Institutions in Crisis NEW THINKING IN POLITICAL ECONOMY Series Editor: Peter J Boettke, George Mason University, USA New Thinking in Political Economy aims to encourage scholarship in the intersection of the disciplines of politics, philosophy and economics It has the ambitious purpose of reinvigorating political economy as a progressive force for understanding social and economic change The series is an important forum for the publication of new work analysing the social world from a multidisciplinary perspective With increased specialization (and professionalization) within universities, interdisciplinary work has become increasingly uncommon Indeed, during the 20th century, the process of disciplinary specialization reduced the intersection between economics, philosophy and politics and impoverished our understanding of society Modern economics in particular has become increasingly mathematical and largely ignores the role of institutions and the contribution of moral philosophy and politics New Thinking in Political Economy will stimulate new work that combines technical knowledge provided by the 'dismal science' and the wisdom gleaned from the serious study of the 'worldly philosophy' The series will reinvigorate our understanding of the social world by encouraging a multidisciplinary approach to the challenges confronting society in the new century Recent titles in the series include: Media, Development, and Institutional Change Christopher J Coyne and Peter T Leeson The Economics of Ignorance and Coordination Subjectivism and the Austrian School of Economics Thierry Aimar Socialism, Economic Calculation and Entrepreneurship Jesus Huerta deSoto The Political Economy of Hurricane Katrina and Community Rebound Edited by Emily Chamlee- Wright and Virgil Henry Storr Robust Political Economy Classical Liberalism and the Future of Public Policy Mark Pennington Good Governance in the 21st Century Conflict, Institutional Change, and Development in the Era of Globalization Edited by Joachim Ahrens, Rolf Caspers and Janina Weingarth Institutions in Crisis European Perspectives on the Recession Edited by David Howden Institutions in Crisis European Perspectives on the Recession Edited by David Howden Saint Louis University, Madrid, Spain NEW THINKING IN POLITICAL ECONOMY Edward Elgar Cheltenham, UK • Northampton, MA, USA © David Howden 2011 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GLSO 2JA UK Edward Elgar Publishing, Inc William Pratt House Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2011926266 1"\ J ,.> ~~£ MIX Paper from raaponalbla aourcea FSce C018575 ISBN 978 85793 211 Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Printed and bound by MPG Books Group, UK Contents List offigures List of tables List of contributors Vi vu vm ~nw~ x Jesus Huerta deSoto 10 11 Institutional illusion and financial entrepreneurship in the European debt scheme Gabriel A Gimenez-Roche A stock-taking of the impact of the crisis Jorg Guido Hiilsmann The Irish economic 'miracle': Celtic tiger or Bengal kitten? Anthony J Evans Europe's unemployment crisis: some hidden relief? David Howden Europe's crisis of accounting Maria Alvarado, Laura Muro and Kirk Lee Tennant Solvency II and the European sovereign debt crisis: the case of misplaced prudence Antonio Zanella The Eurosystem: costs and tragedies Philipp Bagus Fiscal stimulus, financial ruin Fernando Ulrich From German rules to European discretion: policy's slippery slope Malte Tobias Kahler The Euro as a hindrance to recovery? A comparative analysis of the Czech Republic and Slovakia Jifi Schwarz and Josef Sima Compounding agricultural poverty: how the EU's Common Agricultural Policy is strangling European recovery Brian Caithnia 22 44 56 76 92 117 142 164 179 200 229 Index v Figures 1.1 Structure of socially situated action 1.2 Social network and financial entrepreneurship types 1.3 Expansion of European government expenditures relative to tax revenues Social security debt-to-GDP ratio in the Eurozone British and Irish GNI per capita European unemployment rates as per education level Structure of insurers' portfolios (in billions of Euros) Total government debt held by ECB (in millions ofEuros) Eurozone bank holdings of government debt (in millions of Euros) Euro area debts held by the banking system and the ECB (as percentage ofEuro area government debts) The structure of production Savings-induced capital restructuring Keynesian view of increase in savings Worldwide Governance Indicators EBRD-World Bank Business Environment and Enterprise Performance survey responses Percentage of world domestic support subsidies, 1998-2003 Percentage of investment in CAP returned to each country from CAP, 2010 National percentage of contributions to CAP direct income supports, 2010 National percentage of receipts from CAP direct income supports, 2010 Contributors to total OECD agriculture support policies, 11 13 45 57 110 124 1.4 3.1 4.1 6.1 7.1 7.2 7.3 8.1 8.2 8.3 10.1 10.2 11.1 11.2 11.3 11.4 11.5 2010 125 125 146 147 147 191 195 207 211 212 213 217 vi Tables 2.1 Stock market capitalization (billions of US dollars) 2.2 Recent evolution of private investment in the EU and the US 2.3 Aggregate commodity production and aggregate business 25 27 spending in the US Categories of underground economic activity Shadow economies of Europe (percentage of GDP) Legal maximum weekly work hours Shadow economy employment (percentage of workforce) International Accounting Standards Board recommendations and responses Case and class probability Negative externalities of different monetary system alternatives 29 61 63 65 66 4.1 4.2 4.3 4.4 5.1 6.1 7.1 vii 79 100 135 Contributors Maria Alvarado is Professor of Accounting at Rey Juan Carlos University, Madrid, Spain Philipp Bagus is Professor of Economics at Rey Juan Carlos University, Madrid, Spain Anthony J Evans is Associate Professor of Economics at ESCP Europe Business School, London, England Gabriel A Gimenez-Roche is Professor and Chair of the Economics Department at the Champagne School of Management, Troyes, France, and Maitre de Conferences at the Paris Institute of Political Science David Howden is Chair of the Division of Business and Social Sciences and Assistant Professor of Economics at St Louis University, at their Madrid campus, Madrid, Spain Jesus Huerta deSoto is Professor of Economics at the University Rey Juan Carlos, Madrid, Spain Jorg Guido Hiilsmann is Professor of Economics at the University of Angers, Angers, France Malte Tobias Kibler is a management consultant for Steria Mummert Consulting AG Laura Muro is Assistant Professor of Accounting at St Louis University, at their Madrid campus, Madrid, Spain Brian Caithnia is Adjunct Professor ofEconomics at Syracuse University, Madrid, Spain Jifi Schwarz teaches Institutional Economics at Charles University, Prague, and serves as an advisor to the Czech National Bank Board Josef Sima is Professor of Economics and President of CEVRO Institute (School of Legal and Social Studies), Prague, Czech Republic Kirk Lee Tennant is Assistant Professor of Business at StLouis University, at their Madrid campus, Madrid, Spain viii Contributors IX Fernando Ulrich holds a Master's in Economics from the University Rey Juan Carlos in Madrid, Spain, and works in investment banking at Voga Capital in Brazil Antonio Zanella is a PhD candidate in Economics at Rey Juan Carlos University, Madrid, Spain 226 Institutions in crisis Hayek, F (1989), The Fatal Conceit: The Errors of Socialism, Chicago: University of Chicago Press Hill, B (2008), 'Using the Wye Group Handbook to develop EU statistics on the incomes of agricultural households', Journal of Agricultural Economics, 59 (3), 387-420 Human Development Reports (2005), International Cooperation at a Crossroads: Aid, Trade and Security in an Unequal World, New York: United Nations Development Program Institut Franr;:ais des Relations Internationales (2002), World Trade in the 21st Century, Brussels: European Commission Jongeneel, R (2010), 'European dairy policy in the years to come: quota abolition and competitiveness', LEI report Learn, E.W (1963), 'The impact of European integration on American agriculture', Journal of Farm Economics, 45 (5), 983 91 Legum, M (2002), It Doesn't Have to be Like This: Global Economics a New Way Forward, Glasgow: Wild Goose Publications Ludlow, N.P (2005), 'The making of the CAP: towards a historical analysis of the EU's first major common policy', Contemporary European History, 14 (3), 347-371 Mises, L von ([1949]1998), Human Action: A Treatise on Economics, Auburn, AL: Ludwig von Mises Institute Mitchell, D (2008), A Report on Rising Food Prices, Washington, DC: World Bank Mortished, C and P Webster (2008), 'France's answer to global food crisis is EU Protectionism', Times Online, www.timesonline.co.ukltol/news/world/europe/ article3746899.ece, 15 April OECD (2003), 'Agricultural Policies in OECD Countries: A Positive Reform Agenda', OECD policy brief, www.oecd.org/dataoecd/27/43/295571l.pdf, June OECD (20 10), 'Agricultural policies in OECD countries at a glance', OECD, www oecd.org/document/47/0, 3343,en_2649_33 773_45 5385 23_1_1_1_3 740 1,00 html Open Europe (2005), 'Open Europe: why the EU must reform to survive', http:// www openeurope org uklresearch/factsheet pdf Paarlberg, D (1964), 'Reviewed works: "North Atlantic policy: the agricultural gap" by John Coppock', American Economic Review, 54 (4), 508-10 Paarlberg, D and P Paarlberg (2000), The Agricultural Revolution of the 20th Century, Ames, IO: Iowa State University Press Parsons, C (2003), A CertainideaofEurope, Ithaca, NY: Cornell University Press Peeters, K (2008), 'A competitive, sustainable and diverse agriculture: a view of the CAP beyond 2013', EuroChoices, 9, Petit, M (2008), 'The CAP after fifty years: a never-ending reform process', EuroChoices, (2), 55 Pirzio-Biroli, C (2008), 'An insider's perspective on the political economy of the Fischler reforms', in J Swinnen (ed.), The Perfect Storm, Brussels: Centre for European Policy Studies, pp 102-14 Potocnik, J (2010), 'Can the CAP bring considerable benefits to our environment?', 3rd Forum for the Future of Agriculture: The Economics and Politics of Food Security vs Climate Change, Brussels Rabinowicz, E (2004), 'The Swedish agricultural policy reform of 1990 - a window of opportunity for structural change in policy preferences', paper of the symposium Adjusting to Domestic and International Agricultural Policy Compounding agricultural poverty 227 Reform in Industrial Countries, Philadelphia, International Agricultural Trade Research Consortium Reform the CAP (2010), 'Milk quota', www.reformthecap.eu Reuters (2010), 'U.S corn ethanol "was not a good policy" -Gore', Reuters, http://af.reuters.com/article/energyOilNews/idAFLD E6ALOYT20 10 1122?page Number=2&virtua!BrandChannel=O&sp=true, 22 November Rieger, E (2005), 'Agricultural policy: constrained reforms', in W Wallace and M.A Pollack (eds), Policy-Making in the European Union, Oxford: Oxford University Press, pp 161-90 Rodale Institute (2002), 'Farming without subsidies? Some lessons from New Zealand', http://newfarm.rodaleinstitute.org/features/0303/newzealand_subsidies.shtml Rothbard, M.N ([1963] 2004), America's Great Depression, Alabama, AL: Ludwig von Mises Institute Rothbard, M.N (1973), For a New Liberty: The Libertarian Manifesto, New York: Collier Macmillan Rothbard, M.N (1982), The Ethics of Liberty, New Jersey: Humanities Press Ryan, R (2010), 'Strong CAP needed to help farmers cope with regulations, says Walshe', Irish Examiner, www.irishexaminer.com/business/kfcwojgbgboj/ rss2/#ixzz15d4jtq53, 21 July Samuelson, P.A (1954), 'The pure theory of public expenditure', Review of Economics and Statistics, 36 (4), 387-9 Schumpeter, J.A (1942), Capitalism, Socialism and Democracy, London: Unwin Spoerer, M (forthcoming), 'Fortress Europe in long-term perspective: agricultural protection in the European Community, 1957-2003', Journal of European Integration History Stead, D.R (2008), 'The birth of the CAP', EuroChoices, (2), 6-12 Swinnen, J and H de Gorter (2002), 'On government credibility, compensation, and underinvestment in public research', European Review of Agricultural Economics, 29 (4), 501-22 Thurston, J., N Mulvad and B Alfter (2010), 'Reaction to ECJ ruling', Farm Subsidy, http://farmsubsidy.org/news/features/ecj-reactionl, November Toepfer International (2007), 'Biofuels to keep global grain prices high', Reuters, www.reuters.com/article/idUSL309054420070730, July 30 Tuinman, Abe S (1963), 'The European Economic Community and its agricultural policy', Journal of Farm Economics, 974 82 UK Taxpayers' Alliance (2009), Food for Thought: How the Common Agricultural Policy Costs Families over £400 a Year, London: Taxpayers' Alliance UNEP (2009), Towards Sustainable Production and Use of Resources: Assessing Biofuels, New York: United Nations Environment Program Vaglenov, S and T Balabanova (2010), 'A family affair: Bulgarian farming minister distributes EU money among his family', Farm Subsidy, http://farmsubsidy org/news/features/family-affair/, 16 September Villepin, D de (2005), L'Homme europeen, Paris: Pion Walt, V (2010), 'Even in hard times, E.U farm subsidies roll on', Time, www time com/time/business/article/0,8599, 1989196,00.html#ixzz161g83cuA, 14 May Zahrnt, V (2009), 'Public money for public goods: winners and losers from CAP reform', ECIPE working paper 08/2009 Zahrnt, V (2010a), 'Declaration on CAP reform', EuroChoices, (1), 57 228 Institutions in crisis Zahrnt, V (2010b), 'Greening the CAP, and pruning it too', Europe's World, summer, http://www.europesworld.org/NewEnglish/Home_old/Article/tabidl 1911ArticleType/ArticleViewIArticleiD/21663/language/en-US/GreeningtheCAP andpruningittoo.aspx Zobbe, H (2002), 'The economic and historical foundation of the Common Agricultural Policy in Europe', paper from the Xth EAAE Congress Exploring Diversity in the European Agri-Food System, Zaragoza, Spain, European Association of Agricultural Economists Index accounting crisis 76-91 accounting as macroeconomic tool 86 7,88 accounting measures, dysfunctional consequences of all 87-8 accounting as microeconomic tool 83-6, 88 accounting principle of prudence, and sovereign debt crisis 101-2 central banks and accounting rules 86 fair value accounting standards 85-7 financial reporting limitations 81-2 and GAAP (generally accepting accounting principles) 79, 82, 84,85,87 GDP accounting, and overestimation of consumption 145 and incentive bonuses 87-8 International Financial Reporting Standards (IFRS) 79, 84-5 and mark-to-market rules 82, 85-6, 87 and measurement of effectiveness of changes 76 and political desire for change 77-81 regulatory reform, call for 82, 84, 85, 87-8 securitization, role in crisis 85 see also debt scheme; policy changes, problems of accounting crisis, G-20 countries and Washington Action Plan Financial Accounting Standards Board (FASB), global standards 77, 78-80, 82, 87 Financial Crisis Advisory Group (FCAG), financial reporting guidelines 80-81, 83 Financial Stability Board (FSB) 77 International Accounting Standards Board (IASB), global standards 77,78-80,82,86-7 Ackrill, R 207 agriculture see Common Agricultural Policy (CAP) Ahn, N 70 Aidt, T 96 Alaiion, A 70 Alesina, A 56 Altunbas, Y 13 Alvarado, Maria 76 91 Aoki, M 198 Arestis, P 188 Arghyrou, M 128 Austria 13, 57, 63, 65, 66, 211 Austrian theory of economics x-xi, 44, 48-9, 50, 168-9, 173, 175 Ayadi, R 92 Bagus, Philipp xii, 9, 18, 41-2, 76, 87, 89, 117-41, 168, 171, 173, 175 Bajada, C 65, 67 Baltensperger, E 97 Barnett, W 137 Barnier, M 216, 218, 219 Barry, F 44, 47-8, 53 Barth, J 38 Bartlett, B 96 Bastiat, F 223 Baumol, W 18 Baylis, J 165 Belgium 13, 56, 57, 63, 65, 66 Benton, L 68 Bergson, H 103 Bernanke, B 10 Bernholz, P 41 Bertola, G 19 Beyer, A 164 Blanchard, 56, 57 Bloom, D 46 229 230 Institutions in crisis Boeri, T 67, 70 Boettke, P 89 Bolin, 214 bonds see Eurosystem costs and tragedies, government bonds bonuses, incentive 82, 87-8 Borowski, J 184 Bovi, M 62 Boyfield, K 49 Braunerhjelm, P 50 Brazil, biofuels 204 Browne, J 128 Brusco, S 68 Buehn, A 62 Buergin, R 132 Burnham,J.44,46,47,49, 50 Busato, F 67 Calzada Alvarez, G 162 Candelon, B 12, 18, 19 Canning, D 46 Cantor, R 108 Caplan, B 202 Carrillo, M 67 Castaneda, J 172, 173 Castle, S xvi, xviii central banks and accounting rules 86-7 consequences of possible abolition of133 and continuous availability of credit 12-14, 16 European System of Central Banks (ESCB), objectives of 154 and fractional reserve system 10-12 as lender of last resort 97-8, 173 monetary policy rules versus discretion 171-3 purchase of government bonds, and effect on base money 124-7 purchase of government bonds, limitations of measures 128-31 see also European Central Bank (ECB) Chambers, A Chiarini, B 67 Cichocki, S 67 Clarida, R 164 Coleman, J Common Agricultural Policy (CAP) 200-228 biofuels 204-5, 217-18 disease outbreaks, effect of 203 dissolution of agricultural trade 202-3 drivers of218-19 environmental law and pollution 205-6 establishment and goals of 201-2 evolution of 203-6 export subsidies 206-7, 216, 221 farm subsidies 202, 206, 208-10, 211, 218,220-22 food trade deficit 215 future of 222-3 GDP, agriculture's contribution to 210 and global food prices, rising 215, 216-18,221 greening of CAP, call for 203-6, 208-9 guarantee thresholds 203 income levels 206-8, 210-11 and intensification of agriculture 205 investment returned to each country 211 justification, attempting to find 208-10,220 and market stabilization 214-18 milk subsidies 220-21 present-day operations 210-13 public health and subsidized beef, milk and sugar 221-2 quotas and food mountains 202-3, 217 reforms, outcome of 220-22 resistance to 219-20 set-aside policy 209 Single Farm Payment (SFP) scheme 210 subsidy removal, consequences of 213-14 and technological progress 214-15 tobacco subsidies and anti-smoking programs 206 Conerly, W 56 Conway, G 215 Index Coppock, J 223 Cottarelli, C 18 Cowen, T xi, 168 Csajb6k, A 184 Csaki, C 216, 219 Csermely, A 184 Czech Republic see Euro as possible hindrance to recovery, Czech Republic/Slovakia comparison Davidson, C 68 Davies, H 8, 18 De Ia Fuente, A 44 De Ia Rica, S 70 debt scheme 1-21 central bank and continuous availability of credit 12-14, 16 central bank and fractional reserve system 10-12 deposit banks and fractional reserve system 10, 12-13, 14, 15 derivative assets, problems with increased availability of 16-17 entrepreneurial action, distinction from non-entrepreneurial action 3-5 European Central Bank (ECB) and fractional reserve banking 7-14 European Central Bank (ECB), origins and fundamentals 7-8 and fiduciary credit creation 8-9, 12-14, 16 and fiduciary media creation 14 15 fiduciary media and real savings, conflict between, and deflation 9-10 fiscal and banking illusions 10-14 institutional illusions and European finance 7-14 and interest spreads 8-9 public debt and fractional reserve system 11-14 risk mitigation through diversification 14 15 social security debt-to-GDP ratio of individual countries 12 taxation as revenue source, unreliability of 10-11 231 see also accounting crisis; fiscal stimulus and financial ruin; global economic crisis, impact of; policy changes, problems of; sovereign debt crisis and Solvency II debt scheme and financial entrepreneurship credit entrepreneur 5-6, 14 15 financial intermediary 6-7 and financial speculation and fractional reserve banking debt scheme, illusions of 14 16 hedge entrepreneurs 7, 15-16 social network socially situated individual entrepreneurial action 2-5 Dell' Anno, R 67, 70,72 Doff, R 93 Dominguez, K 7, 8, 18, 19 Dorgan,S.47,49, 53 Dowd, K 104 Dutta, J 96 Dwyer, G 171 Economic Recovery Plan 142-3, 155-6 see also fiscal stimulus and financial rum Eggertsson, G 149 Ehrenberg, R 42 Engel, C 184 Enste, D 65, 66, 71-2 entrepreneurship see debt scheme and financial entrepreneurship environmental issues see green policies Euro, Currency Union creation of 165 reasons for political tendency towards 166-7 Euro as possible hindrance to recovery, Czech Republic/ Slovakia comparison 179-99 business environment and enterprise performance survey 193-6 and Common Agricultural Policy (CAP) 211 and cross-border deviations 184 Czech Republic, economic structure 180-81, 186, 187, 189-90 232 Institutions in crisis Czech Republic, lack of institutional reform 181, 189 Czechoslovakia, history of 179-80 economic crisis, effects of 196-8 Euro, negative effects of 185-8 Euro, positive effects of 182-5 exchange rate risk 182 and foreign direct investment (FDI) 183 foreign trade impact 183 and inflation targeting 188 institutional development 188-90 institutions, empirical analysis of 190-92 international competitiveness, loss of 187 loss of independent monetary policy 186-8 medium- to long-term effects 185-6 and one-off costs 185 Slovakia, economic structure 180-81, 186-7, 189-90, 197 Slovakia, pro-reformist government 181, 189 transaction costs and transparency 184-5 Eurobond concerns 173 see also Eurosystem costs and tragedies, government bonds European Central Bank (ECB) and credit expansion xi-xii and fractional reserve banking 7-14 independence and price stability focus 157-8, 167 and inflation policies 157-8 lowered interest rates, effects of 168 malinvestments, prolonging life of Xll-Xlll monetary power delegated to 153 origins and fundamentals 7-8 Securities Markets Programme 158 total government debt held by 124 see also central banks Eurosystem costs and tragedies 117 41 base money production and property rights 120, 132, 134 deposited money, confusion over ownership 121-3 externalities definition 117-19 and fractional reserve banking see fractional reserve banking legal tender laws and violation of freedom of contract 120 monetary and fiscal policy, distinction between 152-3 monetary growth rule suggestion 132 monetary system reform to reduce negative externalities 132-5 national central banks, consequences of possible abolition of 133 national currencies, consequences of possible return to 133 negative externalities of different monetary system alternatives 135 negative externalities in monetary sphere 120-31 property rights and externalities 119 reduction in quality of money as negative externality 121 Stability and Growth Pact (SGP) see Stability and Growth Pact (SGP) total government debt held by European Central Bank (ECB) 124 tragedy of the commons, limiting 131 tragedy of the commons, and monetary regime policy changes 173 tragedy of the commons in base money production 123-31, 132 tragedy of the commons and property rights 122-3 see also fiscal stimulus and financial ruin; policy changes, problems of Eurosystem costs and tragedies, government bonds central banks' purchase of, and effect on base money 124-7 central banks' purchase of, limitations of measures 128-31 collateral categories 130 default risk 128-9, 132-3 Index Eurobond concerns 173 global economic crisis, impact of 24 liquidity risk 129-30 possible unacceptability as collateral 130 and restrictive monetary policy 130-31 Evans, Anthony J 40-55 Fama, E 104-5 Feld, L 65, 72 Ferguson, N 170 Ferlito, C 42 Fialova, K 66 Fidrmuc, J 180 financial entrepreneurship see debt scheme and financial entrepreneurship Finland 13, 57, 63, 66 fiscal stimulus and financial ruin 142-63 budget stimulus package 156 business cycles, failure to understand 150-51 credit expansion, false signals given by 150 deficit rule, exceeding of 143 Economic Recovery Plan 142-3, 155-6 and European Central Bank (ECB) see European Central Bank (ECB) and Europe's treaties and institutions 153-8 and fiscal deficits 158-60 fiscal stimulus, arguments against 149-52 fiscal stimulus packages 143 GDP, government debt as percentage of 143 GDP accounting, and overestimation of consumption 145 and government expenditure and investment contributions 151-2 green investments and European Economic Recovery Plan 155-6 and IMF Excessive Deficit Procedure 159, 161 233 monetary and fiscal policy, distinction between 152-3 national income equation, perceived errors in 144-5 price stability and consumer price index measurement 157-8 price stability and EU Treaty 153-5 Public Finances in EMU Report (2009) 143 saving and paradox of thrift 145-7 sovereign debt crisis 143 Stability and Growth Pact (SGP) see Stability and Growth Pact (SGP) and unemployment 151, 156 and Washington Summit declaration 142 see also debt schemes; Eurosystem costs and tragedies; policy changes, problems of fiscal stimulus and financial ruin, and Keynesian economics and Economic Recovery Plan 142-3, 155-6 fiscal stimulus as recipe for disaster 144-5 investment multiplier concept, criticism of 147-9 savings, view of increase in 146 unemployment, cures for 156 Fischer, S 167 Fischler, F 204, 205, 208, 210, 220 Fleming, M 59 fractional reserve banking and central banks 10-12 consequences of abolition of 134-5 and financial entrepreneurship 14-16 and property rights 121-3, 124, 132, 133 and public debt 11-14 see also Eurosystem costs and tragedies France and Common Agricultural Policy (CAP) 211, 212-13 legal restrictions on working hours 65 shadow economy 63, 64, 66 234 Institutions in crisis social security debt-to-GDP ratio 13 unemployment 56, 57 Frankel, J 183 Friedman, E 69 Friedman, M 132 Fujiwara, I 149 G-20 countries see accounting crisis, G-20 countries and Washington Action Plan; individual countries Garibaldi, P 67,70 Garrison, R 50, 145, 168 GDP accounting, and overestimation of consumption 145 agriculture's contribution to 210 and global economic crisis, impact of 28-30 government debt as percentage of 143-4 as inaccurate reflection of underlying economic imbalances 170 Gerlach, P Germany bad banks, creation of 169 bailout ofPIIGS nations, questioning of 170-71 banking system intervention 168-70 Bundesbank monetary policy and price stability as role model 7-8, 164, 167, 170 and Common Agricultural Policy (CAP) 211,212-13 financial crisis effects 168-71 legal restrictions on working hours 65 shadow economy 63, 66 social security debt-to-GDP ratio 13 unemployment 57 Gertchev, N 13, 15, 85 Gertler, M 164 Giddens, A 2, 3, Giles, D 67 Gimenez-Roche, Gabriel A 1-21 Gingrich, N 89 global economic crisis, impact of 22-43 anti-crisis government interventions, consequences of 38-40 and bank bail-outs 22-3, 37 banking impact 32-8 business impact 26-32 business impact, and future uncertainty over economy 30-32 business practices of banking 32-3 capital markets impact 24-5 crisis warnings from economists 33-4 and future uncertainty over economy 30-32 and GDP 28-30 government bonds, impact on 24 household impact 25-6 immaterial fiat monies 35 inflation, government self-interest in preserving 34-5, 36, 37-8 institutionalized moral hazard 35-7 labor market impact 23, 25, 26 and legislative processes 31 and leveraging 32-3, 34-5 private investment expenditure 27-8, 30 public debt crisis 30-31 public expenditure 31 real-state market impact 23-4, 25 securitization 36 unviable firms and business projects, effect of preservation of some 27 see also debt scheme Godoy, J 221 G6mez-Antonio, M 70 Goodhart, C 168, 173 Gore, A 218 Gouge, W 38 government bonds see Eurosystem costs and tragedies, government bonds Gray, A 44 Greece bailout package 129 budget deficit 112, 161 central bank's purchase of government bonds, and effect on base money 124-7 and Common Agricultural Policy (CAP) 211,212-13 debt to GDP ratio 112 Index EU regional development funding 49 financial aid as breach of European Law 170-71 shadow economy 63, 66, 70 social security debt-to-GDP ratio 13 sovereign debt crisis 144 unemployment 57 Green, D 8, 18 green policies Common Agricultural Policy (CAP) call for greening of 203-6, 208-9 and European Economic Recovery Plan 155-6 Greenspan, A 159 Gros, D xvi Gurdgiev, C 51-2 Gwartney, J 46 Hall, B 218, 219 Hallerberg, M 11 Hammond, B 38 Hardin, G 122, 175 Harding, R 157 Harvey, D 219, 224 Hasha, G 200 Havninek, T 183 Hayek, F.x, 18,99, 133,172,214 Hazlitt, H 89, 148 hedge entrepreneurs 7, 15-16 see also debt scheme and financial entrepreneurs Higgs, R 41,42 Hill, B 207 Hill, C 108 Holcombe, R 18 Holton, G 114 Holub, T 188 Honohan, P 54 Hoppe, H 102, 137 Howarth, D 7-8, 18, 19, 41-2 Howden, D xi, xii, 9, 18, 19, 56-75, 76, 87, 89, 102, 137, 138, 139, 169, 170, 175 Huerta deSoto, Jesus x-xxi, 3, 8, 9, 18, 41-2, 68,83,95,98,99,100-101, 103, 113, 114, 121, 122, 123, 134, 137, 145-6, 168, 170, 175 235 Hiilsmann, Jorg Guido xi, 2, 22 43 Hungary 184, 211 Iceland 89, 17 Ilgmann, C 169 IMF Excessive Deficit Procedure 159, 161 inflation and European Central Bank (ECB) policies 157-8 government self-interest in preserving 34-5, 36, 37-8 targeting, Czech Republic/Slovakia comparison 188 targeting and price stability 172-3 insurance industry see sovereign debt crisis and Solvency II Ireland bank lending and unsustainable leverage 51 birth rate and working-age population 46 budget deficit 112, 161 causes of growth 46-8 'Celtic Tiger' analogy 44-5, 51 cheap credit, effects of 50 and Common Agricultural Policy (CAP) 211, 212-13 construction industry boom 51-2 and domestic policy design 46, 49 economic miracle 44-55 entrepreneurial investment and company relocation 47-8 EU regional development funding 49-50 Euro adoption 50 GDP rises and bubble activity 49 GNI per capita 44, 45, 47-8 hi-tech industries and employment 46 shadow economy 63, 66-7 social security debt-to-GDP ratio 13 transfer payments 48-52 unemployment 44, 49, 57 Irsova, z 183 Issing, 174 Italy and Common Agricultural Policy 211, 212-13 236 Institutions in crisis debt to GDP ratio 112 deficit levels 161 legal restrictions on working hours 65 shadow economy 63, 66, 68 social security debt-to-GDP ratio 13 unemployment 57 Jensen, N 114 Johnson,S.48,65,69 Jones, M 130 Jongeneel, R 206 Jorion, P 104 Kahler, Malte Tobias 164 78 Kaufmann, D 190-91 Kearney, A 70 Kelly, M 44, 51 Keynesian economics see fiscal stimulus and financial ruin, and Keynesian economics Kiff, J Kirzner, I 15 Knight, F Kohler-Koch, B 166, 167 Krause-Jackson, F 129 Krugman, P 51, 142, 144 Lamy, P 222 Leddin, A 54 Legum, M 222 Leibfritz, W 70 Levy, D 96, 108 Levy,M 173 Lewis, B Linder, U 93 Lippert, 60-61 Lo, A 105 Loayza, N 67 Loedel, P 7-8, 18, 19 Lowenstein, R 114 Machlup, F 5, 6, 15 Mackinley, A 105 MacSharry, R 44 McWilliams, D 51 Malta 13, 211 Mankiw, N 57, 138 Marsh, D 139 Matussek, K 173 Menger, C Merton, R 2, Michon, F 68 Miller, R 114 Mises, L von x, 2, 3, 8, 9, 12, 18, 42, 72, 100, 119, 122, 134, 149, 152, 15~ 16~ 16~ 175,205 Mishkin, F 8, 9, 18 Modigliani, F 171 monetary system see Eurosystem costs and tragedies; fiscal stimulus and financial ruin Moravcsik, A 166 Mortished, C 219 Mourao, P 12 Mouratidis, K 188 Mulhearn, C 18 Muro, Laura 76-91 Murphy,A.47,48, 53 Nazareth, R 129 Netherlands and Common Agricultural Policy (CAP) 211,212-13 legal constrictions on working hours 65 shadow economy 63, 66 social security debt-to-GDP ratio 13 unemployment 57, 58 Neuerer, D 173 Neuger, J 132 New Zealand, loss of agricultural subsidies 213 Nickell, S 56 O'Brien, P 70 Caithnia, Brian 200-228 O'Driscoll, G O'Grada, C 46 O'Sullivan, 53 O'Toole, F 51 Packer, F 108 Palm, F 12, 19 Parker, G 142, 162 Parsons, C 223 Parsons, T 2, Paul, R 42 Index Peart, S 96, 108 Petit, M 215 PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) bond guarantees 129 and credit expansion xi-xii deficit levels 161 financial aid to, as breach of European Law 170-71 insurance bonds, incentives to purchase 111 shadow economy 58, 62, 63 see also individual countries Pirzio-Biroli, C 224 Plantin, G 98 Poland 184, 211 policy changes, problems of 164-78 bad banks, creation of, Germany 169 banking system intervention, Germany 168-70 and central bank as lender of last resort 173 central bank monetary policy rules versus discretion 171-3 Eurobond concerns 173 European Central Bank (ECB) and price stability focus 167 European Currency Union, creation of165 European Currency Union, reasons for political tendency towards 166-7 financial aid to PIIGS countries as breach of European Law 170-71 GDP as inaccurate reflection of underlying economic imbalances 170 German Bundesbank monetary policy and price stability as role model7-8, 164, 167, 170 Germany, financial crisis effects 168-71 and liberal intergovernmentalism theory 166 monetary regime and tragedy of the commons 173 price stability and inflation targeting 172-3 237 see also accounting crisis; debt scheme; Eurosystem costs and tragedies; fiscal stimulus and financial ruin Portugal13, 49, 57, 63, 66,211 Portugal, P 56 Potocnik, J 203 Powell, B 44, 46, 47, 48, 49-50, 53 Powell, J 42 Prescott, E 56 Prest, A 118 price stability and consumer price index measurement 157-8 and EU Treaty 153-5 European Central Bank (ECB) focus on 157-8, 167 German policy as role model 7-8, 164, 167, 170 global food prices, rising 215, 216-18,221 and inflation targeting 172-3 Protess, B 89 Pugno, M 67 Puviani, A 12 Rabinowicz, E 214 Ravenna, F 188 Reinhart, V 10 Reisman, G 41, 134 Rettman, A 64 Ridgway, V 89 Ridley, K Rieger, E 220 Rigolini, J 67 Rizzo, M Rochet, J 98 Rogers, J 184 Ronkainen, V 93 Rose, A 182-3 Ross, S 51 Rothbard, M 8, 9, 10, 12, 38, 42, 59-60, 124, 134, 137, 145, 148, 151-2, 168, 169, 209 Ryan, R 205 Salerno, J 11 Salin, P 42 Samuelson, P 204 Samuelson, R 128 238 Institutions in crisis Sandri, S saving and paradox of thrift 145-7 Schiml, M 138 Schneider, F 61, 62, 64, 65, 66, 67, 69, 71-2 Schumpeter, J 95, 215 Schwartz, P 172, 173 Schwarz, Jii'i 179-99 securitization 12-16, 32, 36, 78, 80, 85, 107, 110 Securities Markets Programme (ECB) 158 Selgin, G 133, 172 Sennholz, H 58, 71 Serkin, G 129 Sgherri, S 18 shadow economy see unemployment crisis, and shadow economy Shlaes, A 42 Sima, Josef 179-99 Simons, H 171 Simpson, B 96 Skousen, M.xx,49, 50,151,170 Slovakia see Euro as possible hindrance to recovery, Czech Republic/Slovakia comparison Smaghi, L 157 Smith, S 165 sovereign debt crisis and Solvency II 92-116 and accounting principle of prudence 101-2 asset returns and value at risk (VaR) measurement 104-5, 106 and banking deposit insurance 97-8 banking system and lender of last resort mechanism 97-8 concentration risk 94 corporate rating agencies (CRAs), regulation of 108-9 currency risk 94 equity risk 93 and fiscal stimulus 143 government bonds, insurance companies' failure to hold capital against 112 insurance customer protection 97, 98-9 interest rate risk 93 legal monopolies, regulation and creation of97 lemon problem and free market failure 5-6 licensing and competition restriction 96,98 licensing, and feedback effect 96-9 licensing and regulatory standards 96-7 market risk calculations 93 property risk 93 regulation effectiveness 95-9, 108-9 risk, and corporate rating agencies (CRAs) 108-9 risk and uncertainty, and case and class probability 100-102 risk and uncertainty, and concept of time 102-3 risk and uncertainty, confusion between 99-103, 106 Solvency Capital Requirement (SCR) 92-3 sovereign debt holdings, incentives to increase 109-11 sovereign debt service failure 111-12 spread risk 94 value at risk (VaR), flawed use of 103-7 see also debt scheme Spain budget deficit 112, 143, 161 and Common Agricultural Policy (CAP) 211,212-13 credit expansion and house building boomxi-xii fiscal stimulus package 143 legal restrictions on working hours 65 shadow economy 63, 64, 66, 67, 68, 70 social security debt-to-GDP ratio 13 sovereign debt, central bank postpones recognition of 114 unemployment xiii, 57, 58 Spoerer, M 215, 220 Stability and Growth Pact (SGP) and budget stimulus package 156 and currency quotas 131 suggested reform of 132-3 239 Index see also Eurosystem costs and tragedies Starbatty, J 170 Story, L 89 Stulz, R 15 Sunder, S 84 Suntum, U von 169 Suster, M 182, 183, 184, 185 Sweden 211, 213-14 Swedenborg, B 214 Sweeney, P 44 Symes, V 70 Taleb, N 105 Tanzi, V 67 Tarullo, D 129 Taylor, J.B 172 Taylor, J.D 42 Tedds, L 67 Tennant, Kirk Lee 76-91 Thesing, G 129 Thurston, J 206, 207 tragedy of the commons see under Eurosystem costs and tragedies Trask, S 97, 98 Tsoukalas, J 128 Turvey, R 118 Tyrowicz, J 67 Ueda, K 149 UK and Common Agricultural Policy (CAP) 211, 212-13 deficit levels 143, 161 farm subsidies 206 GNP per capita 44, 45 legal restrictions on working hours 65 shadow economy 63 unemployment 57 Ulrich, Fernando 142-63 unemployment crisis 56 75 Agenda for New Skills and Jobs program 69 and benefit rates 56 EC 2020 Strategy 69 and fiscal stimulus 151, 156 and leisure time, preference-based 57 policies to counteract 68-72 and recession, effects of 57-8 and tax rates 56 unemployment rates per education level 57, 58 and unionization 56-7 and wage levels 57 Youth on the Move program 69 unemployment crisis, and shadow economy assessment of problem of 65-8 and bartering 60 categories 58-9 causes of involvement in 59-60, 62 employment as percentage of workforce 66 estimating size of 61-5 and legal restrictions on working hours 64 nature oflegality 60-61 and PIIGS 58, 62, 63 and productivity 66-7 recession, effects of 64 significance of 58-61 strategies to reduce size of 69-71 taxation avoidance 59, 60 unemployment rate, effect on official 67-8 welfare effects 59, 60, 64, 69, 70-71 us agricultural export subsidies 207 agricultural population 215 biofuels 204 derivatives, new accounting rules for 82 Federal Reserve System, fundamentals Federal Reserve System and purchase of government bonds 138 G-20 Washington Action Plan, response to 82 GDP, global economic crisis effect on 28 30 incentive bonuses, dealing with 82, 88 MNC investment in Ireland 47 price stability and inflation 157 private investment, recent evolution of27, 28 240 Institutions in crisis real estate, global economic crisis effect on 24, 25 unemployment benefit rates 56 Vandone, D 19 Vane, H 18 Vaubel, R 133 Velculescu, D 159 Villepin, D de 223 Vives, X 44 Wagner, R xi Walker, M 60-61 Wallace, N 172 Walt, V 206 Webster, P 219 White, L 133 White, P 44 Whittred, G 89 Wolszczak-Derlacz, J 185 Woods, T 42 Yeager, L xi Zahrnt, V 208, 216, 218, 220-21 Zanella, Antonio 92-116 Zimmer, I 89 Zobbe, H 202 Zoli, E 18 ... Janina Weingarth Institutions in Crisis European Perspectives on the Recession Edited by David Howden Institutions in Crisis European Perspectives on the Recession Edited by David Howden Saint... institutionally integrate their action into that of others, their actions still take place in a social environment beyond their control as they cannot control the motivations behind the actions... decision-making is the dimension that definitively distinguishes the entrepreneur from the non-entrepreneur in the enterprise It is the dimension that personifies the ownership of capital within Institutions