The paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy. The equilibrium under discretion is characterised by inflation and a deficit. Commitment of the exchange-rate instrument only, e.g., through membership in a European monetary union with low inflation, contributes to price stability but increases the deficit. Whether the government will prefer this outcome to the discretionary one depends on the structure of the economy: commitment appears more favourable, the more open is the economy. The time-consistency arguments strengthen the case for simultaneous commitment of monetary and fiscal policy for inflation-prone countries joining a monetary union.
The sovereign debt crises have demonstrated clearly the inadequacy of the earlier system of economics governance in the euro area. Parallel with the acute crisis management, far-reaching reforms of the rules system have been instituted. These include the new regulations adopted in the so-called 'Six-pack' in November 2011 based on earlier proposals from the European Commission and the van Rompuy Task Force. The latest addition is the intergovernmental treaty on a fiscal compact agreed in March 2012 ('Treaty on Stability, Coordination and Governance in the Economics and Monetary Union'). This article discusses whether or not these reforms are likely to work.
A fundamental overhaul of EU economic governance is needed. The most important reform is a strengthening of national fiscal frameworks, including the establishment of independent fiscal watchdogs in Member States that do not yet have such institutions. At the European level, a permament crisis resolution mechanism should be integrated with both broader macroeconomic surveillance and the sanction system. An independent European fiscal council could, based on macroeconomic risk considerations, decide in advance appropriate haircuts in the event of future sovereign debt restructuring.
The paper analyzes the effects of job sharing, i.e. a reduction of working time, on wages and output with a monopoly trade union. The effects are related to how working time is determined initially: the wage increases if initial working time is smaller or equal than the trade union optimum, whereas the result is unclear when it is larger. It is never optimal for the trade union to reduce both wages and working time in response to recessionary supply shocks such as those in the seventies. The analisys may help to explain varying attitudes towards work sharing in different countries.
The paper discusses three aspects of the system for unemployment support. First, active labour market programmes as a means of re-allocating labour from high-unemployment to low-unemployment sectors are analysed, and it is concluded that wage-raising accommodation effects may be a serious problem. Second, the possibility of strengthening incentives for wage moderation by differentiating employee and/or employer contributions to unemployment insurance are discussed. Third, the question is raised whether there may exist other institutional set-ups for providing unemployment support that are more efficient in terms of returning the unemployed to work than government-run systems.
The likely impact of the EMU on the variability and level of employment is analysed. The major conclusions are: (1) Although an inflation-target regime will constrain monetary policy of a non-participant in the EMU, it still leaves considerable scope for exchange-rate changes in the case of country-specific demand shocks, provided that there is some nominal price and wage flexibility. (2) Variations in payroll taxes can be used as a substitute for exchange-rate changes in the EMU, but it will be an imperfect substitute. (3) Money-wage flexibility is likely to be larger inside than outside the EMU, but probably not by much. (4) There are various mechanisms through which the EMU may affect incentives for labour-market reform to reduce equilibrium unemployment, but the net impact is highly uncertain.
The paper demonstrates that policy makers may have a precautionary motive to undertake more labour-market reform - an hence attain lower equilibrium unemployment - inside a monetary union than outside. The reason is a desire to reduce the utility cost of variations in employment when assymetric shocks can no longer be stabilised through domestic monetary policy.
Major economic reforms in Sweden have encompassed comprehensive tax reform, deregulation of product and service markets, reform of the wage-bargaining process, the establishment of a stricter fiscal framework, changes in the monetary regime and general labout market reforms. The Swedish experiences only provide limited support for the view that deep economic crisis is a prerequisite for fundamental reforms. Instead, most of the reforms have been made in response to long-standing problems rather than to acute problems. However, some of the reforms were facilitated by the EU accession, which was arguably triggered by the deep economic crisis in the first half of the 1990's. In most cases, there has been a strong perception among economists, policy makers and the general public of the problems that the reforms have sought to address. Reforms in other countries have provided inspiration in several cases. Most of the reforms have been based on a broad political consensus. A specific feature of Swedish decision-making on reforms is the frequent use of heavy input from economic research as a basis for change.