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L’opera fornisce una panoramica sul funzionamento della Borsa Va­ lori, sul modo di far partecipare grandi masse di risparmiatori al processo di industrializzazione del nostro Paese e sulla possibilità di effettuare investimenti in modo indiretto tramite i fondi senza correre eccessivi rischi.

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Il testo espone in m odo semplice anche i problemi più complicati, e consente un’utilizzazione diversificata a seconda delle esigenze del lettore: dalla preparazione universitaria, alla formazione pro­ fessionale (corsi di specializzazione ed esami da dottore commer­ cialista) fino alla consultazione operativa sui singoli problemi. Questi diversi “ livelli di lettura” vengono evidenziati attraverso un indice m olto articolato ed un’ esplicita individuazione delle parti riservate all’uso postuniversitario, nonché da note, rinvii e postille “ a margine” .

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^

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1

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---RAOUL PISANI

I FONDI PENSIONE AZIENDALI

Tipologie e gestione finanziaria

L'introduzione in Italia dei fondi pensione è generalmente considerata la necessaria risposta alle note difficoltà di gestione dell’attuale sistema pensionistico pubblico a ripartizione. L’attuale dibattito, focalizzandosi quasi esclusivamente sul contributo che la previdenza aziendale può fornire al sistema pensionistico, finisce per trascurare altre questioni non meno importanti, quali il rapporto fra fondi pensione e relazioni indu­ striali e quello fra i fondi ed i mercati finanziari.

II presente lavoro intende offrire un contributo critico all’analisi di questi aspetti. Il lavoro si suddivide in tre parti. Nella prima parte i problemi in questione sono osservati nella loro specificità, nella seconda parte essi sono valutati nell’esperienza di quattro Paesi esteri giudicati « significa­ tivi », ed infine nella terza parte sono esaminati con riferimento al caso italiano, tenendo conto anche delle prospettive di riforma dell’attuale sistema.

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Distributore: G IU FFR È EDITORE

A SPECIAL FINANCIAL SUPPORT SCHEME IN EMÙ: NEED AND NATURE

by Al b e r t o Ma l o c c h i and Ma r io Re y

Università degli studi di Pavia e Università degli studi di Torino

Su m m a r y: 1. The rationale o f a stabilisation policy. - 2. The stabilisation o f the ther baknc eT ° m y' ' , 8 ' T h e . stabilisation o f the regional economies and the balance o f payments constraint m a Monetary Union. — 4. The external adjustment mechamsms. - 5. The internal adjustment-mechanisms. - 6

ie role o f budgetary policy at the regional level. — 7. The role o f bud f J F 1.evel; ~ 8- Built-in stabilisers on the revenue S r t & l l . 9- hscal P°h^ In Practice: strategies and instruments. — 10 Stabilisation policy m the MacDougall Report. — 11. The debate on stabili­ sation policy following the MacDougall Report. — 12. Main issues related

to stabilisation policy in the light o f the theory o f fiscal federahsm. - 13

Some lessons from the most recent fiscal federalism experiences. — 14 The

m

EMU: the different ailH § • -

is-1. The rationale o f a stabilisation policy.

The launching o f the project to achieve Economic and Mone­ tary Union during the ’90s, paralleling the completion o f the Inter­ nal Market, has brought about a fresh debate on the need o f a sta­ bilisation policy within the Community. The request o f new instru­ ments has been mainly supported by the economically weakest countries, fearing that giving up the rate of exchange would impair their ability to face effectively exogenous shocks hitting their econ­ omies. They underline also that every time an agreement has been reached at the international level putting limits to exchange rate variations — and the best example are the Bretton Woods agree­ ments— , it has been backed by the provision o f a financial support scheme.

As a matter o f fact fluctuations are present and relevant in economic life. Yet a wide disagreement exists among economists with regard to both the nature and the duration o f aggregate fluctu­ ations. Competing economic theories are distinguished by different

views about the ultimate sources of macroeconomic instability and about the alleged time-lenghth of their persistence. The temporal dimension of cyclical swings is however of utmost importance, since it has far-reaching implications for the scope of stabilisation policies. In fact if the built-in stabilisers of any economic system are weak and/or slowly operating, so that the macroeconomic con­ sequences of initial exogenous shocks are long drawn-out, then there is a potential a priori case for the usefulness of a counter­ cyclical policy.

Current macroeconomic analysis seems to be characterized by a broad consensus around the so called natural rate hypothesis, ac­ cording to which, in the long-run, free market economies tend to reach an equilibrium position wherein all available resources are fully utilised, apart from unavoidable structural or frictional unem­ ployment. The remaining dissent gathers around two strictly inter­ related matters:

a) the features of the short-run, namely the nature of the

mechanisms that may cause temporary departures from the long- run solution;

b) the length of the short-run, namely the average amount of

time a transitory deviation from the natural rate of unemployment may persist.

“ New classical macroeconomists believe prices to be fully flex­ ible and expectations to be rational. In their analysis, external shocks may have effects inasmuch they cause expectation errors which however cannot persist since agents’ price forecasts are al­ ways unbiased. Endogenous fluctuations are the result either of a continuous random shocks of opposite sign or of a slowly adjusting capital stock. In any case there is nothing anyone can do about them.

Traditional monetarists, instead, believe expectations to be of an adaptive nature. This learning mechanism implies that the ef­ fects o f exogenous shocks will persist until expectations are fully revised as to match actual outcomes. If expectations are corrected at discrete time intervals, the short-run may be quite long; howev­ er, a priori belief in the strength o f the built-in stabilisers, the pre­ sumed ignorance o f policy makers about the actual working of the macroeconomic system and the existence of operational lags sug­ gest an anti-interventionist attitude towards stabilisation policies.

excess demands and supplies. Rational expectations notwithstand­ ing, inertia will imply long-lasting consequences of shocks, as wages and prices are only slowly revised to their equilibrium val­ ues. Furthermore, the structure of the macroeconomic system may be such as to exhibit no inherent tendency to dampen economic fluctuations. Activist stabilisation policies are thus justified and suggested by the twofold belief that welfare losses may be large and that they may persist for long periods of time or not disappear at all” (Bianchi, 1 9 9 1 ).

Throughout this paper it is assumed that institutional rigidities (long-term contracts) and structural parameters of the aggregate supply and aggregate demand functions are such that substantial and protracted welfare losses are implied in a non-interventionist attitude. An intervention o f the public authority in the economic life is always justified by the existence of a cause of market failure. As far as stabilisation policy is concerned, the prevailing justifica­ tion is related to the fact that labour markets are unable to reach an equilibrium neither through wage flexibility nor through migra­ tion from the areas where labour oversupply exists. I f adjustment mechanisms in the labour market work sjowly and imperfectly within the Community, when the overall —-or a regional— econo­ my is hitted by a negative exogenous shock, doing something, even perhaps at the risk o f overshooting, will then be preferable to the alternative of passively assisting at the economic and human wastes implied by the drawn-out periods o f substantial unemploy­ ment. And this conclusion is strengthened by the relevant remark that the persistence o f an Economic and Monetary Union heavily depends on the maintenance o f social cohesion, especially as far as the weakest Member States o f the Union are concerned.

2. The stabilisation o f the European economy.

As far as the stabilisation of the European economy is con­ cerned, the fiscal policy stance is particularly relevant, further­ more if one takes into account that in the Statutes of the future Eu­ ropean Central Bank it is clearly stated that the target to be achieved through monetary policy is the stability of the price level.

The main problem regarding fiscal policy is to decide if the stabilisation targets could be achieved through changes in the Com­ munity budget or through the coordination of Member States fiscal policies. In this context, the time horizon adopted is of primary importance.

In all the existing federations the task of macroeconomic sta­ bilisation of the overall economic system is attributed to the central tier of government. From a theoretical viewpoint the main reason for assigning this function to the federal level lies in the existence of externalities. In an open economy a relevant share of the public expenditure will benefit non-residents through a change in the amount of imports, while the residents will bear the burden of the expenditure through the higher taxes they will have to pay in the future to cover the increased public debt. As usual when externali­ ties are not internalised, “ governments in small, open economies are likely to feel incapable o f undertaking as much stabilisation as would be optimal” (Goodhart- Smith, 1992). Also Van Rompuy, Abraham and Heremans (1990) underline that the more the bene­ fits o f the regional stabilisation efforts spill over to other regions, the smaller the incentive for the regions to use them since they have to bear the full burden in higher debt or tax rates” .

propensity to import. The presumed remedy is to pursue the objec­ tives at a higher level o f government with a broader jurisdiction encompassing major spillover or leakage effects, either through co­ ordination or direct fiscal action. However, any proposal for direct fiscal action for this purpose at the Community level encounters two major issues, the interrelation with monetary policy and the question how to achieve adequate scale o f operation” .

The first limit for the Community to manage directly stabilisa­ tion policy, suggested in the MacDougall Report (1977), seems now overcome in the perspective of the EMU, since monetary policy becomes a European task. But the second limit remains if fiscal policy has to be utilised for stabilisation purposes. As a matter of fact, the specific feature that differentiates the Community’s posi­ tion from the existing federal States is the larger share o f public ex­ penditure that within the EC is attributed to Member States’ bud­ gets vis-à-vis the expenditure managed through the Community budget, that amounts to 1.1% o f the European GDP in 1991.

The general view is that, given the actual size o f the budget and the rules governing its management — impossibility of a deficit (art. 199 o f the Rome Treaty), lack o f flexibility according to the multiannual financial planning due to the 1988 agreements on the budget discipline the Commission’s role in the management of stabilisation policy at the European level should be limited to pro­ moting the coordination of fiscal policy carried out by Member States.

A coordination is m any case necessary even if the central lev­ el o f government is carrying out direct fiscal actions, at least to avoid negative effects towards the achievement o f stabilisation tar­ gets following pro-cyclical behaviours in budgetary policy by lower tiers of government. The difference in this case lies in the fact that coordination remains the only instrument to face symmetrical shocks hitting the overall European economy.

responsability of anty-cyclical policy lies with the Member States. Secondly, with the completion of the internal market external ef­ fects are likely to be larger and therefore the willingness to carry out stabilisation policies by the Member States will be lower. Last­ ly, and this seems to be the decisive point, the impact on the econ­ omy of a discretionary policy based on the coordination of fiscal measures adopted by the Member States will manifest itself with such time lags that the stabilisation effects will result completely offset.

Coordination o f fiscal policies carried out by the Member States is therefore a necessary condition, but not a sufficient one to guarantee the effectiveness of a Community stabilisation policy facing symmetric shocks hitting the whole European economy in a degree relevant from a macroeconomic point of view. And it is use­ ful to recall that also in the experience of the EMS an asymmetry in the effects o f fiscal policy, and therefore a deflationary bias, could be recognised. If a deflationary policy is needed — for in­ stance, to curb the inflationary impact deriving from an exogenous shock raising input costs — the risk exists that each Member State increases taxes or reduces expenditures, without taking into ac­ count the deflationary effects deriving from the analogous mea­ sures adopted by the other Member States, with a concrete possi­ bility of overshooting. If the exogenous shocks reduce demand — for instance, in the case of deflationary policies adopted by the United States or Japan — the adoption of expansionary measures is more difficult since the positive effects of fiscal measures are large­ ly lost for the existence of spillovers, with the following benefits for the ‘free-riders’ countries.

An effective coordination could certainly limit the likeness that a deflationary bias will be inherent in the management of fiscal pol­ icy by the Member States in the framework of the EMU, but possi­ bilities of overshooting remain — due to the time lags linked with the political process necessary for taking the correspondent deci­ sion — either through the effects of automatic stabilisation or through the effects of discretionary policies.

for allocative reasons; b) the possibility to adjust the budget bal­ ance according to the needs o f stabilisation policy, while guarantee­ ing in the meantime the achievement of the target o f monetary sta­ bility; c) the introduction of own resources for the financing of the budget that will guarantee automatic stabilisation also from the revenue side.

3. The stabilisation o f the regional economies and the balance o f payments constraint in a Monetary Union.

The second aspect of stabilisation policy is related with the problem of guaranteeing the establishment o f internal and external equilibrium for a regional economy when hitted by an exogenous shock.

In particular, consequences for the economy o f a Member State must be evaluated deriving from an exogenous shock, that is country-specific, or from a common exogenous shock with asym­ metric effects (Murat, 1991), This is for instance the case o f a drop in exports^ (or an increase in imports) deriving from a change in consumers tastes in foreign countries or from a diminution in com­ petitiveness of domestic goods vis-à-vis foreign ones; o f a natural event with very relevant effects on the level o f productive activity; o f a rise in raw materials prices, and especially o f oil, in an econo­ my largely dependent from this source o f energy; or o f other un­ foreseeable events, that will provide a relevant economic impact in the country concerned (one can refer for instance to the case of Greece, a country largely dependent on tourism receipts, following the Gulf crisis).

“ Given the high degree of substitution between financial claims of similar kinds issued in different regions, a region does not face the same immediate pressure to correct a current-account im­ balance as does an individual country, with a lower international elasticity of substitution between financial assets. Even so, finan­ cial pressures will develop in regions if appropriate adjustment to current-account imbalance is long delayed. If a current-account deficit is not a reflection of local investment opportunities, it will involve a growing burden o f debt servicing, rising invisible account deficits, and falling incomes and wealth. Financial pressures to ad­ just will not appear in the guise of exhausted reserves, but of an in­ creasing unwillingness to provide further loans to the borrowers in the indebted area” (Goodhart, 1989).

Within a Monetary Union the nature of the balance of pay­ ments problem changes and becomes mainly a regional problem of internal disequilibrium, that must be tackled seriously if the overall cohesion of the Union has to be preserved. In any case, also if the covering of the regional current account deficit is guaranteed through external financing in a world of perfect capital mobility, there is still the constraint o f long-run solvency. Sustainability con­ ditions require that the trade balance cannot stay in deficit for ev­ er. The current account may be in disequilibrium only as long as there is a reasonable expectation that in the end the foreign debt will be repaid without issuing new liabilities. Thus, with a single currency the situation is more similar to that of domestic borrowers towards domestic lenders and becomes less binding in the short-run.

Some further qualification is needed on this point. First, the origin o f the current account deficit must be considered. The situa­ tion is different if the deficit takes place following a permanent drop in exports due to a diminution in competitiveness, an in­ creased import of consumption goods or a purchase abroad of capi­ tal goods, that may increase productive capacity in the long-run. In the latter case the urgency of a policy action to cope with the deficit is evidently less binding. Moreover, the governments of Member States may consider the deficit in current account as an indicator of a too expansionary policy or may want to limit the inflow of foreign capital to maintain the control of the domestic economy. In both cases policy measures will be implemented to eliminate the deficit.

not exclude that a Member State’s economy can be heavily hitted by an external shock, that is country-specific, or by a common ex­ ternal shock with asymmetric effects. In this case the Member State’s government is obliged to cope with this sudden change in relevant macroeconomic variables through adequate policy mea­ sures, having no longer the possibility to utilise the exchange-rate instrument. Mechanisms o f adjustment towards external equilibri­ um, effectively working within a Monetary Union in the short- and long-run, must be evaluated, before considering the impact of an exogenous shock on the internal equilibrium in the economy o f a Member State.

4. The external adjustment-mechanisms.

It can be useful to examine first, more in depth, what are the mechanisms that a regional economy — within an Internal Market with a single currency - - can rely on to face a balance o f payments problem. Then, as a second step, on the basis o f this analysis one can try to sketch the necessary ways to come back to conditions of internal equilibrium after an exogenous shock for a region totally deprived of the rate o f exchange instrument.

In normal life regions have to support current account surplus­ es or deficits in their reciprocal trade within a country: some are growing, with higher incomes and employment and larger wealth, while other find it increasingly difficult to sell their goods and ser­ vices on the overall country market. Yet no balance o f payments problem becomes evident and the reason is that the portfolio ad­ justment required to finance a current account surplus or deficit is so smooth for a region that it may pass virtually unnoticed.

The most important element for maintaining a regional bal­ ance o f payments equilibrium has been in the United States the mobility o f production factors, and especially capital mobility” (Hartland, 1949). The analysis o f Mundell (1961), on labour mobili­ ty and optimal currency areas, is thus enlarged, and it can be pre­ sented following the lines o f Goodhart’s (1989) model regarding the interregional payments equilibrium.

reserves from the banking system will not take place and the def­ icit will manifest its effects through a growing deficit of the local banking system towards the central clearing, due to the fact that lo­ cal loans are higher than local savings. The push towards a portfo­ lio adjustment will be stronger on the contrary in a unit bank sys­ tem, where every bank has to maintain independent reserves.

Eventually, when an undesired reduction in money balances takes place, backed by a reduction in (the rate of growth of) wealth — if the investment flow is reduced to restore the desired holdings o f real capital since the asset balance has been disturbed with ex­ cessive capital (due to unvoluntary investment caused by growing unsold stock following the drop in demand for domestic products) and insufficient money — , then people will attempt to restore their asset balance by running down their holdings of financial assets on the integrated financial market (Scitovsky, 1969; Ingram, 1973).

If easily transferable financial assets are sold on the market, effects on prices and interest rates do not follow. But if the external disequilibrium persists for a long time, assets would be put on the market that are not saleable without a reduction in prices, with higher interest rates. Deflationary effects in the deficit country would follow, also due to the fact owners of financial assets are suf­ fering capital losses following the reduction in the value of the fi­ nancial assets, sold at prices lower than the purchase price. The adjustments process then starts, with a diminution in the level of income that brings about deflationary effects on the level of imports.

market will increase, as his credit standing is impaired. This fact also would put pressure for an adjustment in current account.

In conclusion, the process o f external adjustment for a region having to face, within a Monetary Union, a current account deficit, is smoothed by the well functioning o f a perfectly integrated capital market, since the high elasticity o f substitution of financial assets permit to finance easily the deficit without any negative impact on interest rates. But eventually the starting of the adjustment pro­ cess, whose result will be the disappearance o f the surplus in do­ mestic absorption over domestic output, thus eliminating net im­ ports, brings about a deterioration in the economic situation in the country which is adjusting. The problem then arises to guarantee at the meantime internal equilibrium while achieving the process that must reestablish conditions o f equilibrium in the balance of payments.

5. The internal adjustment-mechanisms.

In an economy hitted by an exogenous shock, the first mecha­ nism that can adjust the regional economy is the usual keynesian multiplier effect. I f the deficit has been brought about by a reduc­ tion in regional exports — in a world where wages and prices are sticky in the short-run — , the amount o f income shrinking neces­ sary to reach the external equilibrium in the balance o f payments will depend on the value o f the marginal propensity to import. If there is as usual higher import propensity for a small region vis-à- vis a large one, a smaller income change will be sufficient to bal­ ance the reduction o f exports, while large, self-sufficient regions would have to support massive shift in income to maintain external equilibrium in the absence o f relative price effects.

If, as assumed, wages are fixed, the demand for labour will change with the level o f output, and such fluctuations in the de­ mand for labour can be met either through a variation in employ­ ment or a migration towards other regions where demand for labour is increasing. Even if external financing has covered the balance o f payments deficit, there is a loss in output and conse­ quently a diminution in employment in the deficit country, with a welfare loss.

the regions where demand for labour is increasing are limited, the fluctuations in labour markets could be reduced, restoring new equilibrium conditions, by variations in the relative wage rates in each region, and thus in relative prices, favouring a demand shift in favour of the deficit country through the terms of trade effect. This means that stickiness of wages and prices, assumed in the short-run, is replaced by a limited flexibility in the long-run that helps to restore internal equilibrium.

The effectiveness of this adjustment-mechanism — lower labour costs as a contribution to the relative price decrease needed to restore the competitive position of a region and to bring about employment back to equilibrium — depends on the response of rel­ ative labour costs to differences in regional unemployment perfor­ mances. An analysis taking into account different elements existing in the EMU perspective can reach the conclusion that the effects of EMU on wage flexibility are largely dependent, either directly or indirectly, on changes in the behavour of economic agents deter­ mining and influencing the wage determination process (Commis­ sion, 1990). Some factors — diminution o f inflationary expectations in a fixed-exchange rates setting, difficulty for a type of fiscal poli­ cy bailing-out a region lacking wage adjustments and increased competition in product markets — may result in an increased re­ sponsiveness o f wages to unemployment. The counter argument regards social cohesion that might put a limit on too large devia­ tions in income levels within EMU. This means practically that wage flexibility will be limited if a wage-demonstration effect is working effectively, for instance through the establishment o f an all-European wage-determination policy. In any case, conditional on such factors, wage flexibility may be able to support an effective adjustment process in the regional balance of payments and in out­ put and employment.

It must be considered also that wage flexibility can bring about further depressive effects on original economy already hitted by the exogenous shock, through a reduction in the demand for not- tradable goods generated by the shrinking of disposable income (Begg, 1989). In this case the external adjustment is strenghtened, but there is an additional cost for the deficit country, represented by a further deterioration o f the internal equilibrium.

evi-dence on regional mobility in existing Federations and even inside Member States does not suggest that it would be large enough to bear a significant proportion of the adjustment process. And this conclusion is indipendent from any value judgements on the role of mobility itself, and from the consideration of the linguistic and cul­ tural barriers remaining in EMU also after the achievement of the Internal Market.

In conclusion, in the case o f an adverse shock on a regional economy — e.g. a shock to external demand or international com­ petitiveness which brings the current account out o f equilibrium __ there is an initial output loss without devaluation that is higher than with devaluation. Devaluation is able to cushion the size of the im­ mediate output loss in the first few years through its direct effect on real exchange rates. But without devaluation the return to equi­ librium output is faster than with devaluation where there is a de­ lay in real-wage adjustment. The soft landing with devaluation is balanced by the fact that devaluation results in a higher inflation rate. “ A devaluation, therefore, has the benefit o f not causing as much initial output loss as without devaluation, but the return to equilibrium takes more time and is accompained by higher infla­ tion” (Commission, 1990).

There verse is naturally true in a Monetary Union with a sin­ gle currency: the output loss is larger, but the inflation rate is lower and less time is needed to come back to equilibrium. The point is to examine the instrument that Member States can rely on, having given up the exchange-rate control, to face the output loss and the following unemployment with the goal of maintaining social cohe­ sion within the Internal Market without impairing the process to­ wards balance o f payments equilibrium.

6. The role o f budgetary policy at the regional level.

nal disequilibrium. Expenditure is increased or taxes are reduced, and the temporary budgetary deficit can be balanced by a future increase in the level of taxation, when equilibrium is newly achieved.

The stabilisation policy can be carried out at the regional lev­ el, since fiscal policy effectiveness is relevant in a world of capital mobility with fixed exchange rates, as is the case for Monetary Union. According to the usual Mundell-Fleming argument, in a world of flexible exchange rates an increase in public spending will bring about an appreciation of the currency through an incresed in­ terest rate, thus curbing the demand for regional output. In EMU this negative effect disappears, but the increase in interest rates spill over to other Member States, creating problems of coordina­ tion. In addition, inside EMU there are further constraints on re­ gional budgetary policy deriving from the need for fiscal discipline and coordination o f economic policy. The trade-off between real wage adjustment and budgetary policy as an alternative to devalu­ ation shows (Commission, 1990) that wage moderation has the most negative impact on real income loss. A reduction o f employers so­ cial security contributions reduces the real income loss strongly, but has a budgetary cost. The increase is government expenditure results in even slightly less real income loss, but comes at a greater budgetary cost.

Evidently, the risk exists through an active fiscal policy at the regional level o f delaying the long-run adjustment, since the be­ haviour of economic agents can be biased by the fact that they know the government will intervene to dampen income fluctuations.

A permanent shock to the same type requires inevitably that factor market adjust through changes in wages and prices. In this case budgetary policy at the regional level cannot be utilised since a permanent increase in expenditure or a permanent tax cut can af­ fect dangerously the amount o f government debt. In any case, it can help only temporarily, but could cause the factor adjustment to be sluggish.

fis-cal expansion would thus be lost — even more if one accepts the Ricardian hypothesis that future taxes are immediately incorporat­ ed in the consumers’ budget constraint.

Eventually, a system of fixed exchange rates is able to protect a region from the effects o f a monetary shock (Hall-Taylor, 1986; Dornbusch, 1980). An active fiscal policy at the regional level can avoid a negative impact on the region of temporary real shocks. But, if a permanent real shock is hitting the regional economic sys­ tem, its effects can be balanced only with the support of a federal fiscal authority.

7. The role o f budgetary policy at the central level.

In a Monetary Union, with a central fiscal system, another ef­ fective adjustment factor exists. “ A region which forms part of a political community, with a common scale of public services and a common basis o f taxation, automatically gets ‘aid’ whenever its trading relations with the rest o f the country deteriorate. There is an important built-in fiscal stabiliser which arrests the operation of the export-multiplier: since taxes paid to the Central Government vary with the level of local incomes and expenditure, whilst public expenditures do not (indeed they may vary in an offsetting direc­ tion through public works, unemployment benefit, etc.), any dete­ rioration in the export-import balance tends to be retarded (and ul­ timately arrested) by the change in the region’s fiscal balance — in the relation between what it contributes to the central Exchequer and what it receives from it (...). This seems to me the main reason why there appears to be no counterpart to the ‘balance o f pay­ ments problem’ on the regional level” (Kaldor, 1970).

A model of this kind has been studied by Sachs and Sala-i- Martin with regard to the United States. They assume that if a real demand shock hits a region in the US and the labour mobility is limited, the real exchange rate must increase in the deficit region paralleling the diminution in the demand for its products, and this result can be achieved through a slump in production. But in a Federal State with a Monetary Union the magnitude of the needed recession is reduced since the shocks are partly compensated through the functioning of a common federal fiscal authority. “ Af­ ter a permanent taste shock like the one proposed by Mundell, we can maintain full employment without changing the nominal ex­ change rate or the nominal prices if we tax region B sufficiently and give the proceeds to region A (or reduce tax in A). This will, under some reasonable assumptions, increase demand for good a and reduce demand for b at the initial relative prices. More gener­ ally, the tax and transfer policy will mitigate, but not completely eliminate, the regional fluctuations” (Sachs-Sala-i-Martin, 1989).

If this authority exists and taxes vary directly with the change in income, while transfers vary in the opposite direction, the change in income dY following an exogenous shock can be assumed to be

dY = dllid - /.<■)

where dH is the exogenous shock on demand and A = 1 - PJTR/Y) - PJTXIY)

ptr = - (dTRITR) / (dYIY)

/3te = (dTXITX) I (dYIY).

If it is assumed that A < 1, “ the multiplier on changes in H is smaller for smaller values o f A, i.e. for larger values of /3te and filr. Pro-cyclical taxes and counter-cyclical transfers stabilise the econo­ my in the face of external shocks” (Sachs-Sala-i-Martin, 1989).

therefore, absorbes somewhere between 35% and 40% of the in­ terregional cyclical income imbalances” (Sachs-Sala-i-Martin, 1989). If a federal fiscal authority exists, then automatically a large absorption of exogenous shocks is realised. The total amount o f this absorption depends substantially from three factors: a) the global size of the budget, since the value of A diminishes — and so the val­ ue o f the multiplier with an increase of the amount o f transfers and taxes on GDP (respectively, TR/Y and TX/Y); b) the provi­ sion o f taxes that vary pro-cyclically, that is diminish with a reduc­ tion in income and increase with the growth o f income, since taxes paid to the central fiscal authority can be considered like imports;

c) the existence o f expenditures that change anti-cyclically, espe­

cially transfers in the field o f social security, that rise when income diminishes and decrease when income grows, since transfers that one region receives from the central fiscal authority can be consid­ ered like exports.

The results achieved by Sachs and Sala-i-Martin in their em­ pirical work are challenged by Von Hagen (1991) that estimates in 10 cents the automatic stabilisation effect through the fiscal system m the case of a GDP loss equal to 1 dollar. The Von Hagen’s con­ clusion is consequently that “ the United States provide an example o f a Monetary Union working without significant mechanisms to balance regional shocks” . Anyway, given the uncertainty o f the re­ al effectiveness o f these automatic stabilisers and the limited size of the Community budget, it seems still more necessary to enlarge the package of instruments that regional stabilisation policy can exploit.

In this perspective, the suggestion already advanced in the MacDougall Report (1977) o f a “ Conjunctural Convergence Facili­ ty to extend grant finance to economically weak Member States in particular difficult economic situation” should be usefully resumed, and further developed in the proposal, described in the following pages, o f a ‘ Special Financial Support Scheme” .

8. Built-in stabilisers on the revenue side.

Fifteen years ago the MacDougall Report (1977), adopting a similar analytical point o f view, strongly supported the idea o f in­ creasing the size o f the Community budget, up to at least 2-2.5% of European GDP.

From this Report it emerges clearly that, in the current situa­ tion of the Community, the task of promoting an effective stabilisa­ tion o f the all-European economy cannot be carried out effectively since the size of the EC budget is too limited to have a significant impact on macroeconomic variables. But a priority task for a Com­ munity driving towards an Economic and Monetary Union is also redressing imbalances in the level of income between the different Member States. This is necessary for the purpose of obtaining po­ litical consensus in order to achieve other objectives, such as the completion of the Internal Market. And the Single Act correctly re­ iterates the importance of economic and social cohesion.

A first order condition to get these targets is surely to increase the size of the Community budget, and mainly to raise spending for structural policies. In the actual political situation of the Communi­ ty it seems realistic to assume that a doubling of the present size of the budget — equivalent to the size indicated as a target in the MacDougall Report for the pre-federal phase — is the maximum level that could be achieved.

In this hypothesis it is necessary to evaluate the new own re­ sources that could be utilised to finance the increased Community expenditures, taking into account only the types of taxes generating positive and sufficiently large redistributive and stabilisation ef­ fects. As a matter of fact some built-in stabilisers should be intro­ duced also on the revenue side, if one wants to assign to the EC budget at least partially the role that Sachs and Sala-i-Martin at­ tributes to US Federal budget.

the Community budget that the poor ones. The Member States would then levy on their citizens the overall Community surtax on the basis o f their respective income tax structures.

The amount of the tax burden for a country i is defined in this way. I f ta is the proportional Community tax rate (the share of the respective GDP each country has to pay to the Community budget) and Y the income (YE is the Community overall income), then

T = t Vx °a 1 i with

te j j f c , - ta ye h i

and, since the tax is proportional to GDP, for each Member State i

K = Tt!TE -- YJYe m

I f T{* is the share o f the total tax burden TE due by each coun­ try i after the correction by a progressivity coefficient kh then

ti = W M = kt TJ Mh Tx

1=1

where the progressivity coefficient, being N the amount o f popula­ tion, is

K

(YJNM YIN)

and the new effective tax rate, with

^ = tiTE = t*ai Yi ' [3]

is, taking into account [1], [2] and [3]

i ai — T*/Yi = Tgj/Yi = t{ (ta Y^/Yi = ta (tilhi)

where the ratio between the progressive and the proportional rate is

t a j t - a = U l h E

Once the tax burden for a country i is defined, the second step is the distribution of the tax burden within each country. In accor­ dance with the conclusions of the Tresch’s analysis, which states that it is up to the central level of government to redistribute in­ come among the regions, while the lower levels of government should be responsible for intra-personal redistribution (Tresch, 1981; Petretto, 1987; Rimini, 1991), each Member State would make provision for the Community surtax to be distributed among its own citizens in accordance with its existing progressive income tax structure (Majocchf, 1987).

Essentially, the citizens of the various Member States would have to pay a surtax earmarked for the financing of the Communi­ ty budget. The rate of this surtax to be paid by each citizen in country i is determined in this way. If

T

and the revenue of the personal income tax in country i is

Ri

Yi

then

J j | (t*

The rate o f the surtax to be paid by each taxpayer in country i to contribute to the financing of the Community budget would therefore be t*Jri.

Naturally, the application of this surtax does not change in any way the form of the tax function for each country, and hence the degree of progressivity defined on the basis of the social welfare function supporting the progressive income tax legislation adopted by each Member State.

an automatic stabiliser, its impact depending, besides the total amount o f taxation, also from some technical features of the tax, able to reduce the time lags between change in income and change in taxation.

Clearly, this proposal, which obviously does not presuppose any prior harmonisation o f national income taxes, is only feasible in the context o f a Community deeply reformed, where the principles of solidarity are more firmly entrenched and the powers o f political control over the size and management o f the budget are clearly de­ fined, attributing a major role to the European Parliament.

A second type of own resource that could envisaged in this context is the so called carbon tax. The Commission has recently presented a Communication to the Council defining a strategy to limit C0,2 emissions and to improve energy efficiency, so that the target — fixed by the Joint Energy-Environment Council of Octo­ ber 29, 1990 — could be achieved of stabilising carbon dioxide emissions in the year 2000 at the level o f the year 1990. A first pos­ itive decision has been taken by the Energy-Environment Council o f December 13, 1991, that has charged the Commission to present formal proposals to the Council before May 1992.

In the Communication one o f the measures included in the package suggested by the Commission is a new tax on all the fossil fuels, nuclear electricity and electric power generated by large hy­ dro-plants. The tax should be established by half according to the energy content and by the other half according to the carbon con­ tent. The rate could be equal to $3/barrel o f oil at the beginning in January 1993 and could be increased by $1 each year up to $10 in the year 2000. The carbon tax, together with the other regulatory, fiscal and voluntary measures and if complemented by adequate national programmes, could be sufficient to guarantee the achieve­ ment of the stabilisation target.

ap-pear positive, since energy consumption — and consequently car­ bon dioxide emissions — increases with an increasing level of income. The possible negative effects on the personal distribution of in­ come must further be considered, since energy expenditure repre­ sents a larger share in the budget of the poorest families vis-à-vis the richest ones. But these negative redistribution effects (Smith, 1991) could be balanced efficiently through the neutralisation of the revenue deriving from the tax, and mainly through a reduction of the taxes that put a burden (the deadweight loss) on the incomes deriving from labour and capital. In this way the fiscal system will evolve towards a structure more environment-friendly and in the same time less distorting and more favourable to the employment and to the formation of savings, as it has been already the case with the Swedish fiscal reform (Rimini, 1992).

9. EC fiscal policy in practice: strategies and instruments.

On the basis of this theoretical background, it is possible to turn now in the second part of this paper to a more specific insight to policy instruments to support weaker national economies within the EMU. Since fifteen years, several proposals have been for­ warded both from the official EC documents and from academic contributions. Two main issues stand at the background of this de­ bate. First, traditional fiscal stabilisation policies, based both on discretionary interventions and on automatic flexibility mecha­ nisms, have been criticized from different point of views. Budget policy priorities and objectives have changed considerably over the last decade, showing a remarkable bias in favour o f the efficiency aspects o f fiscal measures. In other words greater emphasis has been given to mid-term targets and to supply-side strategies as re­ gards taxation, expenditure and public debt (Padoa Schioppa, 1987). These theoretical and political views could not avoid to af­ fect the question whether a stabilisation policy of ortodox keyne- sian type at the Community level is needed or, on the contrary, whether what seems necessary, in the case of a country asymmet­ ric shock, are policy measures of redistributive kind perhaps asso­ ciated with some, more or less severe, efficiency constraints.

structure. Nonetheless in the early stages of EMU, because o f thé limited size o f the Community budget and of its allocative oriented structure, a traditional stabilisation fiscal policy at Community lev­ el seems difficult to be attainable. The special support scheme en­ visaged in this paper could be considered a “ necessary - possible” ' Community intervention, even if the authors o f this paper are fully aware that from a less gradual and less pragmatic point o f view it could easily be charged o f being a “ too late” or a “ too little” kind

of policy. \\

10. Stabilisation policy in the MacDougall Report.

The major role played by public finance, in cushioning short­ term and cyclical fluctuations in existing economic unions has been underlined in the MacDougall Report (1977). One-half to two- thirds (what seems to be rather exagerated according to recent esti­ mates) o f a short-term loss in primary income in a region due to a fall in its external sales might be automatically offset through lower payments of taxes and social insurance contributions to the central government, and higher receipts o f unemployment and other bene­ fits. Xf only because the European Community budget was so rela­ tively very small, there was no such mechanism in operation on any significant scale as between Member States, and this was an important reason why in such circumstances Monetary Union was considered impraticable.

In fact economic and monetary integration leads to the pro­ gressive loss by Member States of their ability to control trade, ex­ changes rates, and monetary and fiscal policies, although the loss of control over fiscal policy is only partial in a federal system. The more open the economies of Member States are, the less effective national instruments o f economic policy become. The presumed remedy is to pursue the targets o f economic policy at a higher level of government encompassing major spillover or leakage effects, ei­ ther through coordination or direct fiscal action.

charac-teristic of such federation would be that the supply of social and welfare services would nearly all remain at the national level (Ma- jocchi, 1987). Such an arrangement could provide sufficient geo­

graphical equalisation of productivity, standards of living and cush­ ioning o f temporary fluctuations to support a Monetary Union. A federation with these special characteristics would thus greatly fa­ cilitate the creation of a Monetary Union. The MacDougall Report, however, tended to concentrate also on what it called “ pre-federal integration” with a public expenditure at Community level amount­ ing around 2-2.5% o f GDP, with a limited public sector activity, falling short, however, of Monetary Union.

In considering which expenditure functions might be carried out to greater extent at Community level two major criteria were envisaged. First, the case for Community involvement in achieving economies of scale (external relations and trade; energy, advanced technology, industrial and technical standards). Second, the case for Community involvement in spillover events within the Commu­ nity. This would imply a Community action in the areas of struc­ tural and cyclical policies (regional, manpower, unemployment) to ensure so far as possible that the benefits of closer integration are seen to accrue to all and that there is growing convergence — or at least not widening divergence — in the economic performance and fortunes of Member States.

Among the main directions in which the Community’s expendi­ ture might be changed, even in the “ pre-federal integration” phase, the MacDougall Report suggested a need for substantial ex­ penditure at Community level in the area of structural, cyclical, employment, and regional policies in order to reduce inter-regional differences in capital endowment and productivity. The “ menu” included some items, which enter fully in the ortodox fiscal policy instruments, namely:

Second, a system of cyclical grants to local and regional gov­ ernments, that would depend upon regional economic conditions related to regional unemployment and trend indicators (e.g. region­ al GDP per capita and regional unemployment trends).

Third, a conjunctural convergence facility, aimed at prevent­ ing acute cyclical problems for weak Member States leading to in­ creasing economic divergences, taking into account the extent to which the Member State was or was not prospering in the course of trade and competition in the Community and, according to the cir­ cumstances, subject to negotiated economic policy and perfor­ mance conditions.

Where grants are involved, they should be made as cost-effec­ tive as possible. This could involve the use o f specific purpose matching grants, having variable matching ratios, and possibly the attachment of macroeconomic performance conditions to some of the grants, to increase the likelihood that they would increase eco­ nomic convergence.

To summarize, the MacDougall Report considered whether the Community budget could or should be used as an instrument for helping to stabilise short-term and cyclical fluctuations in econ­ omic activity. The Report concluded that this would be very limit­ ed in the “ pre-federal integration” period. With a budget of the or­ der of 2-2.5% o f GDP, the budget balance would have to swing by enormous percentage fractions o f this budget to have a perceptible macroeconomic effect on activity in the Community as a whole. In any case budgetary deficits and surpluses would have only limited effects unless they were linked with a coordinated Community monetary policy. Nonethless the Report would favour:

a) a limited power o f borrowing (and repayment) to prevent

the need for a Communitary budgetary policy that actually accen­ tuated cyclical movements, by forcing tax increases or expenditure cuts in recession years and viceversa, and to “ lean in the right di­ rection so far as the general thrust o f coordinated national con­ junctural policies is concerned;

b) specific counter-cyclical policies, such as those mentioned

above, i.e. the Unemployment Fund; cyclical grants to local and regional governments; a “ conjunctural convergence facility” .

11. The debate on stabilisation policy following the MacDougall

Report.

Few yers later the Study Group on the Economic Effects of Budget and Financial Transfers in the Community (Forte Chair­ man, 1979) developed a global approach to convergence within the Community. The Group felt necessary to submit to a critical evalu­ ation the items suggested in the MacDougall Report. As to the is­ sues more directly related to the stabilisation policy at the Commu­ nity level, the Group-considered that the Community Unemploy­ ment Fund would act as a significant complement to a Community job creation programme. Apart from its symbolic and psycological value as a means o f fostering a European awareness, such a system would have the important merit of affording an opportunity to har­ monise the fragmented national systems with their different levels of benefit and financing arrangements. Like the national systems, a partial Community unemployment benefits system would have the advantage of providing an automatic cyclical equalisation structure.

According to the Forte Group the MacDougall proposal that cyclical grants be made to local or regional governments would ap­ pear to be premature in the pre-federal stage. It would cut deeply into the Member States’ administrative structures and budgetary systems and would have no political basis. If the grants were made as general purpose grants, they would in many cases fail to be con­ verted into investment, because of lack of clearly defined planning responsibilities. If they were made as specific purpose grants, there would be a bias in favour of regions in countries where the relevant tier had the power and duty to draw up medium-term in­ vestment programmes. It would therefore be necessary for such an arrangement to be prepared as part of a partial harmonisation of administrative structures that should include a gradual transfer of regional policy responsibilities to the Community.

mean that programmes geared to evening out cyclical swings could not and should not have regional points of emphasis.

It would therefore be important to take steps to improve also the set of economic policy instruments available at Community lev­ el. According to the Forte Group, since — given the close inter- dipendence o f international trade — inter-state coordination en­ hances appreciably the efficiency of national measures, the Con- junctural Convergence Facility would clearly be a major step for­ ward on the road to integration. In periods o f generally depressed economic conditions, funds from this facility would normally have to be available to all governments, but there should be a bias in favour o f those countries faced with sharpest recessionary trends. It would clearly be too great a burden on the Community budget if a sufficiently large conjunctural convergence facility were to be made available exclusively or predominantly in the form o f grants. It is only conceivable as a credit facility. The Community’s powers to issue its own loans should be increased accordingly. Two condi­ tions should be satisfied. First, crowding-out effects should be avoided. Secondly, institutional arrangements should ensure that the recipient governments did in fact spend the funds in a way which affected demand. Finally, using the Community funds for the purpose of counter-cyclical economic policy would require an ability on the part o f the Community authorities to act quickly.

The key importance o f a ’ stabilisation policy at the Community level has been re-emphasised recently. The Report of the Group chaired by Padoa Schioppa (1987) holds that macroeconomic stabil­ isation has long been regarded as an essential function of national economic policy. Nevertheless, as markets open up and interna­ tional interdependence grows, macroeconomic policies are vulnera­ ble to the increasing cross-border effects o f national policies and situations. With the additional factor o f the liberalisation of the cap­ ital market, the international repercussions o f internal policies be­ come extremely significant. Stabilisation is thus naturally shifted towards higher levels of government.