening report.
The discussion in the second chapter on the factors that impact on
the implementation of the ENP is noteworthy and valuable, especially if
the effects of this policy are to be correctly explained. The author classifies these factors into three main groups: related with the EU as a subject of the ENP, related with the East European countries as objects of
this policy, and related with the role of the Russian Federation’s policy.
One should not miss three particularly interesting issues examined in
this part of the monograph.
The first one regards a consensus at an EU’s level about the general
concept of the ENP towards the states of Eastern Europe. Unfortunately,
as emphasised here, different objectives and measures implemented by
the entities carrying out this policy, i.e. the EU bodies and national governments of Member States are simply a normal state.
The second issue refers to the fact that a target condition of political
relations is not defined brings about the limited efficiency of this policy.
This hinders absorption by the countries that are subjects of this policy
and coordination by the EU. The ENP’s economic objective is more accurately identified and involves the creation of a free trade area between
the EU and the East European States. The focus is put on the fact that
such an area is supposed to be more advanced than classical B. Balassa’s
definition says because free transfer of goods, services, and capital is assumed there.
The last issue, as the author correctly notices, concerns the fact that
the nature and efficiency of the ENP towards the Eastern European
countries cannot be studied if the impact of the Russian Federation’s
policy is neglected. This follows from that many European Union Members States in their foreign policy give priority to their relations with
Russia as well as the status of East European States in Russia’s strategy
for its foreign policy. Therefore, the opinion held in this monograph
that the countries of Eastern Europe are an area of confrontation between Russia’s hard and direct Realpolitik and the EU’s soft and normative policy.
Book review: Europejska polityka sąsiedztwa Unii Europejskiej wobec państw Europy Wschodniej
The third chapter describes the institutional mechanism of the European Neighbourhood Policy, presenting its basic normative acts and the
role of the bodies involved at different levels in its implementation. Political and financial instruments applied to implement policies towards
the East European States are also examined here.
The effects of the policy in key thematic areas are studied in the
next chapter. The author discusses the changes that occurred while implementing the ENP in the countries of Eastern Europe. The analysis
carried out from the view point of the East European States, i.e. the
subjects of ENP is to demonstrate the effects of the EU policy in these
states. It may be doubtful, of course, as to whether all changes can be
clearly linked to the implementation of the ENP. However, the mere assignment of these changes to the thematic areas specified in the policy
assumptions is cognitively valuable.
The last chapter is an attempt to assess the current EU’s policy towards the East European countries. On the one hand, it is a synthetic
summary of the previous considerations, and on the other, based on
a qualitative analysis, it shows the strengths and weaknesses of the already implemented ENP. Thus, this assessment can be regarded as a sort
of recommendations how to modify successfully the existing policy.
Finally, the author considers possible scenarios of further development
of the ENP, indicating those that seem the most likely.
Although this monograph is definitely excellent, unfortunately, the
data beyond 2009 is not examined here. Given the nature of the ENP,
one can wonder how the implementation and effects of this policy were
impacted by the economic crisis?
Will the economies of East European countries be more involved in
the development of economic cooperation with the EU during the recession? Or quite the contrary, will they direct their policy to strengthen
economic ties with Russia to secure supplies of energy raw materials?
Are not the economic crisis in the EU and problems of the Eurozone
undermining the attractiveness of the EU Member States to the East
European States?
Will not the internal problems in the EU weaken the Community’s
interest in developing and financing the ENP?
These questions seem to be reasonable and should encourage the author to continue his research on the ENP towards the countries of Eastern Europe he started so successfully here.
185
Bartosz Jóźwik
Book review: Państwa
bałtyckie i Europy Wschodniej.
Reakcja na światowy kryzys
gospodarczy i regionalny
kryzys gazowy
Krzysztof Falkowski, Eufemia Teichmann (eds.), Państwa
bałtyckie i Europy Wschodniej. Reakcja na światowy kryzys
gospodarczy i regionalny kryzys gazowy [Baltic and East
European States. Reaction to World Economic Crisis and
Regional Gas Crisis], Warszawa: Oficyna Wydawnicza Szkoły
Głównej Handlowej, 2010.
The recent economic crisis was a kind of test for many economies, including those in the Baltic and East European countries. The monograph Baltic and East European States. Reaction to World Economic Crisis and Regional Gas Crisis, edited by Krzysztof Falkowski and Eufemia
Teichmann, addresses not only the main problems faced by these countries because of the economic crisis but also identifies some areas that
urgently need reforming. The monograph is composed of eight chapters, grouped into two thematic parts, each accompanied by a summary.
The first part discusses the reaction of the Baltic States, Belarus,
Ukraine, and Russia to the global financial crisis. The causes, course
and consequences of the global financial crisis and economic recession
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Bartosz Jóźwik
in these countries have been analysed against the developments in the
world and the European Union.
The paper by Eufemia Teichmann describes how the economies
and economic policies of Lithuania, Latvia, and Estonia, or small, posttransformational EU Member States responded to the challenge of the
global financial crisis and economic recession in 2008-2009. Paying
particular attention to the new Member States (EU-10), she clearly discusses the global financial crisis and economic recession and describes
its course in the European Union. The detailed description of the economic recession and financial crisis in the Baltic States is followed by
the political response of the world, EU and Baltic States to the financial
and economic crisis.
Krzysztof Falkowski’s paper Russia, Belarus and Ukraine against
world financial crisis and economic recession shows his intimate knowledge of the issue. He attempts to analyse the root causes and effects of
the crisis and economic recession and the anti-crisis measures taken in
these three countries of the Commonwealth of Independent States he
has selected on purpose. These countries are the closest neighbours of
Poland, and thus of the European Union which have strongly felt the
negative consequences of the crisis. The crisis faced by these states
proved conclusively that Belarus and Ukraine were incapable of coping
with those consequences on their own. Moreover, the paper discusses
the impact of the economic recession in the Baltic States on the development of their trade and investment relations with Poland. The facts
and arguments are provided by the author in line with the requirements
for academic publishing.
The paper by Łukasz Ambroziak and Marzena Błaszczuk-Zawiła Poland’s trade and investment relations with the Baltic States – five years after the EU enlargement and within economic crisis of 2008-2009 indicates
that Poland’s accession to the European Union contributed to improving cooperation. Turnover increasingly boosted over these five years although Estonia, Latvia and Lithuania continue to be relatively of little
importance for Poland’s trade. In the international production chain,
these countries are suppliers of intermediate goods to Poland and recipients of consumer goods from Poland. The authors point out that certain positive trends were also noticed in investment cooperation which,
however, remained relatively insignificant. Unfortunately, the economic
crisis has contributed to weakening economic cooperation.
The papers in the second part of the monograph focus on the regional problem of the Russian-Ukrainian gas crisis in early 2009. Ireneusz
Bil and Honorata Nyga-Łukaszewska in their highly content-related pa-
Book review: Państwa bałtyckie i Europy Wschodniej
per European Union’s Energy Policy in view of gas crisis in January 2009
claim that this crisis was one of the first real tests for the energy security
in the European Union which had been hardly interested in this issue
before. The authors say that, against widespread beliefs, the significance
of Russia as a gas supplier to the EU is relatively minor although it is
geographically diverse. Western Europe has got large, consolidated markets of energy with diversified suppliers, whereas the markets in Eastern
Europe are small and heavily dependent on Russia, with little opportunity to gain an additional amount of gas for their hardly diversified
imports and no infrastructure. Therefore, the authors focus on the area
that needs special approaching and solutions, i.e. further integration of
energy markets in the EU and the diversification of supply in terms of
geography, suppliers, transit routes and forms of fuel like natural gas or
LNG.
The next two papers analyse the gas crisis in view of Ukrainian and
Belarusian energy policy. Marcelina Gołębiewska in her paper Origin
and effects of Kiev-Moscow gas crisis from perspective of Ukraine focuses on a very important issue of the gas crisis which is seen as the next
stage of the long-term Russian-Ukrainian conflict over natural gas. She
points out that as long as Russia felt the short term effects of the gas crisis in 2009 and the impact of the economic crisis on the economy and
gas industry, Ukraine faced the overlapping short- and long-term effects
of the gas crisis and the impact of the economic crisis. Jan Pieriegud’s
paper Impact of Russian-Ukrainian gas conflict and Gazprom’s pricing
policy on economy of Belarus as a transit country discusses the changes
in the demand for natural gas in Europe and the changes since 2006 in
Gazprom’s policy in shaping prices for natural gas. Also, the paper describes some projects on constructing new gas pipelines as an alternative to the Russia-to-European countries supply via Belarus.
The last two papers deal with energy security. Stanisław Cios’ paper
Political and business background of planned gas pipelines – Nord Stream,
South Stream, and Nabucco discusses the concept of enhancing the security of natural gas supply in the European Union. Above all, he analyses the actions taken by governments and entities in the energy sector
in Germany, France and Italy as main European importing countries.
The paper by Jaroslav Neverovic Lithuania’s energy security against background of Lithuanian-Polish co-operation in electro-energy comprehensively describes one of the EU’s infrastructure projects.
Summing up, the monograph Baltic and East European States. Reaction to world economic crisis and regional gas crisis, edited by Krzysztof Falkowski and Eufemia Teichmann, is a valuable contribution to the
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discussion about the influence of the effects of the economic crisis and
their prevention not only in the said countries but also in the countriesneighbours to the region whose energy security depends on the economic policies in Russia, Ukraine, and Belarus. The monograph can be
recognised as highly informative for its reliable analyses of the phenomena and valuable recommendations for economic reforms.
Wojciech Misterek
Book review: Rozwój Polski
Wschodniej. Ograniczenia
i wyzwania
Bartosz Jóźwik, Mariusz Sagan (eds.), Rozwój Polski Wschodniej.
Ograniczenia i wyzwania [Development in Eastern Poland.
Limitations and Challenges], Warszawa: Difin, 2012.
The scientific monograph Development in Eastern Poland. Limitations
and Challenges, edited by Bartosz Jóźwik and Mariusz Sagan, focuses
on the economic situation and developmental potential of the voivoideships in Eastern Poland. The authors adopted a scientific approach to
describe numerous phenomena which are typical of this part of Poland
and significantly influence its development. The monograph discusses
comprehensively the growth potential of Eastern Poland for 2014-2020.
Such an objective is noteworthy as the current economic downturn
forces all market participants to show their competitive advantages. This
phenomenon also relates to local governments because they will need to
be concerned about the factors that can support economic development
if they want to contribute to improving their residents’ living standards.
In fact, the comfort of inhabitants’ life and their wealth or access to attractive and stable jobs can depend on local infrastructure and efforts of
local entrepreneurs and foreign investors. Thus, any local governments
in Eastern Poland are forced to create competitive advantages so that
over the forthcoming years they could influence the process of reducing any disparities in relation to other regions in Poland and the European Union or even attempt to outdistance some of them. That is why
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Wojciech Misterek
the growth potential of this part of Poland discussed here becomes so
up-to-date. Moreover, the allocation of funds for the next programming
period is being consulted now so it is reasonable to show the needs of
poorer regions and the high efficiency of aid received by far to maintain
the level of support necessary to further reduce any present disparities.
The multi aspectual issue is explained successfully in this well-structured monograph. The noteworthy interdisciplinary and diverse research content enables to identify numerous aspects. The authors focus
not only on the economic aspects of the phenomena typical of this region, regarding other parts of Poland as a source of both worse economic development and reasons for necessary strengthening any further investment. Katarzyna Sołkowicz’s reflections on cultural conditions are
particularly meaningful here. She proves the opinion that these conditions are methodologically necessary to understand the idea of social
and economic changes in the region. Importantly, the author points out
that any possible development in the region based on innovation can
trigger long-term quantitative and qualitative changes although it may
be regarded as controversial.
It is, however, worth emphasising that any economic issues are essential to achieve the objective set in this monograph. The comprehensive analysis of the economic conditions reveals ill-invested infrastructure in this region, which impacts on the economic situation of
any entities. Not only are the current situation and its change over time
discussed by the authors, but also key factors necessary to revive this
region economically. The research results indicate that this region is
highly underdeveloped in many aspects, and thus its key determinants
for entrepreneurship are worse than those in the other regions of Poland. One should not miss the analysis of the concept that a sustainable
competitive advantage can be achieved by regions with enterprises capable of creating and absorbing innovation; and innovative enterprises operate just where they can achieve favourable conditions for their development. Thus, it is necessary to cope with any limitations and spend large
sums of money to develop projects that can activate local entrepreneurs
and to create initiatives attractive enough to foreign investors, including mostly innovative entities. The authors emphasise, however, that
the efficient stimulation of the entrepreneurial development in Eastern
Poland as it is across this country must be a broad-spectrum activity because competitive advantages are created at several levels. Therefore, such
measures are costly and long-term, and they need to be supported in
the next programming periods.
Book review: Rozwój Polski Wschodniej. Ograniczenia i wyzwania
These considerations also involve some detailed analyses of agriculture as one of the most fundamental economic sectors in Eastern Poland. One should remember that the authors treat this sector both as
a real potential and an opportunity to strengthen the region as well as
one of the most troublesome domains in terms of economic strengthening and social problems reflected mainly in the labour market. Importantly, the monograph recognises a few key issues typical of the agriculture in this region such as low human productivity. Therefore, some
significant structural changes are plausible to enhance the issue studied as well as improve the living conditions of inhabitants. The authors
claim that the development of environmental protection infrastructure
should be one of the methods to improve living standards in this region.
Consequently, this can improve the living conditions of the rural residents and activate any entrepreneurship in this region, e.g. creating new
jobs outside agriculture.
The authors attempt to identify several possible trends to improve
this situation, which makes this monograph cognitively valuable and
can contribute to the discussion on the projected developmental changes in the forthcoming years and the efficient allocation of funds for this
region in the next programming period. One of these trends is to enhance the development of Business Process Offshoring (BPO), mainly
in accounting, human resources management, remote customer service
or financial transaction service. The other one should enhance urban
centres as key areas where growth is generated and promoted. Consequently, the authors claim that this region of Poland is less developed as
it is agricultural by nature and its urban centres are weak.
Summing up, this monograph is definitely a valuable contribution
to the discussion on the further development of Eastern Poland and
the necessity to take actions to fully exploit its growth potential. Obviously, this issue is fundamental during the on-going discussion on the
allocation of funds in the next programming period because the studies
presented here clearly indicate that this region needs any further investment enhancement. Undoubtedly, this monograph significantly contributes to research development thanks to the rich empirical material
and interdisciplinary nature of the papers included. The recommendations in the chapters can become valuable hints for governments, local governments, and entrepreneurs on formulating efficient economic
programmes and policies.
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Information and Materials
Bartosz Jóźwik
IV Forum Regionalistyczne:
Polityka spójności Unii
Europejskiej. Doświadczenia,
wnioski i rekomendacje
na lata 2014-2020
4th Forum on Regionalism:
European Union Cohesion Policy. Experience, conclusions,
and recommendations for 2014-2020
On 2 December 2011, the 4th Forum on Regionalism European Union
Cohesion Policy. Experience, conclusions, and recommendations for 20142020 took place at the John Paul II Catholic University of Lublin (KUL).
It was organised by the KUL Development Foundation, Konrad Adenauer Foundation, International Economic Relations Department of
the Institute of Economics and Management at KUL, Institute of EastCentral Europe, Higher School of Real Estate Management in Warsaw,
Association for Lubelskie Voivodeship Communes and the KUL Students’ Scientific Group for European Studies. Honorary Patrons for the
Forum were: Minister of Regional Development Elżbieta Bieńkowska,
Mayor of Lublin Krzysztof Żuk and Director of the Statistical Office in
Lublin Krzysztof Markowski.
The participants of the 4th Forum on Regionalism, who were representatives of science, European, Polish, and regional authorities as well
as local government, and non-profit organizations supporting regional
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development, discussed the conditionings and experience in conducting the cohesion policy in Europe, Poland, and regions. They formulated the recommendations for 2014-2020. The Forum focused on European neighborhood policy, in particular the Eastern Partnership which
becomes a recognisable symbol for the EU’s activities in Eastern Europe. It should be noted that the Eastern Partnership means a new policy in which Poland as a leader in the EU presidency since the second
part of 2011 has had an exceptional role to make this partnership a basic
objective for any activities towards the countries of Eastern Europe and
the South Caucasus.
The 4th Forum on Regionalism was opened by Rector of the John
Paul II Catholic University of Lublin Rev. Professor Stanisław Wilk and
the opening speech was delivered by Janusz Lewandowski, UE Commissioner. The Forum comprised three parts.
The first part was a panel discussion to share experience in implementing the cohesion policy at European, national, regional, and local
levels. Bartosz Jóźwik, PhD (KUL) and Mariusz Sagan, PhD (Warsaw
School of Economics) were its leaders. The speakers were: Janusz Lewandowski, PhD – Commissioner for Financial Programming and the
Budget, Marceli Niezgoda – Vice Minister of Regional Development,
Krzysztof Hetman – Marshal of Lubelskie Voivodeship, Krzysztof Żuk,
PhD – Mayor of Lublin and Professor Jerzy Kłoczowski – Director of
the Institute of East-Central Europe.
The second part focused on international conditionings and experience in implementing the European cohesion policy. The participants
discussed the difficulties in carrying out the current cohesion policy,
the concepts of changing it for a new financial perspective, the cohesion
policy in new Member States, and the European Neighborhood Policy
in the sixteen Member States as a recognisable symbol for the EU activities in Eastern Europe. The following speakers participated in the
panel discussion led by Bartosz Jóźwik, PhD (KUL): Professor Andrzej
F. Bocian (University in Białystok; Globalisation and Regionalisation),
Magdalena Sapała, PhD (Poznań University of Economics; Cohesion
Policy in the Multiannual Framework of the European Union 2014-2020.
Change and continuation), Aleksandra Dyba, MA (Cracow University of
Economics; The economic competitiveness of the Visegrad Group – international rankings), Professor Wojciech Kosiedowski (Nicolaus Copernicus University; Problems of economic cohesion of border regions in the
EU and CIS. Convergence or divergence?) and Maria Kola-Bezka, PhD
(Nicolaus Copernicus University; Some determinants of development of
entrepreneurship and cross-border cooperation on the eastern borderland
IV Forum Regionalistyczne
of the EU and Belarus in the context of future European Neighbourhood
Policy).
During the third part the participants analysed national and regional conditionings and experience in implementing the cohesion policy.
The case studies presented dealt with the way the cohesion policy is implemented in Lubelskie and Podkarpackie voivodeship. The following
speakers took part in the panel discussion led by Mariusz Sagan, PhD
(Warsaw School of Economics): Aneta Karasek, MA (Maria CurieSkłodowska University in Lublin; The impact of the Creative Class on
regional development in Poland), Artur Jan Kukuła, PhD (John Paul II
Catholic University of Lublin; Support of the information society development in Lublin Voivodeship by the European Union funds 2007-2013),
Anna Kołomycew, PhD (University of Rzeszów; The directions of rural development in regional policy of Podkarpackie voivodeship), Bartosz Bartosiewicz, PhD (University of Łódź; Territorial cohesion of Łódź
Metropolitan Area in the light of Employee Flows), Grzegorz Gałek, PhD
(Polish Oil and Gas Company – PGNiG SA; Development and modernisation of Polish gas infrastructure supported by the Operational Programme Innovative Infrastructure and Environment funds) and Krzysztof Markowski, PhD (Statistical Office in Lublin, John Paul II Catholic
University of Lublin; Determinants of development of Lubelskie voivodeship).
The speakers and some other representatives of scientific centers
have submitted for publishing over 40 papers on the issues discussed
during the 4th Forum on Regionalism.
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Bartosz Jóźwik
Konferencja:
Europejska integracja
gospodarcza i konwergencja
Conference:
European economic integration and convergence
Held on 15 November 2012 at the John Paul II Catholic University of Lublin (KUL), the conference European economic integration and convergence was organised by: the Konrad Adenauer Foundation, KUL Development Foundation, Institute of East-Central Europe in Lublin as well
as the Institute of Economics and Management and Institute of Political
Science at the John Paul II Catholic University of Lublin.
The conference examined and assessed the implementation of the
convergence objective under the 2007-2013 EU cohesion policy. Under
this objective, the growth potential should be so stimulated to achieve
and maintain a high rate of growth with regard to any disparities in the
European Union which was expanded in 2004 and 2007 by the accession of chiefly the Central and East European states. This process required to be discussed and assessed because convergence is a prerequisite for the efficient and complete economic integration of the European
Union, i.e. economic and monetary integration which has become
harder after the 2007-2008 economic crisis. It is worth pointing out that
numerous problems with the Eurozone have begun to directly impact
on the economic condition of the strongest EU economies such as Germany and France.
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Bartosz Jóźwik
The conference was attended by academic staff, representatives
of administrative staff, students of the universities in Lublin, the John
Paul II Catholic University of Lublin and Maria Curie-Skłodowska University, and researchers who just study European issues. Convergence
and the difficulty in its implementation at European, national, regional,
and local levels were discussed in the six presentations. The first one
Economic integration and convergence in the European Union by Bartosz
Jóźwik, PhD, Institute of Economics and Management at the John Paul
II Catholic University of Lublin, addressed the basic problems with convergence in the European Union Member States. These included the impact of the economic crisis on the convergence of the new EU Member
States (EU-10), the convergence in the Lublin region, pointing out the
changes in the employment structure, the labour market situation in the
region, investment attractiveness of the Lublin region and prospects for
convergence in economic development, and the major strategic areas
for the near 2014-2020 financial perspective covered by the Europe 2020
strategy.
The next presentation Projected directions of the CAP Reform post
2013 and economic convergence in the European Union was delivered by
Bożena Oleszko-Kurzyna, PhD, Institute of Economics, Maria CurieSkłodowska University in Lublin. She pointed out that since it was
launched, the Common Agricultural Policy (CAP) has been significantly reformed, especially by an increasing shift from strongly supported
sectoral interventions towards market-oriented policies of rural sustainable development. The expected CAP scenario of 2014-2020 indicates
that aid allocation will still be determined by certain past principles
which favour an unequal allocation of funds. This means that the new
Member States will continue to receive less financial assistance to implement the CAP, while making up for their agricultural development
shortcomings.
Monika Banaś, PhD hab., Institute of Regional Studies, Jagiellonian
University, delivered the third presentation The cultural differences in
view of contemporary problems in the European Union. Ireland, Spain,
and Greece. Culture as a factor co-shaping interpersonal, intergroup and
international relations must not be neglected despite it remains a minor
phenomenon in a debate on methods, forms, and modes, or, in brief,
integration strategies capable of merging the EU’s internal structures.
Ireland, Spain, and Greece are countries which have faced recently (Ireland) and are still facing (Spain and Greece) severe economic, financial
and social difficulty. They can serve as an example of the local communities’ unequal treatment of issues such as an attitude to power, willing-
Konferencja: Europejska integracja gospodarcza i konwergencja
ness to take risks in economic activities or long-term planning in these
activities.
Tomasz Stępniewski, PhD (Institute of East-Central Europe and Institute of Political Science at the John Paul II Catholic University of Lublin) delivered the next speech. He noticed that the European Neighbourhood Policy, which is the framework for the EU’s activities towards
its neighbours, is not an efficient instrument so this policy has been frequently modified in the 21st century. The EU authorities and individual
Member States have been coming up with new initiatives to make their
actions more efficient, e.g. Black Sea Synergy and Eastern Partnership
projects for the Eastern neighbours and the Union for the Mediterranean for the states of the Southern neighbourhood. The Eastern Partnership is a young policy, still under implementation. Its successful
implementation requires all of the 27 EU Member States and the six
states embraced by the policy to cooperate. Unfortunately, certain international events precluded the Eastern Partnership from becoming the
key issue under the Polish Presidency, and the state of the affairs behind
the EU’s Eastern border also seems to prove that this initiative is sort of
waning due to being perceived as a project of a little impact.
Barbara Adamczyk-Sosnowy, Regional Employment Agency in Lublin, discussed major groups of tasks performed by the EURES network
in her presentation Employment services under the European Employment Services. The first group covers employment service, or the service of informing and advising the unemployed, including the ones
who need non-standard information, e.g. the young, elderly, disabled,
women and family members of EU migrant workers as well as employers. The second group of tasks refers to the development of cooperation among trans-national and cross-border social partners concerned
and other institutions to improve labour markets, their integration and
mobility. The last group focuses on how to efficiently promote the coordinated monitoring and assessment of mobility obstacles, a too high or
too low degree of skills, and directions of migration.
The last presentation Lublin development strategy up to 2020 by
Krzysztof Komorski, Deputy Director of the Strategy and Promotion
Department in the Lublin Municipal Office was on the difficulties in
socio-economic development of the Lublin region and Lublin. Employing the latest diagnosis of Lublin and the Lublin region assets, the draft
strategy is based on a thorough analysis of the external environment
included the changing global paradigms of development. The presentation focused on Lublin’s key competitive advantages such as its socioeconomic and population potential which is the greatest in Eastern
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Poland, great academic potential, role as a centre of East-West cooperation, strong and internationally recognisable cultural environment, and
ecology. The competitive advantages defined in the draft Lublin 2020
strategy helped formulate four key, interrelated axes of development activities as signposts for the next decade. These are: openness, academicism, entrepreneurship, and friendliness.
The presentations were followed by a discussion which focused
chiefly on the employability and self-fulfilment of young people in
a united Europe, and the development in Lublin which is supported by
the EU Structural Funds. The conference participants, especially numerous students, who will soon enter the labour market, found these
issues crucial and noteworthy.
About the Authors
Monika Banaś – Associate Professor, Institute of Regional Studies,
Jagiellonian University
Jesús Sánchez Cotobal – Professor at the Business Training Institute,
Madrid Chamber of Commerce
Aleksandra Dyba – Ph.D. Candidate, Chair of European Economic
Integration, Cracow University of Economics
Tomasz Grzegorz Grosse – Professor at the Institute of European
Studies, University of Warsaw
Bartosz Jóźwik – Ph.D., Institute of Economics and Management, John
Paul II Catholic University of Lublin
Jarosław Kuśpit – Ph.D., Department of Global Economy and
European Integration, Institute of Economy and Finance, Maria CurieSkłodowska University in Lublin
Bożena Oleszko-Kurzyna – Ph.D., Faculty of Economics, Maria CurieSkłodowska University in Lublin
Wojciech Misterek – Ph.D., Banking Department, Maria CurieSkłodowska University in Lublin
Józef Bogusław Osoba – Ph.D., Lecturer, Skarbek University (Fryderyk
Skarbek Higher School of Commerce and International Finance) in
Warsaw – Lublin branch campus
206
Paweł Pasierbiak – Ph.D., Faculty of Economics, Maria Curie-Skłodowska University in Lublin
Henryk Ponikowski – Ph.D., Institute of Economics and Management,
John Paul II Catholic University of Lublin
Katarzyna Sołkowicz – Ph.D., Faculty of Social Sciences, Institute of
Economics and Management, John Paul II Catholic University of Lublin
Tomasz Stępniewski – Ph.D., Associate Professor, Institute of Political
Science, John Paul II Catholic University of Lublin and Assistant
Professor at the Institute of East-Central Europe in Lublin

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