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Causes and effects of government debt and possible ways to the long-term
solution
Zdeněk Pikhart
Abstract: Article discusses in theoretical way causes and effects of government debt and the
most effective ways to solve it. Firstly are identified causes of unsustainably high government
debt stemming from endogenous and exogenous reasons, including discussion of negative
impacts on long-term deficits risk premium, private investment and economic growth. Next
chapter is devoted to proposals of possible solutions of the government debt consequences,
which stands on two pillars - creating the conditions for long-term economic growth, which
also involve the elimination of the causes of previous imbalances and the actual debt, which
outlines ways on both the revenue and the expenditure side, including possible amortization
of a debt or its repurchase by central bank.
Keywords: business cycle, government debt, stabilization policy, fiscal imbalances
JEL Classification: G01, H21, H62
The Ontological Reflection of the Monetary Theories
Jiří Štekláč
Abstract: The aim of the thesis is to create money market model throughout ontological
reflection in order to reach the more realistic assumptions than current economic theories may
offer. The study concludes that the least realistic is vertical model which is unfortunately the
most common in mainstream economic textbooks. The author has some reservations even
about the more realistic Post Keynesian models as well and therefore the alternative realistic
model which assumes endogenous money supply and exogenous interest rate is created. In
this model, money supply is given by credit supply and credit demand. Central banks control
the short-term interest rate and cannot control monetary base because these two goals are in
direct conflict. Under the certain conditions, central bank is able to influence money supply
indirectly. Liquidity market (reserve market) and money market must be strictly separated.
Keywords: money supply and credit, central bank, monetary policy, interest rate, banks and
other depository institutions
JEL Classification: E51, E52, E58, E43, G21
Prologue
From time to time we may encounter some assumptions within mainstream economic theory
from which the consequences are deductively correctly derived. Nonetheless, these theories
fail in the face of reality because contained assumptions are not realistic at all. The
representative example is the monetary theory.
The important factor is applied methodology. Milton Friedman contributes to the fact that the
positivism was one of the domain approaches in economics during the 20th century.
According to his theory, there is no way how to test assumptions directly with reality. The
only clue of correctness is the predictive ability of given theory (Friedman, 1966). This
methodological approach, however, is seemed to be fatally wrong within monetary theory.
Friedman’s “good predictive capability” that the central bank is able to manage money supply
throughout monetary base seemed to be correct for many decades until the paths of money
supply and monetary base definitely diverged. Until the divergence has occurred the causality
between money supply and monetary base could not be obvious from positive empirical
testing.
Thus, in order to reach realistic monetary theory it is much better to use Post Keynesian
methodological realism which seeks for the total explanation of causal mechanism rather than
for the success of prediction. The most important aspect of this methodology is that each
research should start with an ontological reflection instead of unrealistic assumptions. This
reflection was missing for a decades in economy.
The aim of this thesis is to execute such ontological reflection and perform the much more
realistic assumptions of money market.
The first part briefly introduces current monetary theories via excursion of historical
development from older theories about money to its current essence – i.e. debt and
endogenous.
The second part presents current theories of money market mechanism and money demand
and supply explanation. The cardinal models are exogenous-vertical model (so typical for
mainstream economy), endogenous-horizontal model and endogenous-structural model.
The third part is devoted to the inherent ontological reflection of monetary theory. The author
suggests endogenous-realistic model of money market and liquidity market mechanism on the
basis of practician’s interpretation, accounting principles and own experience from banking
sector. In the next step, endogenous-realistic model is confronted with previous models.
Author performs the empirical testing of endogenous-realistic model in fourth part.
Some notes on natural interest rate are to be found in fifth part.
The study concludes that exogenous-vertical model (unfortunately the most favorite in
textbooks) is the most far from reality. Author has some reservations about horizontal and
structural models which are, however, much closer to reality. The fundamental basics of the
endogenous-realistic model are summarized in epilogue.
1. From commodity money to debt money
„Each and every time a bank makes a loan, new bank credit is created – new deposits – brand
new money.“
- Graham F. Towers Money as the medium of exchange was the undoubtedly exogenous variable at the beginning
of its use. In his famous essay, Carl Menger wrote: “Money has not been generated by law. In
its origin it is a social, and not a state institution. Sanction by the authority of the state is a
notion alien to it” (Menger, 1892, p. 55). He defines money as a special commodity which
was chosen by market. It was especially precious metals – their quantity was given
exogenously by quantity of mines. In hand to hand with creation of modern banking system
the idea of banks as mere financial intermediaries has been developed. Let’s remember Edwin
Cannan and his famous cloakroom theory: “The most abandoned cloakroom attendant cannot
lend out more umbrellas or bicycles than have been entrusted to him, and the most reckless
banker cannot lend out more money than he has of his own plus what he has of other
people's” (Cannan, 1921, p. 30).
This theory was, nonetheless, abandoned by neoclassical economists themselves. The banks
evidently lent out more than they own. The frictional reserve system was developed.
Nevertheless, neoclassical economists were able to defend their thesis about neutrality of
money and logical priority “savings before loans” for a long time. In this view, the quantity of
money is managed by central monetary authority via monetary base. This imagination was
supported by monetarists as well. M. Friedman wrote: “I have observed that noneconomists
find it almost impossible to believe that twelve people out of nineteen—none of whom have
been elected by the public—sitting around a table in a magnificent Greek temple on
Constitution Avenue in Washington have the awesome legal power to double or to halve the
total quantity of money in the country” (Friedman, 1992, p. 24). So, in the Friedman’s opinion
FED has power to change monetary base which causes the proportional shift in money supply
throughout multiplier effect. When we get back deep to history we may find the similar
statements in Irving Fisher’s work. He, however, had some reservations about FED’s control
of the money supply in his book “100 % Money”. As a consequence, Fisher suggested 100 %
minimum reserve requirements for the banks.
Figure 1 | Fisher’s pyramid
Source: Fisher, 1997
Fisher’s imagination of money supply is shown in Figure 1. “One billion cash supporting
thirty billion check-ing deposits. This is top-heavy and unstable so that the check-book money
can shrink to 3 billion (or theoretically even to 1) and then expand again. Under the 100%
system the base would be as broad as the top.“ (Fisher, 1997)
Such a theory opens a door to the “floating money multiplier”. We may find such an idea in
works of the “Austrian” economists. This school of economic thought calls credit expansion
as the issue of “fiduciary media” – i.e. fiat money (Mises, 1998). In fact, monetary base does
not set the money supply but put only certain limit on credit expansion in this theory.
Therefore the money multiplier begins to lose its meaning.
We can find the most realistic monetary theory in work of J. A. Schumpeter 1, Knut Wicksell
and Post Keynesians. They have completely abandoned the concept of monetary base, money
multiplier and logical priority “deposits create loans”. Schumpeter was well aware about the
fact that loans create deposits. “It is much more realistic to say that the banks ‘create credit,’
that is, that they create deposits in their act of lending, than to say that they lend the deposits
that have been entrusted to them. And the reason for insisting on this is that depositors should
not be invested with the insignia of a role which they do not play. The theory to which
economists clung so tenaciously makes them out to be savers when they neither save nor
intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not
have.” (Schumpeter, 2006, p. 1080) Schumpeter strictly disagrees with the concept of banks
as financial intermediaries. In order to start production cycle it is necessary to grant a loan,
not to collect deposits. In Schumpeter’s view, the natural “neoclassical” causality is reversed
– i.e. investments make savings.
This view is shared by Post Keynesians. Paul Davidson criticizes Friedman’s monetary
conception: “From a Keynesian viewpoint, money does not enter the system like manna from
heaven, or dropped from the sky via a helicopter, or from the application of additional
resources to the production of the money commodity” (Davidson, 1972, p. 877) Davidson
expresses his conviction that money is not supplied “outside” into the circulation by central
bank. However, it is necessary to say that even Post Keynesian economists admit the central
bank’s influence on money supply. There are a plenty of heterogeneous approaches. For
instance, Robert Pollin divides Post Keynesians on horizontalists (central bank plays less
important role) and structuralists (central bank plays more important role). (Pollin, 1991)
Franko-italian circulacionistic school (school of monetary circulation) is the most skeptical to
the role of central bank. “The main conclusion of the circuit approach in terms of the
endogenous nature of money is that money is endogenous because how it enters the economy,
i.e., through the normal operations of a capitalist economy of production, due to the credit
needs of firms. Money is not endogenous because of the role of central banks or as a result of
household portfolio decisions. These two last versions of endogenous money are more akin to
Post Keynesian theory.” (Rochon, 1999, p. 16)
1
It is necessary to say that Schumpeter was one of the realistic economists and practician. He was minister of
finance and the president of Biederman Bank which unfortunately collapsed after four years of his presidency.
Let’s interpret the above stated way from “exogenous” to endogenous money in figure 2.
Figure 2 | From exogenous to endogenous money
Exogenous money
Endogenous money
Commodity
Money
Banks as
intermidiaries
Fixed money multiplier
Float money
multiplier
Endogenous money
Early Austrian
School
Neoclassicals
Cambridge School, American
Marginalists, Chicago School
Austrian School
Other Economists, Post Keynesians,
Circulacionists
Carl Menger
Edwin Cannan
Alfred Marshall,
Irwing Fischer,
Milton Friedman
Ludwing von Mises,
F. A. Hayek
Knut Wicksell, J. A. Schumpeter,
J. M. Keynes, N. Kaldor, P. Davidson,
A. Graziani, L. Rochon
Neutral money
Monetary theory of production
Source: own
2. Money and the role of central bank – current theoretical approaches
„The job of the Central Bank is to worry.“
- Alice Rivlin In this part I would like to present cardinal money market theories: exogenous-vertical model,
endogenous-horizontal model and endogenous-structural model. We focus on the role of
central bank.
Mainstream exogenous theory is well represented by the basic economic textbooks such as
Gregory Mankiw’s macroeconomics. He defines money supply in this way: “The Fed
influences the money supply through open-market operations, reserve requirements, and the
discount rate. Open-market operations are the purchases and sales of government bonds by
the Fed. If the Fed buys government bonds, the dollars it pays for the bonds increase the
monetary base and, therefore, the money supply.” (Mankiw, 2001, p. 80) And so “The supply
curve for real money balances is vertical because the supply does not depend on the interest
rate.” (Mankiw, 2001, p. 272) We can observe the mainstream interpretation of money market
in figure 3.
Figure 3 | Money market in vertical approach
Interest
rate (i)
Money
Supply1
Money
Supply2
i1
i2
Money
Demand
M/P1
M/P2
Source: Mankiw, 2001
Real Money
Balances (M/P)
In general, if the central bank increases monetary base than the increase in money supply
through the multiplication process occurs and short-term interest rate goes down.2 The
quantity of money is given exogenously by central monetary authority.
This approach is in direct contradiction with Post Keynesian’s endogenous money market
conception. The Radcliffe report has contributed to the formation of modern endogenous
theory. Gurley interprets one of its important conclusions in this way: “The money supply has
been largely uncontrolled during the postwar period; neither the banks' cash ratio nor their
liquidity ratio has placed an effective upper limit on monetary growth” (Gurley, 1960, p. 673)
Paul Davidson admits some possibilities of central bank’s money supply control. He asks
Friedman for explanation of some of his attitudes: “A fruitful further exchange of ideas will be
enhanced, if, in his rejoinder, Friedman devotes some space to indicating why his framework,
which assumes a completely exogenous money supply is preferable to a Keynesian analysis
which, when the finance motive and elasticity properties of money are included, permits
money-supply changes to be endogenous under certain circumstances and exogenous under
others.” (Davidson, 1972, p. 880) It is interesting that Lord Keynes himself based his theory
on exogenous essence of money in his masterpiece General Theory (Keynes, 2006) whereas
his theory in Treatise on Money (Keynes, 1930) was based on endogenous money supply.3
In general, Post Keynesian’s theory of money is, unfortunately, neglected in economic
textbooks. The reason may be its heterodoxy (Lopušník, 2010, p. 1). The main approaches
within Post Keynesian endogenous theory are horizontalism and structuralism. In horizontal
approach, commercial banks are the price setters and quantity takers (Sojka, 2002) Nikolas
Kaldor was one of the main proponent of this approach. Rousseas (1992) constitutes Kaldor’s
imagination of money supply as horizontal curve and money demand as downward-sloping
curve as it is shown in figure 4.
Figure 4 | Money market in pure horizontal approach
Interest
rate (i)
Money
Supply1
Money
Supply2
i1
i2
M1
2
M2
Money
Demand
Money in circulation (M)
It is important to note that the most of macroeconomics is derived from this model (with Keynesian cross).
Especially IS-LM model and aggregate demand function.
3
Keynes himself never used the term “endogenous money”. “Keynes did not clearly spell out the proper
sequence of events leading to the creation of money. He never really argued in terms of reversed causalities
between deposits and loans.” (Rochon, 1999, p. 4)
In Kaldor’s opinion, central bank can influence money supply via shifts in short-term interest
rate: “Of course, within limits, the ultimate monetary authority can and does exercise control
over the volume of borrowing, because it can control interest rates, particularly at the short
end, through open market operations, far more powerfully than other operators.” (Kaldor,
1970, p. 7) Thus, in opposite to the vertical approach, the interest rate is exogenously given by
monetary authority.
In advanced form, both the horizontalism as well as structuralism distinguish credit market
and reserve market within money market. “The accommodative [horizontal] position …
maintains that no effective quantity constraints exist on bank reserves. Individual banks can
always obtain additional reserves, at the market price, so long as lender confidence in their
solvency (ability to repay) is preserved. (Moore, 1991, p. 404) In contrast, “The structural
position … makes less of a break with the mainstream view that central banks control
monetary aggregates exogenously by varying the supply of reserves. It maintains that even
thought central banks are able to restrict the supply of bank reserves quantitatively, this will
be more or less, but not perfectly, offset through innovative bank liability management
practices.” (Moore, 1991, p. 404)
Figure 5 | Credit Market and Reserve Market in Post Keynesian Approach
Interest rates (i, r)
Ls
r1
Rs
Fixed
mark-up
r0
i1
i0
R1
Bank reserves (r)
R0
L0
L1
Bank loans (l)
45°
D0
D1
DR
LD
Bank deposits (d)
Source: Fontana, 2004, own
Guiseppe Fontana accents the common denominators of both approaches. One of them is an
idea that “loans make deposits” and “deposits make reserves”. Moreover, he endeavors to
constructive interpretation of the debate. The individual controversial arguments are shown as
issues that can “be explained rigorously once a single-period–continuation framework is
adopted.” (Fontana, 2004, p. 367)
Figure 5 shows the Fontana’s Post Keynesian money market interpretation. We move on in
relevant causal order (from right upper quadrant) so that we can explain the graph correctly.
Money supply is given by intersect of credit supply (commercial banks) and credit demand
(non-bank subjects as firms, households, government). The amount of bank credit determines
the amount of bank deposits and therefore the entire money supply.4
In the horizontalist point of view, only horizontal part of curve is relevant and money supply
is determined exclusively by credit demand. According to verticalists, credit supply is
imperfectly elastic. “Horizontalists look at the credit market with the assumption that during
the money supply process banks are not affected by changes, if any, in their own liquidity
ratios and the liquidity ratios of their customers. Structuralists allow for the possibility that
over the business cycle banks revise their non-price and price terms of credit.” (Fontana,
2004, p. 375) In the both approaches, the banks rises up their mark-up (credit supply curve
goes up) during the recession and vice versa.
The right lower quadrant represents 45° curve of equality between loans and deposits (LD
line). The slope of the curve in left lower quadrant is given by reserve ratio and expresses
required amount of bank reserves. The amount of bank reserves is derived from credit market
and not vice versa as it is in verticalist approach. The disagreement between horizontalists and
structuralists exists in behavior of the central bank. Horizontalists insist that central bank must
satisfy every demand for additional reserves because it plays the role of lender of last resort.
On the other hand, verticalists advocate that central bank can defend itself by changes in
interest rate for given amount. Contrary, theories are correspondent in opinion that central
bank can influence money supply by shifts in target rate. “Central banks have a very active
role in the money supply process. By adjusting the short-term nominal interest rate, they may
be able to affect lending conditions in the credit market. This power of central banks is in
general recognized by both horizontalists …and structuralists.” (Fontana, 2004, p. 372)
The different aspects of endogenous money theory are highlighted by a circuit dynamique
approach (circulacionists). “Money is therefore endogenous, as in Post Keynesian theory, but
the analysis rests neither on the accommodative role of the central bank nor on the nature of
contracts, uncertainty, and portfolio analysis. Production is what money gives its endogenous
nature.” (Rochon, 1999, p. 9) So the circulacionists describe money as endogenous in the way
how it enters into the economy. They have strong doubts about the use of standard analysis of
money market through the supply and demand curve. Rochon translated DiRuzza (1984) from
French: “It appears to me that the use of supply and demand analysis with respect to money
gives rise to more inconveniences than advantages. If we assume that the supply of money is
4
The assumption that bank deposits are the entire money supply is applied in this model. (currency is excluded)
endogenous, and determined by demand, the notion of a supply itself loses all its significance.
The only quantity of money foreseeable, possible and normal, would be the desired quantity,
i.e. that arising from the internal economic needs of the system. A money supply function is
unthinkable because apart from the precise intersection with the demand function, all other
points on supply curve represent something which is not money” (Rochon, 1999, p. 14)
3. Money and the role of central bank – ontological reflection
„If the central bank tried to run a system of monetary base control, it would fail.“
- Charles Goodhart This part of the study undertakes the analysis of financial system reality and subsequently
implants it into the theoretical economic framework.
Within his positive methodology, Profesor Friedman denies the possibility of comparison
assumption directly with reality. He did not see any meaningful way how to do it. The only
way how to verify the assumptions is to test the predictive ability of given theory. (Friedman,
1966) That methodology is the subject to criticism from the Post Keynesian lines. Their
theory is much more based on the methodological realism – i.e. they search for the realistic
assumptions. The Post Keynesian cognitive starting point is an ontological reflection
(Jespersen, 2011). Simply said, all the assumptions should correspond with reality. For
instance, reality can be assured through higher level of communication between academicians
and practicians. The author hereby tries to detect the money market reality on the basis of
practicians’ interpretation, own banking sector experience and international accounting rules.
First of all, the great confusion about “what the money is” exists. Debates are may be older
than economics itself. For instance, Lin Lin argues with Dr. Currie about what financial
instruments meet the definition of money: “Dr. Currie would argue that no "money" is
created if the check is redeposited with the savings bank. This is, however, not correct. To say
that time deposits are not money is the same as saying that Mr. D can at his own free will
destroy money simply by depositing his check with the savings bank.” (Lin, 1937, p. 80) As
the time goes by (and maybe because these disagreements) the relatively clear definitions of
monetary aggregates have been developed in practice. Unfortunately, the most of the
economic theories do not worry about such definitions. For Example, in spite of the fact that
the reserve account balances (liquidity) of banking sector are not the part of monetary
aggregates in all countries over the world the most of economic textbooks and papers call
them money.5
It is very common to read in magazines, newspaper or even professional publications that
central banks “print” money. In reality, however, central banks do not have any direct
influence on money supply in common. If the central bank grants a loan to the commercial
bank, no money is created. Only liquidity is created. The central banks even do not manage
Until 2006 the liquidity on bank’s clearing account was the part of monetary aggregates in Great Britain. That
was only exception.
5
the money creation via monetary base. As Alan Holmes6 confirms, the causality is directly
opposit: “The idea of a regular injection of reserves-in some approaches at least-also suffers
from a naive assumption that the banking system only expands loans after the System (or
market factors) have put reserves in the banking system. In the real world, banks extend
credit, creating deposits in the process, and look for the reserves later.” (Holmes, 1969, p. 73)
The fact is that the liquidity management (the managing of reserves) and loans management
are independent even within individual bank. The liquidity is influenced by many bank’s
departments. Reserve requirements recalculation is the one but not the only aspect of the
liquidity management. If the bank is solvent the department of liquidity management never
asks the department of loans management if the bank has enough reserves to grant a loan. The
lending bank clerks do not care about reserve ratio but the client’s creditworthiness. In other
words, lender does not care about the reserves for granting a loan. Contrary, he cares about
the client’s ability to repay the debt because in case of default the bank is obliged to increase
expense account balance of nominal value of the entire loan which bears the negative effect
on its own capital.
Figure 6 | The money creation and liquidity creation
Central Bank (CB)
Loans granted to B1
Clearing account B1
2) 25
PS) 0
2) 25
Clearing account B2
PS) 100
Commercial Bank 1 (B1)
Clearing account CB
Current accounts
SB) 0
SB) 0
2) 25
1) 250
Commercial Bank 2 (B2)
Clearing account CB
Current accounts
SB) 100
SB) 700
Loans Granted
SB) 0
1) 250
Loans
SB) 700
Loans accepted CB
2) 25
Source: Jílek – Svobodová, 2013, own
We can explain the process on the basis of international accounting rules (Figure 6).
Commercial bank 1 grants a loan to the non-bank subject and thereby the money supply
increases (Operation 1). If we suppose that there is 10 % reserve requirement, the bank needs
to obtain the liquidity in amount of 10 % out of granted loan (i.e. 25) at the interbank market.
Assume that bank 1 wants to borrow liquidity from bank 2 and bank 2 is willing to lend
liquidity only at higher rate than the interbank rate targeted by central bank. If operating target
6
Alan Holmes worked for 33 years in the Federal Reserve Bank of New York, where he manages Federal
Reserve account for open market from 1965 to 1979.
of a central bank is a short-term interest rate then central bank must provide additional
liquidity (reserves) to the banking sector (for instance, through the granting a loan to B1),
otherwise the interbank short-term interest rate would go up above desired level of this rate
(Operation 2). That is the case of banking sector with deficit of liquidity.7
From above mentioned example it is clear that “Bank reserves market is the special kind of
market. Central bank operates on both demand and supply side of it. It determines the
demand by setting reserve requirements and by setting conditions for the interbank clearing
system. At the same time it determines supply by means of open market operations. Open
market operations are used to achieve the desired level of interest rates.” (Jílek, 2009, p. 151)
This fact means not less and not more than the operating targets short-term interest rate and
monetary base are in direct conflict. If the central bank started to manage the monetary base8
it would not be able to harmonize reserve requirements of the commercial banks with their
lending activity. This scenario would lead to very high volatility of the interbank interest rate
and therefore the very high volatility of the all interest rates in the economy. 9 Both the low
volatility of interest rates and explicitly announced desired level of the target rate are the
evidences of the fact that all the central banks over the world use the short-term interest rate
as an operating target.
Figure 7 | Liquidity Market and Credit Market in Realistic approach
Interbank
Interest Rate
(i)
i0
i1
Liquidity (Reserve) Market
Credit Market
Reserve
Interest Rate
Supply (BRs)
(r)
Credit Market
Credit
Supply (CS)
Credit
Demand
(CD)
Reserve
Demand
(BRd)
BR0 BR1
Bank reserve liquidity (BR)
M2 M0 M1
Money Supply
(M)
Source: own
In order to formulate alternative model it is necessary to distinguish credit market and
liquidity market because they are two separate circuits.
7
If it was the banking sector with systematic surplus of liquidity than the central bank would have to absorb the
excess liquidity, otherwise the effective interbank interest rate could go down below targeted level.
8
It is technically impossible anyway – central bank can’t control the volume of currency.
9
It happened in history during the “great monetary experiment” at the late seventies when the FED was trying to
target monetary aggregates via monetary base.
Figure 7 shows the realistic idea of credit and liquidity markets. Whereas demand for reserves
and reserve supply are set exclusively by central bank the credit market (which determines
money supply) is outside the direct control of the central bank. The credit supply is an
upward-sloping curve which starts above the interbank interest rate (set by central bank).
Commercial banks are willing to provide additional amount of credit at the higher interest
level insomuch as borrowers credit risk growth in hand to hand with the amount of provided
loans. Credit demand is the downward-sloping function because the borrowers are willing to
accept additional amount of loans at the lower interest rate. The intersect of credit supply and
credit demand determines money supply. So, the money supply is not set by central bank (just
reserves) but it can be influenced (under the certain conditions) through short-term interest
rate which is set by central bank.
If the central bank decides to decrease short-term interbank interest rate (through providing
additional liquidity) then the final decision about money supply lies at the credit market. For
instance, if the economic crisis shifts credit demand function to the left (or makes credit
supply curve less elastic) then the money supply may shrink despite the decline in the shortterm interest rate.
It does matter how this model correspond with previously stated theoretical models. It is quite
clear that vertical model fails in confrontation with reality. Central banks have no direct
influence on monetary aggregates and therefore cannot set money supply exogenously (it may
set the supply of the bank reserves). Accordingly, central banks set the short-term interest
rates exogenously and this rate cannot be determined by money demand. Short-term interest
rate is clearly exogenous variable whereas money supply is clearly endogenous variable in
realistic model and wherefore the horizontal position is the closest to our model. Nonetheless,
the horizontal explanation of providing liquidity due to the central bank’s “lender of last
resort” role is not entirely accurate. In reality, the central bank must provide liquidity in order
to reach given interest rate and not because of its role. This fact is even accepted by some
circulacionists: “In fact, a central bank’s accommodation is instrumental in avoiding interest
rate hikes that a non-accommodating behaviour would lead to in the interbank market.”
(Rochon, Rossi, 1997, p. 9)
4. Money and the role of central bank – empirical testing
Our methodology requires the empirical test after the ontological reflection (Jespersen, 2011).
The subjects to such a test are the two crucial conclusions – exogenity of interest rate10 and
endogenity of money11.
The central banks manage the short-term interest rate in order to influence all the interest rates
in the economy – i.e. in order to shift the entire yield curve. If there is a strong positive
correlation between the target rate and the other interest rates in the economy then the interest
rate is exogenous variable. The standard linear-regression model is sufficient with respect to
the fact that we examine simple correlation and not the causality.12
The specific test will be based on monthly US data. We suppose that the basic relationship
between Federal Funds Target Rate and Effective Federal Funds Rate is strongly positive. We
used the monthly data from October 198213 to November 200814. The result is performed in
Figure 8.
Figure 8 | Correlation between target and effective fund rate (1982-2008)
B
Effective Federal Funds Rate
(%)
Correlation coeficient
F
Sum of squares
1,0115
0,0028
0,9976
129476,0678
1951,9930
Deviations
14
12
10
8
6
4
2
0
A
-0,0360
0,0166
0,1228
312,0000
4,7037
Residues
Coeficients
St. Error
St. Error of Y Estimate
Degrees of Freedom
y = 1,0115x - 0,036
R² = 0,9976
0
2
4
6
8
10
12
14
Federal Funds Target Rate (%)
Source: FRED (2013), own
The almost perfect correlation can be represented by value 0.9976. As we can see in the
graph, the target and effective rate are almost the same. So, for the further examination of the
influence on the other interest rates, we may use the effective rate as an approximation of the
target rate. Firstly, we will judge the influence of the effective rate on the entire yield curve
10
The subject of the test will be the correlation between target interest rates and other rates in economy.
The subject of the test will be the causality between money supply and monetary base.
12
To said that the market interest rate determines the target interest rate is somewhat absurd.
13
FED has left the monetary experiment.
14
FED causes the liquidity “floods” at the interbank market.
11
which we constructed out of the interbank market rates and government bonds yields. The
result is to be found in Figure 9.
Figure 9 | Correlation between effective rate and yield curve rates (1986-2013)
Interest Rate
1-Month USD London Interbank Offered Rate
3-Month USD London Interbank Offered Rate
6-Month USD London Interbank Offered Rate
12-Month USD London Interbank Offered Rate
2-Year Treasury Constant Maturity Rate
5-Year Treasury Constant Maturity Rate
10-Year Treasury Constant Maturity Rate
30-Year Treasury Constant Maturity Rate
Correlation Coefficients
of the FED
0,9918
0,9860
0,9782
0,9632
0,9380
0,8502
0,7598
0,6639
Source: FRED (2013), own
Figure 10 | Fed influence on yield curve rates
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1-Month USD 3-Month USD 6-Month USD 12-Month
2-Year
5-Year
10-Year
30-Year
London
London
London
USD London
Treasury
Treasury
Treasury
Treasury
Interbank
Interbank
Interbank
Interbank
Constant
Constant
Constant
Constant
Offered Rate Offered Rate Offered Rate Offered Rate Maturity Rate Maturity Rate Maturity Rate Maturity Rate
Under the FED's control
Beyond the FED's control
Source: FRED (2013), own
When we plot the values from table to the graph (Figure 10), we may observe that the yield
curve interest rates are almost under the FED’s control. The power of control slightly weakens
with the distance of maturity. We can analyze some other interest rates outside the yield curve
to support the conclusion (Figure 11).
Figure 11 | Correlation between effective rate and other rates (1986-2013)
Interest Rate
Bank Prime Loan Rate
30-Year Conventional Mortgage Rate
24 Month Finance Rate on Personal Loans at Commercial Banks
Moody's Seasoned Aaa Corporate Bond Yield (AAA)
Source: FRED (2013), own
Correlation Coeffictients
of the FED
0,9699
0,8490
0,7439
0,6639
The second, and the more arduous, quest is the test of the causality between monetary base
and monetary aggregates. Naturally, the question of causality is not only the significant
methodological problem but specifically also the problem of econometrics. (Korda, 2007)
When we use the simple linear-regression model we get no more than almost perfect
correlation until the end of 2008. This would say nothing about the causal question (whether
deposits make reserves or reserves make deposits).
One of the controversial ways how to test the causality is the “Granger’s causality”. The
essence of this econometric instrument is the testing of causality in terms of time sequence –
i.e. testing whether changes in one variable systematically precede the changes in another
variable. So, besides the monetary base and monetary aggregate M2, the additional input in
our testing is the time lag (2 months).
Figure 12 shows that we can reject null hypothesis that monetary base (MB) does not cause
the changes in monetary aggregate (M2) but we cannot reject null hypothesis that M2 does
not cause the changes in MB at the 5 % significance level (0.0044 < 0.05).
Figure 12 | Granger’s causality between MB and M2 (2M lag) (1984-2008)
Pairwise Granger Causality Tests
Date: 06/09/13 Time: 12:36
Sample: 1984M02 2008M09
Lags: 2
Null Hypothesis:
Obs
F-Statistic
Prob.
MB does not Granger Cause M2
M2 does not Granger Cause MB
294
1.73436
5.53089
0.1783
0.0044
Source: FRED (2013), EViews, own
This kind of test must be, however, inevitably the subject of self-critics. Granger causality is
very sensitive to so-called spurious causalities. (Eichler, 2007) Moreover, there are a plenty of
reservations about the ability of this econometrical apparatus to decide what is cause and what
is consequence. (Hušek, 1999) Nor the author himself concludes anything through the
granger’s test. This is the confirmation of our methodological argumentation that causality
cannot be tested – it must be explained. It must be observed in a practice.
5. Some notes on natural interest rate
A couple of lines ago, we concluded that the interest rate is an exogenous variable.
Nevertheless, in both the mainstream and Austrian economic theory exists the idea that
decline in rate of interest is the immediate consequence of the credit expansion. It means that
the real rate of interest can fall below the “natural rate of interest”. This natural rate is defined
in 8th Chapter of Wicksell’s book: „There is a certain rate of interest on loans which is
neutral in respect to commodity prices, and tends neither to raise nor to lower them. This is
necessarily the same as the rate of interest which would be determined by supply and demand
if no use were made of money and all lending were effected in the form of real capital goods.
It comes to much the same thing to describe it as the current value of the natural rate of
interest on capital.“ (Wicksell, 1962, p. 102).
Real rate of interest is set exogenously and therefore its natural level can be just estimated
(natural rate is not observable). The natural rate of interest is commonly the subject of interest
of the central banks as well: „We show that time variation of the natural rate has important
implications for the design and implementation of monetary policy. Adjustment to changes in
the natural rate is crucial for the achievement of long-run inflation and short-run
stabilization goals.“ (Laubach, Williams, 2001, p. 21).15
The criticism of these efforts is directed to the inability of estimating the accurate natural rate
by central monetary authority on time. Potužák characterizes that in the eyes of the Austrian
school of thought and under assumption of endogenous money: „[T]he output gap and higher
inflation are rather the outcome of the entire process. They both come into existence
especially due to the inability of the central bank to keep track with the natural rate of
interest. In other words, by increasing the policy rates after the positive output and
inflationary gaps have occurred, it is too late for the central bank to avoid the business cycle.
… Hence, it is quite reasonable to assume that under the current banking and monetary
system the market interest rate does not respond sufficiently to the increase in the natural rate
of interest, either due to the accommodative behaviour of the commercial banks or due to the
lag in the monetary policy response.” (Potužák, 2012, p. 127)
The stability and “idol” of natural rate of interest are, nonetheless, surely at least very
disputable. The business cycles would certainly not be excluded even if the central bank were
reaching natural interest rate permanently and accurately. Moreover, with respect to the
practical point of view it could not be suitable to let natural rate of interest free market
interaction. It could lead to the extremely high volatility of interest rate and therefore the
interest rate risk management would become impossible. Central banks anchor the
expectations via setting of interest rates.
Discussions may be various but the reality shows that real interest rate is under control of the
central bank which just strives to estimate and subsequently reach the natural rate of interest.
Epilogue
The main aim of this paper was to highlight unrealistic assumptions of the mainstream money
market model. The study searches for the reality in the models of alternative heterogeneous
approaches and subsequently formulates new model which should be based on the realistic
assumptions. The crucial aspects of the reality neglected by the mainstream are:
a) Money supply is an endogenous variable, whereas interest rate is an exogenous
variable.
b) Commercial banks stand on side of credit supply which, in interaction with credit
demand, determines the money supply.
15
For example, it is possible to find some methods of estimating the natural rate in Williams’ paper (2003).
c) Central bank is able to influence the money supply only indirectly throughout the
control of the short-term interest rate.
d) Steering the monetary base is not the subject of central banks’ interest because it is
in direct contradiction with the real operating target – short-term interest rate.
e) Credit market and liquidity (reserve) market are the two different circuits. Liquidity
(reserves) is not the part of monetary aggregates and hence it is not money. Money
supply is determined exclusively by the credit market.
The above stated conclusions may surely have significant impacts on the entire mainstream
economic framework. The author is aware that the money market is just shard of the mosaic
of the whole macroeconomic science. Thus, following research should be focused on the
impacts of above examined conclusions on the other areas of macroeconomic theories.
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Market failure analysis of the venture capital market in the Czech Republic
Ondrej Ptacek
Abstract: share of amount of VC (Venture Capital) investments on total PE (Private Equity)
investments in the Czech Republic was only 3.2 % on average in 2007-2010, which is far
below the European level. In 2008-2010, the venture capital investment to total PE investment
ratio was 12.2 % in Europe, almost 4 times higher. Overall, the CEE (Central and Eastern
Europe) PE/VC markets are much more buyout oriented then the rest of Europe. Particularly,
early-stage venture capital financing is very low in the Czech Republic. Furthermore, business
angels’ networks do not adequately take the place of lacking early stage venture capital funds.
The VC market in CEE, not only in the Czech Republic, concentrates on larger later-stage
investments.
PE/VC investing has not yet become a common investment method in the Czech Republic.
Such funds are regarded as rarely used alternative financing sources that entrepreneurs seek
out only after they are rejected at the bank. Selling a business is not a common goal of
entrepreneurs. One of the reasons is that in the Czech Republic, the participation of pension
funds and insurance companies as limited partners in PE/VC investing is significantly
restricted by law. Another reason still limiting expansion in PE/VC investments in the Czech
Republic is that entrepreneurs are not prepared to share the business with an investor and are
often lacking in strategic management knowledge.
Keywords: venture capital, private equity, financial markets, seed capital, start-up capital,
expansion capital
JEL Classification: G24
Introduction
This analysis has been undertaken with aim to calculate the equity gap in the Czech Republic
on the basis of international data comparison. The main research question and hypothesis is a
possible existence of equity gap on the Czech venture capital market with comparison to CEE
and European markets.
The analysis has been processed using documents, statistics and figures of MIT, CVCA,
EVCA, EIF, EUROSTAT, Deloitte, PwC, NVCA, Thomson Reuters, The World Bank and
McKinsey Global Institute.
The definitions presented in the Community Guidelines on State aid to promote risk capital
investments in small and medium-sized enterprises (2006/C 194/02) and the terms used in
EVCA statistics of PE markets are slightly different. Nevertheless, for the purpose of this
document, we suppose that the term “expansion stage” used by the Commission equals the
definition of “later-stage venture” used by EVCA.
1. Analysis
1.1. Recent development of European PE market
The financial crisis of 2008 and 2009 has caused serious harms to the PE market. The
European PE market was pushed 10 years back after a long-term market growth peaked in
2006. The indicators of fundraising, investments and divestments slumped by 2/3 of the 2006
and 2007 values. Prognoses say that the PE market is not to fully recover within this decade.
By contrast, The McKinsey Global Institute estimates that the PE share on global financial
assets is about to lower from 28% in 2010 to 22% in 202016. At the same time, the riskiness in
PE funds’ portfolios has substantially risen due to uncertain further global development –
write-offs formed almost 50% of European divestments in 2009 due to EVCA. However 2010
was then the first year of recovery, write-offs were still 22.3% of total divestments value17.
More detailed information is included in Chart 1.
The Central and Eastern Europe region (CEE), including Czech Republic, has experienced
similar development; only the slump in fundraising was even higher – the 2009 result was
only 1/10 of the 2007 value. As regards investments, while for the rest of Europe 2009 was
the worst year in decade and the market experienced certain recovery in 2010, the investments
in the CEE region developed vice versa, with culmination in 2009 and halved in 2010. But,
the 2009 extraordinary CEE investments peak was caused by one mega buyout transaction
realised in the Czech Republic. The investment went to a consumer goods & retail company;
however, the company’s activities are spread throughout the CEE region, so the real impact of
this investment is regional.
Chart 1: Fund-raising, investments and divestments in Europe by year, € billions, data source: EVCA
120
100
80
60
40
20
0
2000
2001
2002
2003
Funds Raised
2004
2005
Investments
2006
2007
2008
2009
2010
Divestments
1.2. The Czech PE market
PE/VC investments have been made in the Czech Republic since 1990. An association
bringing together private equity and venture capital investors (CVCA) has been in operation
since 1997. Other investors who are not members of the CVCA also are active in the Czech
Republic. These investors are not always typical venture capital funds, but their investments
are similar to classic PE/VC investments in structure.
16
17
see The McKinsey Global Institute (2011)
see EVCA (2010)
Specifically, the Czech PE market is characterized by unstable development, which is caused
mainly by low total number of transactions – including all PE segments, only about 20
investments are realised in the Czech Republic per year. A vast majority of investments is
concentrated on buyout, replacement and growth segments, venture capital represents
minority. Under such conditions, the total value of investments is dependent on
(non)existence of one or several mega/large buyout transactions in the given year.
Thus, total PE investment value in the Czech Republic ranged from € 182 million to € 1,385
million in 2007-2010 due to EVCA figures, or 0.133 to 1.017 % ratio to GDP, as seen below
in Chart 2. Such figures comprise fluctuation between being European champions and
outsiders. Nevertheless, the 1.017% ratio of PE investments value to GDP in 2009 was rather
exceptional and probably unrepeatable deviation from long-term trend.
The 2009 figures were influenced by one mega and one large buyout transactions of CVC
Capital Partners targeting a multinational brewing and retail group StarBev – more a kind of
regional than country-specific investment, which represented more than 50 % of total 2009
investment values.
For the purpose of international comparison of PE markets development, it is important to use
such indicators that respect the different stage of development of the respective economies.
Some differences between the PE market of Europe and CEE region or the Czech Republic
may be supported by distinct level of overall economic activity and output. One of such
reliable indicators, which is able to clear the economic performance influence from the data,
is PE investments to GDP ratio. In 2005-2010, the total value of private equity investments in
the Czech Republic represented 0.275% GDP on average, whereas European average stood
for 0.413%, as follows from the Chart 2. The 2009 deviation from long-term in the Czech
Republic is caused by absolute values distorted by two outstanding mega.buyout transactions.
This upward leap is probably non-repeatable under the new conditions in the PE/VC market.18
18
see Di Carlo, A., Kelly, R. (2010)
Chart 2: PE investments as GDP percentage in Europe and Czech Republic by year, data source: EVCA
and EUROSTAT
1.200%
1.000%
0.800%
0.600%
0.400%
0.200%
0.000%
2005
2006
2007
Europe
2008
2009
2010
Czech Republic
In the past, the Czech Republic did not offer a suitable tax and legal environment for the
establishment of private PE/VC funds and therefore most entities that operate in the Czech
Republic and use local managers are domiciled abroad. The situation started to change after
the accession of the Czech Republic to the European Union in 2004 when the qualified
investors’ fund was introduced into Czech law on collective investment (similar to
Luxembourg’s SIF) and other legislative changes are now being developed to standardize
PE/VC area at the European level and to enhance the availability of private capital. For the
purpose of accuracy in trends, we then present only 2007-2010 figures from this point on, i.e.
after the adoption of law on collective investment in the Czech Republic has substantially
motivated the market to develop much faster. This is quite remarkable in Chart 2 above – in
2007-2010, the market has started to become more progressive with average PE investments
to GDP ratio about 0.404% and therefore reaching European levels. Therefore, Czech position
within the CEE region is very strong as 32,46% of total CEE PE investments value was
realised in the Czech Republic in 2008-2010.19
The rise in the number of investments in recent years was also caused by the gradually
expanding awareness of PE/VC investing in the Czech Republic among entrepreneurs and
managers as well. Greater interest in investing also was recorded among funds investing in the
CEE region as a result of the economy’s maturing and its overall successful development.
Nevertheless, the crisis has pulled the market indicators back to 2006-2007 values in 201020.
1.3. The Czech VC market
The situation in the venture capital does not observe similar trend as PE as a whole. Albeit,
the development of investments value has been observing an upward trend since 2007 peaking
in 2009 and decreasing in 2010 (as regards investments, the financial crisis has hit PE in the
19
20
see EVCA (2010)
see CVCA (2010)
CEE region later than in the rest of Europe) and the position of the Czech VC market within
the CEE region is quite strong with about 25 % market share over the years 2007-2010.21
Table 1: Investments in PE segments in the Czech Republic as GDP percentage by year, data source: CVCA, EUROSTAT
Seed
Start-up
Subtotal Early-stage
Later-stage venture
Subtotal venture
Growth
Rescue/turnaround
Replacement capital
Buyout
Total PE
2007
0.000%
0.000%
0.000%
0.003%
0.003%
0.093%
0.000%
0.002%
0.048%
0.146%
2008
0.000%
0.000%
0.000%
0.009%
0.010%
0.184%
0.000%
0.000%
0.126%
0.320%
2009
0.000%
0.000%
0.000%
0.020%
0.020%
0.131%
0.000%
0.095%
0.696%
0.943%
2010
0.000%
0.009%
0.009%
0.007%
0.016%
0.100%
0.000%
0.000%
0.017%
0.133%
Average
0.000%
0.002%
0.002%
0.010%
0.012%
0.127%
0.000%
0.024%
0.222%
0.385%
But, share of amount of VC investments on total PE investments in the Czech Republic was
only 3.2% on average in 2007-2010, which is far below the European level.22 Due to EVCA
findings, in 2008-201023, the venture capital investment to total PE investment ratio was
12.2% in Europe, almost 4 times higher. Furthermore, because the CEE PE markets are much
more buyout oriented, the whole CEE region VC investments represent only 2.08% of the
European VC market in 2008-2010. So, however the Czech Republic ranks among regional
champions in VC, it still represents a developing market in the European context.
Another good indicator suitable for measuring the differences in VC markets of the Czech
Republic, CEE and Europe is ratio of VC investments value to GDP. In 2010, this was
0.016% in the Czech Republic, 0.006% in the whole CEE region and 0.027% in Europe.
We can use both indicators mentioned above (share of VC investments value on total PE
investments value and VC investments to GDP ratio) to look into the VC markets even in
more detail later.
Early-stage venture capital financing is very low in the Czech Republic and is following a
negative trend since 2001, as show the CVCA statistics.24 Seed and start-up capital only
amounted 4% of the EU 25 average in 2004 with the situation to worsen in the following
years. In 2008-2010, no investments were located in seed stage in the Czech Republic
compared to 27 companies invested in CEE region (0.14% share on total PE investments), see
Table 3. However seed capital share ranks the least in PE markets around the world, in the
CEE region, it is almost invisible, including Czech Republic. As the PE market of the Czech
21
see EVCA (2010)
see EVCA (2010)
23
2007 European figures cannot be utilised because of different methodology – prior to 2008, the growth and
later-stage venture segments were combined in expansion segment.
24
see CVCA (2010)
22
Republic is otherwise very strong within the CEE region, this shows lack of interest of
investors in this particular segment.
Table 2: PE investments by region, € x 1000, 2008-2010 totals, data source: EVCA
Seed
Start-up
Subtotal Early-stage
Later-stage venture
Total venture
Growth
Rescue/Turnaround
Replacement capital
Buyout
Total
Total
% of
Czech
% of total Total CEE
Total Europe
total
Republic
0
0,00%
8 969
0,14%
549 010
13 420
0,67%
96 932
1,56%
5 988 123
13 420
0,67%
105 901
1,71%
6 537 133
52 614
2,61%
189 249
3,05%
7 627 988
66 033
3,28%
295 150
4,76%
14 165 119
587 704
29,19% 1 625 374 26,20%
17 898 868
400
0,02%
11 941
0,19%
1 456 567
139 965
6,95%
212 906
3,43%
4 981 064
1 219 437
60,56% 4 057 708 65,41%
77 695 396
2 013 540
100,00% 6 203 078 100,00% 116 197 014
% of total
0,47%
5,15%
5,63%
6,56%
12,19%
15,40%
1,25%
4,29%
66,87%
100,00%
Table 3: Number of companies receiving venture capital, 2008-2010, data source: EVCA, CVCA
Czech Republic
Seed
Start-up
Subtotal Early-stage
Later-stage venture
Total venture
CEE
0
2
2
9
11
27
100
127
77
204
The situation is quite similar in start-up stage. Only 0.67% of total PE capital invested over
the years 2008-2010 in the Czech Republic falls within this segment compared to 1.56% in
CEE and 5.15% in Europe (see Table 2).
In general terms, early-stage enterprises receive only a little venture capital in the Czech
Republic. The change in legislation, which enabled the PE market to become more
progressive in the Czech Republic after 2004, didn’t encourage investors enough to enter the
venture capital market as well. This is particularly evident from Table 4, which shows the
alignment of different Czech PE funds (full CVCA members). Only a few of them are
oriented on early-stage investments and only two funds with total sources of only € 100
million and geographical scope of the whole CEE region prefer also investments under € 1
million. Only two investments were realised by these funds in the Czech Republic so far. The
total amount of funds managed in the Czech Republic is about € 4.5 billion and the average
fund size is € 373 million. On average, the minimum deal size is € 6.5 million and maximum
€ 50 million.
Table 4: CVCA full members, 2010, data source: CVCA
Fund name
Type of
investments
Preferred
amount of
investment
Volume of
funds
managed
Sector preferences
Geographical
focus
Number of
deals in
the CR
3TS Capital
Partners
Growth Capital,
Expansion
Capital, Buyouts
€ 3 million - 20 € 230
million
million
Consumer &
Services, M & M,
ICT, Env. & Energy.
Czech Republic,
CEE
5
Advent
International
Buyouts,
Expansion
Capital, Sector
Consolidation
min. € 30
million
None
CEE, Trukey
3
Amundi Private
Equity Funds
Buyouts,
Expansion
Capital, Sector
Consolidation
€ 5 - 15 million € 156
million
None
CEE
None
ARGUS Capital
Group Limited
Buyouts, Sector
Consolidation,
Later Stage
Expansion
Capital
€ 10 - 40
million
None
CEE, Turkey
6
(including
regional
deals)
ARX Equity
Partners
Acquisitions,
Buyouts,
Expansion,
Sector
Consolidation
€ 5 - 50 million Approx.
€ 200
million
None
CEE
7
Credo Ventures
Start–Up,
Growth Capital,
Expansion
Capital
€ 0,25 - 2
million
€ 20 million IT&Media, Mobile
Communication,
Healthcare
Czech Republic,
Slovakia, central
Europe
2
Enterprise
Investors
Acquisition,
Buyouts,
Expansion
Capital, Sector
Consolidation
€ 1 - 100
million
€ 1,7 billion
CEE
6
(including
regional
deals)
€ 0,5 – 5
million
€ 80 million Com. & New
Media, SW & IT
Services, Electr. &
HW, Life Sciences,
Chem., Materials,
Cleantech and RES
DACH and CEE
None
GCP gamma capital Start–Up, Early
Expansion;
partners
Selected Seed,
Later Stage, Sp.
Situations;
Mezzanine
€ 1 billion
€ 400
million
None
Fund name
Type of
investments
Preferred
amount of
investment
Volume of
funds
managed
Sector preferences
Geographical
focus
Number of
deals in
the CR
Genesis Capital
Limited
Buyouts,
Consolidation,
Growth, VC:
Early Stage,
Growth
€ 3 - 10 million € 70 million None
Czech and Slovak 20
Republics
INVEST EQUITY
Buyouts, Later
Stage Expansion
Up to € 100
million
€ 110
million
None
CEE, DACH
1
JV Capital
Management
Early Stage
Capital,
Development
Capital, Buyouts
€ 1- 3 million
€ 10,5
million
None
Czech Republic
24
KBC Private Equity
Non Specified
Non Specified
N/a
Non Specified
Belgium and CEE 5
Riverside Europe
Partners
Buyouts, Later
Stage Expansion
€ 15 - 150
million
€ 500
million
None
EU, Turkey, CH,
Croatia
4
Furthermore, business angels’ networks do not adequately take the place of lacking early
stage venture capital funds due to CVCA findings. According to CVCA, there may be only a
very limited amount of early-stage investments made off the statistics, restricted to
investment agreements with individuals25. Ventures already having research and
development results must still seek funds for their commercialization among friends and
family or rely on bank loans and grants.
Specifically, in the CEE region, the VC investments hold only about 30% of total number of
invested companies in 2010, whereas the European average is about 65%. The reason of
such differences behind the figures is the major concentration of CEE PE market on laterstage, and therefore larger, investments. Stronger representation of early stage is lacking in
the region. Early stage otherwise form the vast majority of companies financed through VC
in pan-European statistics.26
Later-stage venture investments do not suffer from such large lack of interest of venture
capitalists, as the average deal value is higher and generally exceeds the limit of € 1 million.
Despite this, there is still a large gap in the comparison of European data, mainly as regards
investments of lesser values. In 2008-2010, only five later-stage venture and one early-stage
venture companies obtained VC investments in the Czech Republic totalling € 54.5 million,
which represents an average of € 18.5 million. Compared to CEE data, the average value of
investment per venture company is more than 3 times higher in the Czech Republic
25
26
see CVCA (2010)
see EVCA (2010)
(€ 5 million in the Czech Republic, € 1.5 million in CEE)27. Thus, seed, start-up and even
smaller later-stage venture projects cannot fulfil the threshold of minimum investment
values required by VC funds investing in the Czech Republic.
The following chart 3 shows venture capital investments to PE investments ratio by stage
and region in 2008-2010. The gap in both early stage and later stage venture is evident even
in compare of Czech and CEE data, which may be quite surprising, as the Czech PE market is
among regional leaders.
Chart 3: Venture capital investments to PE investments ratio by stage and region, 2008-2010, data source:
EVCA
Seed
14,00%
12,00%
10,00%
8,00%
6,00%
Total venture
4,00%
Start-up
2,00%
0,00%
Czech
Republic
CEE
Europe
Later-stage venture
Early-stage venture
The following chart of investments value to GDP ratio confirms the results: as regards venture
capital, the Czech market is underdeveloped in the European context. Early-stage deals do not
even reach the CEE values in the Czech Republic. In this particular statistics, the influence of
economic output differences on the market size is adjusted by using GDP as denominator in
the calculation.
27
see EVCA (2010)
Chart 4: Venture capital stages, investments value to GDP ratio, 2008-2010, data source: EVCA, The
World Bank
Seed
0,025%
0,020%
0,015%
0,010%
Czech
Republic
0,005%
Later-stage venture
0,000%
Start-up
CEE
Europe
Early-stage venture
The comparison of both charts 3 and 4 indicates that whereas the later-stage venture shows
lower investments to PE investments ratio in the Czech Republic than in the whole CEE
region, the later-stage venture investments value to GDP ratio is about two times higher in the
Czech Republic than in the CEE. This is caused by the above cited feature of the venture
capital market in the Czech Republic – average deal value is much higher in the Czech
Republic than in the rest of the CEE region (or even in Europe as a whole as regards laterstage venture). Thus, this creates a burden for companies seeking equity financing of lesser
values.
According to CVCA findings28, PE/VC investing has not yet become a common investment
method in the Czech Republic. Such funds are still regarded as alternative financing sources
that entrepreneurs seek out only after they are rejected at a bank. One of the reasons for this is
insufficiency of domestic sources of investment funds, upon which especially smaller venture
capital oriented funds throughout Europe depend.
2. Results and discussion
Financing sources for PE/VC funds include in particular pension funds, insurance companies,
banks, funds of funds, and government agencies. In the Czech Republic, the participation of
pension funds and insurance companies in PE/ VC investing is significantly restricted by law.
While large regional private equity funds are able to obtain funding from foreign institutions,
smaller domestic funds oriented toward venture capital are too small and therefore
uninteresting for such investors. Domestic sources for these funds are thus lacking. Another
28
see CVCA (2010)
reason lies in legal barriers to establishing PE/VC funds within the Czech Republic. In the
Czech Republic, we still encounter funds headquartered and based in foreign countries and
which were established under different legal systems.
Since the 1990s, the entire financial market in the Czech Republic has been primarily focused
on bank products and bank service providers. The market offers debt products for small and
medium sized enterprises, but these products cannot cover all needs, mainly because of their
nature (debt products). Small- and medium-sized enterprises are not able to fulfil credit
guarantees and they lack a portion of equity that cannot be replaced by debt. Equity resources
bring another major benefit, the know-how and experience with the commercialization of
ideas and projects, which cannot be replaced by debt products.
Another reason still limiting expansion in PE/VC investments in the Czech Republic is that
entrepreneurs are not prepared to accept a new partner with an equity share (the logic of “a
smaller share of a much bigger pie”). To ensure a functional relationship between an investor
and entrepreneur, it is essential that the two partners are in harmony and pursue the same goal
as to the direction of the company. Only then will the invested funds be used to their best
advantage and lead to the exit.
Given the evidence in the previous chapter, the Czech PE market is not able to allocate
resources effectively to its venture capital segments mainly due to29:


Risk aversion on the supply side leading to high minimum investment threshold
Imperfect information on the demand side
If the Czech Republic pursues reaching the European average as benchmark, it has to fill-in a
yearly gap in VC investments values of about 0.023 % GDP according to 2008-2010 figures,
which represents € 33.4 million nowadays.
Stage-by-stage, the possible yearly equity gap amount is about € 2.2 million in seed, € 19.1
million in start-up and € 12.1 million in later-stage venture. The following Table 5 shows the
differences relative to GDP.
Table 5: Possible yearly equity gap in the Czech VC market, GDP percentage, 2008-2010, data source: EVCA, EUROSTAT
Seed
Start-up
Subtotal Early-stage
Later-stage venture
Total venture
29
Czech Republic
Europe
0,0000%
0,0031%
0,0031%
0,0123%
0,0154%
0,0015%
0,0161%
0,0175%
0,0205%
0,0380%
compare with Pazour M., Marek, D. (2011)
Possible equity gap
CZ
0,001%
0,013%
0,014%
0,008%
0,023%
One of the main reasons is that the investment criteria applied by the VC funds operating in
the Czech Republic actually exclude investments in the seed and start-up stages of SME
development.30 Even investments through the later-stage are limited given the minimum
investment size of ca. € 1 million for most funds. Consequently, the majority of realized
transactions are management buyouts or buy-ins and replacement or secondary purchase
transactions.
The gap amount shall be calculated with regard to the real demand. There occurs imperfect
information on the demand side, as the entrepreneurs are lacking practical knowledge on VC
(including its indirect positive effects on business) and are usually not willing to share equity
with investors. This obstacle has to be removed as well, if the Czech market should fill-in the
equity gap.
Furthermore, the future impact of current development in the financial markets on the Czech
VC may not be very positive. The recent regulatory measures tend to influence negatively the
capital available from the funds’ LPs. Less new money in the global PE market should
influence even the Czech capital market, as most of the PE investors in Czech companies are
represented by foreign PE/VC funds31. This adds another risk and uncertainty to the future
development of the so far poor performing Czech VC market, mainly as regards investments
under € 1-3 million. Leastwise, the change in legislation in the Czech Republic may be a
positive factor, which may be further utilised by the VC investors after transposition of the
AIFMD to the Czech law, which is expected in 2013.
The analysis of international data has approved the existence of an equity gap in the Czech
Republic. This is in line with findings of other authors32. The perspective for future research is
to analyse in more detail the causes of the situation on the market and to suggest steps that
should help to bridge the equity gap and help prospective venture business plans to find
financing to strengthen the competitiveness of the Czech Republic.
List of Abbreviations
AIFMD
BI
BIC
CEE
CoC
CVCA
ČRUIF
EIF
EUROSTAT
EVCA
GP
30
Alternative Investment Fund Managers Directive (2011/61/EU)
Business Incubator
Business Innovation Centre
Central and Eastern Europe
Cash-on-Cash
Czech Venture Capital Association
Český rozvojový, uzavřený investiční fond, a.s. (Seed/VC fund of the OPEI)
European Investment Fund
European Statistical Office
European Venture Capital Association
General Partner
For instance due to higher expected IRR etc., compare with Zinecker, M. Rajchlová, J. (2010)
compare with The McKinsey Global Institute (2011) and Di Carlo, A., Kelly, R. (2010)
32
compare with Pazour M., Marek, D. (2011)
31
IRR
LP
MIT
NPV
OPEI
PE
SMEs
STP
VC
Internal Rate of Return
Limited Partner
Ministry of Industry and Trade of the Czech Republic
Net Present Value
Operational Programme Enterprise and Innovation
Private Equity
Small and Medium Sized Enterprises
Science-Technology Park
Venture Capital
List of EVCA definitions
Private Equity: An asset class consisting of equity securities in operating companies that are
not publicly traded on a stock exchange.
Buyout (Management buyout): Financing provided to enable current operating management
and investors to acquire existing product lines or businesses; (Management buy-in) Financing
provided to enable a manager or group of managers from outside the company to buy in to the
company with the support of private equity investors.
Replacement capital: The purchase of minority stake of existing shares in a company from
another PE firm of from another shareholder/s. It can be marked also as secondary purchase
capital.
Rescue/Turnaround: Financing made available to an existing business, which has
experienced trading difficulties, with a view to re-establishing prosperity.
Growth: Most often a minority investment in relatively mature companies that are looking
for capital to expand or restructure operations, enter new markets or finance a significant
acquisition without a change of control of the business. It is usually the first round of PE
financing. Additionally, most investments made by buyout funds into venture stages would be
defined as growth capital.
Venture Capital: A subset of PE, refers to equity investments made for the launch, early
development or expansion of a business.
Later-stage venture: Financing provided for the expansion of an operating company, which
may or may not be breaking even or trading profitably. Later-stage venture tends to finance
companies already backed by VC and therefore involves third- or fourth- (or a subsequent)
rounds of financing.
Early-stage venture: Provision of start-up and seed capital
Start-up: Financing provided to companies for product development and initial marketing.
Companies may be in the process of being set up or may have been in business for a short
time, but not sold their product commercially.
Seed: Financing provided to research, asses and develop an initial concept before a business
has reached the start-up phase.
References
[1]
Merton, R. C. a Perold, A.: Theory of Risk Capital in Financial Firms. Journal of
Applied Corporate Finance, Issue 6, p. 16–32, 1993
[2] Puga, D.: European regional policies in light of recent location theories. Journal of
Economic Geography, Volume 2, Issue 4, p. 373-406, Oxford, 2002
[3] Zinecker, M.; Rajchlová, J.: Private equity and venture capitalists investment criteria in
the Czech Republic. Acta Universitatis Agriculturae et Silviculturae Mendelianae
Brunensis, 2010, LVIII, No. 6/ 2010,p. 26-38.
[4] Ptáček, O.: Delivering Support to SMEs in a Business-Friendly Way: The Seed Fund.
European Procurement & Public Private Partnership Law Review, Issue 4/2012, p. 278283
[5] Pazour, M., Marek, D.: Fondy rizikového kapitálu s účastí soukromých a veřejných
finančních prostředků. Technology Centre of the Academy of Sciences of the Czech
Republic, 2011.
[6] Di Carlo, A., Kelly, R.: Private Equity Market Outlook. European Investment Fund,
2010
[7] EVCA: Central and Eastern Europe Statistics 2010. An EVCA Special Paper edited by
the EVCA Central and Eastern Europe Task Force. EVCA, July 2011
[8] The McKinsey Global Institute: The emerging equity gap: Growth and stability in the
new investor landscape. The McKinsey Global Institute, November 2011
[9] European Investment Fund: JEREMIE, SME Access to Finance in Czech Republic,
Evaluation Study. EIF, 2007
[10] CVCA: Venture Capital in the Czech Republic.
http://www.cvca.cz/files/Czech%20Republic%202009.pdf
Historical, juridical and macroeconomic aspects of the firm´s bankruptcy
L´ubomír Augustín
Abstract: Economic crisis is generating in practical live of firms and households a lot of
negative implications, especially bankruptcy of natural persons / corporations. In the
theoretical economie are arising a expressive and irreplaceable challenges, which we have to
correctly decipher, grab it and find a optimal prevention including effective tools against
inflation, unemployment, recession and others negative factors of the contemporary world.
This is not absolutely easy task for economists, lawyers and reseachers. First part of this
article is regarding history of bankruptcy in France and UK, second part point out
macroeconomics factors under 21. century in connection to firm´s bankruptcy in USA and
Europa. Third part deal with about link among economic theories and bankruptcy, fourth part
of this article emphasise some of bankruptcy agents and last part has a mathemathical context
in the light of econometrics, in the reflection of prediction of numbers of bankruptcy and
evolution of the GDP.
Keywords: law, bankruptcy, insolvency, GDP, inflation, firm, commercial code,
macroeconomics, unemployment, economic theories, economic crisis, econometrics, common
law, lex mercatoria, classical economics, institutional economics, keynesian economics,
monetarism, Chicago school of economics.
JEL Classification: A12
Changes in preparation for long-term economically active life
Jiří Beck, Karel Hlavatý
Abstract: Article defines the issue of extending the economically active life as an important
precondition for a meaningful extension of the life of people and as a new concept for
solution current problems of social security of citizens in old age. The economically active
life is defined as a part of the life of person´s, in which increases (or at least economically
holds) their property. Article stresses the vital importance of the preparatory phase (10 to 30
years) for the entire economically active life. Its important part is education to social
responsibility for own his life. The basic innovation, which leads to improvement of the
preparatory phase, is a fundamental change in approach to a career human life in the present
and in the near future. Promoter of this innovation can only be the State education system, in
particular in its lowest levels. Given the themes of innovation, which improve the current
preparatory phase of the economically active life. Currently for a resolution of practical
problems of the economy is main obstacle the economic ignorance of the specific results
related fields, some of which are listed in the article.
Keywords: economically active life, innovation, social responsibility
JEL Classification: B41, D10, J17, J24
TIMODAZ
Pavel Strnad, Michal Višňovský
Abstract: This article is focused on the data analysis of the project TIMODAZ, which
examines the influence of temperature on the ferroconcrete concrete lining of the nuclear
waste depot. The results of the measured data remote values elimination methods will be
mainly presented in the article as well as how the missing values were supplemented. In the
end of the article the results will be evaluated and recommendations given.
Keywords: TIMODAZ, datamining, outliers, thresholding, interpolation, data inpitting
JEL Classification: C8
Libraries of the BIM components: Past, present and future
Vojtěch Kusý
Summary: In the recent years a new method for building design, analysis and maintenance –
Building Information Modelling (BIM) – has been finally delivered to the practice. It helps to
integrate the processes of the construction industry under one hood. However BIM models are
very complex, they go in a great detail and the particular components contain a number of
various specifications, thus it takes more resources to create them in comparison to the
traditional method of the design. One of the tools, which could help to reduce the BIM model
creation costs, are BIM component libraries, which contain a collection of the needed
component in an appropriate quality and in a format, which is readable by the target BIM
platform. The British “National BIM Library” (NBL) is currently an example of this kind of
tool. In this article, I am proposing embedding ontologies to a BIM library with the following
claims: Processing of the BIM components in a higher semantic level will lead to higher
automation and elimination of unnecessary manual man's work. Moreover, output of
components in one of the widely supported ontological formats we enable use of the
components data in the environment of the semantic web.
Keywords: BIM, IFC, IFD, COBie, OWL, RDF, ontology, metadata, interoperability
JEL Classification: C80, L74
The current European recipe for crisis management - centralization and
regulation reflecting the context of the Austrian School economic theories
and the fundamental principles of the European Union
Helena Mitwallyová
Abstract: The article seeks to answer the question whether the principle of subsidiarity and
decentralization prevail as the main motives of EU policies. It compares the EU economical
action with Austrian School´s economic approach and tries to assess the impact of the subsidy
policy on the economies of the Member States.
Keywords: decentralization, subsidy policy, the European Union, the Austrian School,
regulation, the principle of subsidiarity
JEL Classification: H5, H59, H730, H760
Introduction
The European Union had been forming based on the policies the aim of which was to ensure
the competitiveness of the European region. It strived to do so by the incorporation of the
common market and the economical and monetary union. Moreover, these mechanisms were
to help the development and growth of economies, the employment rates; improve living
standards and increase the quality of the environment. The functionality of these aims was
articulated in four freedoms: the free movement of goods, people, services and capital.
Furthermore, other common EU policies have been defined in the fields of e.g. economic
competition, common export policy and in agriculture. Additionally, the European Union was
also based on the principles of subsidiarity and decentralization.
Considering the present development it may be claimed that the European Union is
abandoning these principles and is on the contrary taking the opposite direction towards more
intense centralization and regulation. We can see a major problem in the dependency of the
individual Member States on the subsidy policy and in the difficulties that occur in case of its
failure. Another problem is the increasing of regulation from the EU part whenever a new
problem arises.
The article should confront the current EU modus operandi with the macroeconomic ideas of
the Austrian School and confirm or contradict the hypothesis that the principles of
decentralization and subsidiarity are still claimed by the EU, but in fact the real EU policy is
getting diverted from these values.
The principle of subsidiarity is a frequently quoted term. What does this principle actually
mean? Let us investigate closer what the EU itself declares: ‘The principle of subsidiarity (...)
determines when the EU is competent to legislate, and contributes to decisions being taken as
closely as possible to the Union citizen. It appears alongside two other principles that are also
considered to be essential to European decision-making: the principles of conferral and of
proportionality. (...) In all cases, the EU may only intervene if it is able to act more effectively
than Member States. (...) The principle of subsidiarity aims at bringing the EU and its citizens
closer by guaranteeing that action is taken at local level where it proves to be necessary.
However, the principle of subsidiarity does not mean that action must always be taken at the
level that is closest to the citizen. (...)‘33
Also decentralisation constitutes one of the basic fundamental principles of European
governance. ‘The White Paper on European Governance furthermore emphasises the concept
of law through intensive participation in state administration. Member State governments as
well as regional and local communities, along with representatives of business and civil
society, individual experts and concerned citizens, are entitled to being involved in the
process of European governance. The European governance should further on develop in the
scope of the subsidiarity principle and in the framework of both vertical and horizontal
decentralisation (presenting the necessity of a larger respect to the opinions of nongovernmental institutions and equal individuals and that on all levels). The efforts of bringing
the European governance closer to regional and local governments and all subjects remain the
centrepiece of attention.’34.
It is clear from what has been declared that the principles of subsidiarity and decentralisation
are key issues for EU politicians. However, how does EU treat the principles nowadays? Is
the proceeding regulation and expansion of the European bureaucratic apparatus in
compliance with these principles?
To be implemented consistently, the principles of subsidiarity and decentralisation presuppose
not only the political but also financial independence of regions. Considering the state of
affairs in the Czech Republic, the political independence has been accomplished. The
financial independence appears to be a problem of a larger extent. The present fiscalfederalism system of reallocating financial means from centres to regions – including the
subsidy system – does not provide for much of financial independence; even though an
optimum rate of fiscal decentralisation of public expenditure is declared to be one of its
principles.
For instance the EU Committee of Regions in its resolution of the 100th plenary session
showed a moderate optimism concerning the progress of decentralisation; although the
Committee rather feels efforts of individual Member State governments encountering the
present crisis to centralise.35
So far we have spoken about the financial dependence of regions – i.e. self-governing units
and municipalities; however a major problem of the Czech economy (and not only it) is the
growing dependence of companies on the state as well as on EU subsidy policies, which shall
be elaborated further on.
33
The European Union/the principle of subsidiarity
Pomahač, R., 2010
35
Draf Opinion of the Committee of the Regions form the 11 th and 12th April 2013
34
The European Union defines a general course in which the whole community should evolve.
The European Commission issued the strategic priorities for the forthcoming decade called
Europe 2020 whereby it states on its webpages:
‘The European Union is working hard to move decisively beyond the crisis and create the
conditions for a more competitive economy with higher employment. The Europe 2020
strategy is about delivering growth that is: smart, through more effective investments in
education, research and innovation; sustainable, thanks to a decisive move towards a lowcarbon economy; and inclusive, with a strong emphasis on job creation and poverty reduction.
The strategy encompasses five ambitious goals in the areas of employment, innovation,
education, poverty reduction and climate/energy.’36 The EU thus strives to play an active role
in solving the present crisis and searches new ways to overcome the crisis and prevent its
repetition. No economist would dispute the goals declared above. However, the question of
how the European Union intends to reach them remains open.
Unfortunately we have to remind the failure of the previous Lisbon strategy elaborated for the
years of 2000-2010, which the EU itself has admitted. It stated that the industrial production
in 2010 dropped to the level of the 1990s and the unemployment rose up to 10% of the
productive population of the EU. (…) The deficit is 7% GDP and the level of indebtedness
exceeded 80% of GDP.37 Has the EU changed its tools and policies so that this failure would
not be repeated or at least it would have a much smaller impact? Is an institution like the EU
whatsoever capable of preventing or diminishing the impacts of individual crises that
economies experience regularly? May the efforts to save economies at all costs in fact be
damaging?
What Is the Correct Solution of Crisis Situations?
Viewed from the point of neo-classical economic theories and theories of the Austrian School,
the solution of crisis situations lies in curbing the bureaucratic apparatus and transferring the
initiative to the private sector. Viewed from the point of the EU the most common solution is
the creation of a new supervisory and regulatory agency that ensures transparent supervision
and control of the issue. What do the neo-classicist economists say about regulation?
Rothbart’s evaluation of the governmental intervention into the economy is fairly blunt:
‘What, then, have we learned about government and money? We have seen that, over the
centuries, government has, step by step, invaded the free market and seized complete control
over the monetary system. We have seen that each new control, sometimes seemingly
innocuous, has begotten new and further controls. We have seen that for governments are
inherently inflationary, since inflation is a tempting means of acquiring revenue for the State
and its favored groups. The slow but certain seizure of the monetary reins has thus been used
to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic
direction of the entire economy. Furthermore, government meddling with money has (...)
36
37
The European Commission, Europe 2020 in a Nutshell
Peková, J., Veřejné finance, s. 577
fragmented the peaceful, productive world market and shattered it into a thousand pieces, with
trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates,
currency breakdowns, etc.‘38 Jörg Guido Hülsmann states in the Epilogue to Rothbart‘s book:
‘It is a matter of time when both North America and Europe reach the dead-end road where
their economies, built upon worthless (unsecured) paper banknotes, have ended up. (…)
Western economies will then become subject to absolute government supervision as was the
case during the German National Socialism, or else hyperinflation awaits us ahead. This
moment may come in several years or perhaps just decades. It may be postponed by the
monetary union of dollar and euro (and yen?). The dead-end street – at the end of which there
lurks socialism or hyperinflation – however remains. Only radical economic reforms (…) can
lead us out of here.’39
The decisions the European Union has made alas confirm Rothbart’s words about each new
control begetting new and further control. How has it handled the present-day crisis? We learn
from the information published on the European Commission websites the following: ‘The
crisis exposed fundamental problems and unsustainable trends in many European countries. It
also made clear just how interdependent the EU's economies are. (…) Repairing the financial
sector: The EU has established new rules and agencies to prevent any forthcoming problems
and ensure their brisk detection; and to make sure all financial players are properly regulated
and supervised.’40 This yet again confirms Rothbart’s words about multiple control and the
establishment of more and more bureaucratic agencies regulating something they cannot even
understand. As Vláčil observes: ‘The concurrence of bureaucratic and risk systems is
symptomatic for the state administration apparatuses. These mostly hold the monopoly to
diagnose problems and their solutions. Not rarely does their decision result in an illusory
intervention resolving nothing whilst rather re-enforcing mechanisms that had given rise to
the problems.’41
Are we to find an optimum solution to the present situation, we have to respect the
interconnectivity of the EU Member States economies. Is the European Union capable of
being reformed into an institution that guarantees the free-market advantages while
performing minimal intrusion into the Member States economies? The European Union
encounters a crucial problem expressed in its motto: ‘United in Diversity’. The European
countries appear to be so diverse that they are not capable of absorbing the unified rules.
The European Union should not solve the aftermath of individual problems but focus on
exterminating their causes. One of the causes may be its meddling with too many spheres in
individual states, which in the Union’s diversity appears to be an unsustainable concept in the
long-term outlook, although the European policy is quite successful in many an area – e.g.
free market, security cooperation policy, the environmental area etc. The solution may lie in
the decreasing of the policies of the European Union or in the reduction of the number of
38
Rothbart Murray W., What Has Government Done to Our Money, p. 87
Rothbart Murray W., What Has Government Done to Our Money, p. 138
40
The European Commission, Economic Governance
41
Vláčil, J. Veřejná správa: Sociálně psychologické problémy v historii a současnosti, p.162
39
present Member States – i.e. only to those that are able to fully meet the rules of the Union. A
kind of “partial” membership may also present a possibility for those states that are not
capable of standing up to the Union requirements. However, these options are so radical and
complicated that a consensus on such a solution is hardly imaginable. On the other hand
escalating regulation and repeated aid to states incapable of fulfilling the Union rules are
measures that cannot be applied endlessly. The European Union finds itself at a crossroads.
The question is which way it will venture. What is important is to decide. The European
Union cannot afford any procrastinating.
The Banking Union – Another Example of the Centralization Activities of the EU
Another step confirming the above-stated approach is the solution concerning the financial
sector regulation. The EU has come up with a new project of ‘the Banking Union’ that should
foresee and prevent Cyprus-like situations. Although the outline of the Banking Union is very
rough, a debate on its functioning has already developed a vivid character. Even the Czech
Republic, although it is not a member of the EMU (European Monetary Union), has taken part
in the discourse; most recently, in the public debate called ‘the Banking Union and the Czech
Republic’ that was organized by the analytical centre Glopolis in cooperation with RSJ, a.s. at
the Centre for Economic Research and Postgraduate Education CERGE-EI on 9th April 2013.
CERGE-EI in its Briefing Paper summarises the three pillars of the Banking Union of the EU:
‘The proposal of the Banking Union stands on three pillars: (i) the single supervisory
mechanism (SSM) that transfers the banking supervision powers from national to European
level; (ii) the common European deposit-guarantee scheme that will lead to a limited though
shared deposit guarantee in European banks; (iii) the common resolution mechanism that will
provide appropriate tools and will ensure cross-frontier cooperation to solve the insolvency of
banks.’42 Apparently, the debate that has evolved around the theme of the Banking Union is
perceived as quite awkward. The ČNB (the Czech National Bank) is hesitant in its approach
to yet another regulation in the banking sector. The director of the Financial Market
Regulation and Analyses Department at the Czech National Bank, Pavel Hollmann, already
expressed his worries concerning the regulation at the Conference of Insurance Brokers in
2011, which is regularly organised by the Association of Czech Insurance Brokers. In his
opinion the up-coming legislation storm could bring about destruction.43
The Banking Union project has its radical opponents in the circles of the Members of the
European Parliament. For example, Daniel Hannan, the British Member of the European
Parliament for the Conservative Party stated on his blog on 14th September 2012: ‘The
European Parliament is back in full session, carrying on as if nothing untoward were taking
place beyond its walls. (…) MEPs are regulating private industries whose workings they
barely understand. Their chief target in this session is the financial services sector, which they
find at once baffling and frightening.
42
43
Briefing paper for the debate BANKOVNÍ UNIE A ČR 9th April 2013, CERGE-EI
ČNB se bojí nadměrné regulace finančních trhů , 11. 10. 2011
Instead of pretending that an outside agency can police the system, we need to shift the
personal incentives. (…) All you need to do is ensure that the people running it (the bank) will
suffer if things go wrong.
Sadly, the EU is going in precisely the opposite direction, passing regulations which are at
once expensive and ineffective, killing off small operators, encouraging mergers and raising
barriers to entry. In other words, Brussels has itself created the phenomenon of ‘too big to
fail’ which is at the root of the problem.’44
Thus yet again the European Union seems not to be solving the problems as it does not focus
on defining and gradually removing the causes; it creates yet another supervisory and
regulatory mechanism that will not prevent the repetition of the whole disaster but will exploit
financial means from the EU budget for its operation. As a result it will produce ‘sterile’
recommendations that will prove too little to remedy the situation.
The Subsidy Policy – The Right Way or a Way to not Being Self-Sufficient?
Most of the developed economies are characterized by increasing the proportion of public
budgets. ‘In the Czech Republic, the public budget constitutes over 40% of the GDP.’45
‘The share of the public sector in the national economy had been growing in all countries
during the past century. The explosion was triggered by the economists’ strong belief in J. M.
Keynese’s theory that public expenditure and budget deficit motivate the creation of new jobs
and reduce unemployment. The 1913 public expenditures in France and Germany totalled
approx. 17% and 14% of GDP respectively; while by 1994 it had already reached 55% and
49% respectively. Also Great Britain has experienced this trend (1910 – 13%, 1976 – 54%).’46
If we looked at some of the developed countries, we would see a constant growth in the
importance of the total governmental expenditures that cumulates diverse trends of partial
components, fluctuation of government consumption and government investments. The
proportion of the government expenditures in relation to the GDP varies in individual
countries, from 11-12% in Paraguay and Guatemala, around 77% in Israel and 54% in
Sweden and the Netherlands. Except for those countries having large expenditures for defence
purposes, the ratio is higher in the developed countries than in the less developed ones;
therefore the economic development seems to lead to an extensive control and large
transfers.’47
At the present economists declare ‘that expelling private investments by government
investments (financed by the deficit) is a standard textbook example of the negative budget
deficit impact on the economy. The subsequent call for loan funds that was initiated by the
issue of government bonds has been pushing up the interest rates, which in turn leads to the
fact that some private investments will never occur. As a result, while the overall investment
Laisses Faire, Regulace z EU nevyhnutelně způsobí další krach. 31. 12. 2012
Holman, R. Makroekonomie. Středně pokročilý kurz., 2010 p.383
46
Holman, R. Makroekonomie. Středně pokročilý kurz., 2010 p.383
47
Kadeřábková, B. Makroekonomie, Neoklasický přístup. 2003 p.226
44
45
volume remains all the same, the ratio of the government (state) investment has risen at the
expense of the private investments.’48
The governments appear to be heading in the opposite direction, despite all the
recommendations of neoclassical economists and economists of the Austrian School. Instead
of encouraging private investment, they are taking the reins of the investment activity
themselves. The European Union encourages the trend especially with its subsidy policy. Is
the current system of fiscal policy the only alternative for the developed world? For instance,
J. Peková states that the present crisis marks the end of the social state epoch and the banking
crisis is only its fuse. The situation where non-democratic states play the role of economic
tigers and the democratic ones are experiencing economical problems deserves at least some
thought, according to Peková.49
Are the Bureaucrats Able to Define the Proper Goals of Subsidy Programs?
A frequent problem of individual subsidy programs is the fact that their targets are not
harmonized in accordance with the real needs of the target group. Who really defines the
target needs that determine where the EU billions are to be redistributed? The answer is at
hand. It is the state servants of individual Member States who follow the research outcome
and data provided by the regional governments; however, the final outcome is mostly far from
the original requirements. The targets are once more ‘sterilized’ on the part of the EU that yet
again assesses whether these targets are defined properly or not. Thus at first sight the EU
appears to accepts the requirements of the decentralized administrations and regions;
however, the endorsement mechanism itself virtually excludes the sustainability of the
original targets. Additionally, the decentralization principle ceases to have credibility at
determining the future regional priorities.
The above-mentioned argument gives rise to justified criticism that the financial means are
wasted on projects lacking any deeper sense and activities that the individual regions could
easily go without. The target of this reproach is very often the European Social Fund (ESF)
whose clerks are flooded with a myriad of various educational projects and trainings the sense
of which we may successfully doubt. What advantages would a Municipal Authority gain
from letting its clerks attend a course of ‘creative thinking’ or a two-day training in
telephoning skills? Ivan Pilip contributed his comment to the discussion on the blog
‘hn/ihned‘: ‘Nonetheless the criticism is justifiable in many cases: the system is too
bureaucratic, the processes take too long and in part of the projects (esp. the so-called ‘soft
projects’ by ESF etc.) it turns the attention of the states to financing those projects that would
otherwise not be a priority.’50
As the financial means shrink, the European Union itself seems to be dissatisfied with its
subsidy policy. This will be demonstrated in the next planning period as the EU will
Šíma, J. Fiskální disciplína jako žádoucí reakce veřejných rozpočtů na nepříznivý hospodářský vývoj.
Nedatováno
49
Peková, J. Veřejné finance, p. 23
50
Dialog IHNED, Jsou evropské dotace přínosem?
48
apparently strive to curb the bureaucratic structures created to redistribute the EU funds
means in individual states and will decide on the allocation of the subsidies itself. Let us give
the example of the transportation area and the financing of the trans-European transportation
network. The next programming period will be specific in that a part of the money will be
diverted to a specific fund CEF (Connecting Europe Facility) and the individual projects from
various countries will compete against each other. The main stated criteria are to be: the
project maturity, European added value and the project’s quality.
What is the Impact of the Subsidy Policy on the Economy?
It poses a very broad question and it is too early to be evaluated. Besides the positive effects
as increasing employment and improving the situation in many areas; a warning sign appears
and that is the growing dependence on the subsidy policy. Is it desirable to accelerate the
economic development through the subsidy policy? What will happen to the economy of a
Member State at the moment the inflow of subsidies slows down or even ceases completely?
There are companies that are now existentially dependent on the subsidies. Primarily, they are
consulting agencies that process the subsidy applications for their clients, but also agencies
that provide various services. And it again belongs to the ESF subsidy sphere. A number of
these companies may vanish by the end of the planning period in the years 2007-2013 as their
services will no longer be sought after. One can object that it deals with only a small section
of the economy. However, we will illustrate further on what the disruption in the flow of
finances from the EU funds caused to the transport infrastructure in the Czech Republic.
The Impact of Terminating Construction Projects on the Transport Infrastructure
Business
After Vít Bárta had ascended the post of the Minister of Transport and Communications in
2010, one of his early resolutions was the termination of planning road and railway
constructions that were financed by the state budget as well as by EU funds.51 His leitmotif
was to reduce the justly-criticized high price of the transport infrastructure construction, and
to change the priorities of the transport infrastructure based on the new so-called
‘Superstrategy’. However, the ministerial decision came in the middle of the programming
period of 2007-2013 when it was unrealistic to expect the European Commission to be willing
to approve of such a fundamental change. The measures that had stopped the planning and
construction of the transport infrastructure took about nine months and had a negative impact
on the institution receiving contributions from the State Budget – Ředitelství silnic a dálnic,
p.o. (ŘSD; Road and Motorway Directorate of the Czech Republic) that ensures the repairs of
the road network in the Czech Republic through contracting private suppliers. However, the
Správa železniční dopravní cesty, s.o. (SŽDC; the Railway Infrastructure Administration, a
state organization) that ensures the same for the railway network was struck even more.
SŽDC had 31 constructions interrupted, while ŘSD dealt with 15 closures. One of the other
aims of the minister was to transfer part of the means from the 1 and 3 priority axes meant to
finance the railway infrastructure to the 2 and 4 priority axes to pay for the road infrastructure.
51
SŮRA, Jan. Bárta zastaví 31 staveb na železnicích, nejvíc silnic stopne na severu Moravy, IDnes.cz, 2010
The above-mentioned suspension of construction preparatory works incurred a significant
drop in the construction works themselves. The report issued by ÚRS Praha, a.s. (a budgeting,
engineering and consulting agency) shows a decline in public tenders as well as in the volume
of financial means in the period of 2008-2012. In 2010, 27% less of public tenders were open
than in 2008. ‘In comparison with the prosperous year of 2008, the value of the contracted
construction orders in 2012 dropped by 46.4%, by CZK 96.6 billion in absolute numbers, out
of which the traffic infrastructure accounted for 75.9%, CZK 88.1 billion in absolute
numbers.’52 Metrostav a.s. (a universal construction joint stock company) states in its Annual
Report for 2012 that the number of employees dropped by 11.2% in the period of 2008-2012.
The yearly revenue per an employee sunk from CZK 229,000 in 2008 to CZK 92,000 in
2012.53 Subterra a.s. (a construction joint stock company) states in its Annual Report for 2011
alike that in consequence of the construction market and prevailing uncertainty in winning
specific orders the first half of 2011 saw a significant reduction of the number of employees,
mainly in blue-collar professions. The decline meant 7% in 2008-2011. The Subterra a.s.
Company also declares that transport construction constitutes 44% of its activities and public
assignments reach 70% of the completed projects. 54
Table no. 1 The development of the number and volume of public tenders acquired in the
construction industry
Year 2012
Year 2011
Year 2010
Year 2009
Year 2008
Development of construction
No.
CZK(mil)
No.
CZK(mil)
No.
CZK(mil)
No.
CZK(mil)
No.
CZK(mil)
ENGINEERING CONSTRUCTION
2 684
70 942
1 961
82 557
2 198
75 664
2 279
140 631
2 202
160 622
Out of which: transport infrastructure
1 028
27 963
736
27 559
761
23 721
935
97 502
1 006
116 014
Technical infrastructure
1 656
42 979
1 225
54 998
1 437
51 932
1 344
43 129
1 196
44 607
Source: ÚRS Praha, a.s., designed by the author
The pace of drawing financial funds that resulted in a lower amount of launched constructions
and subsequently a crisis of this market, slowed down, which in parallel brought about the
reduction in employment not only in the construction companies but also in project
engineering companies (especially in the area of railway construction design). After the restart
of the project preparation, the project engineering companies have not succeeded in recreating
the original number of construction designers, thus the preparation of these highly demanding
ÚRS Praha, a.s. Monitoring stavebního trhu, Veřejné stavební zakázky 2013
Metrostav, a.s., Výroční zpráva 2012
54
Subterra, a.s., Výroční zpráva 2011
52
53
projects has been suffering from a crucial lack of experts. 55 The number of employees
dropped by more than a quarter according to the project engineering companies. Therefore,
after the re-launch of the projects preparation, the companies were not able to start their
activities immediately in the same scope and quality as before the lapse.
More Examples of Companies and the Public Sector Being Dependant on the Subsidy
Policy
There is still another situation frequently debated nowadays that afflicted some of the NUTS
II regions. The Karlovarský and Ústecký regions are now searching for a solution to the issue
of how to handle a penalty that they are to pay for the faulty drawing of the subsidies from the
ROP Severozápad (Regional Operational Program North-West). The penalty is so high that it
endangers the budgets of both the regions. It reaches CZK 2.6 billion. If the regions fail to pay
the penalty, they will not be entitled to receive the subsidies for the already implemented
projects. According to the chair of the Regional Committee of ROP NW Petr Navrátil, the
suspended ROP NW would lock up CZK 4.8 billion for projects that have already been
completed and that are only waiting to be reimbursed as well as for projects for which the
contracts have only just been concluded. In this context, it would mean the largest detriment
for villages and towns that are expecting about a billion Czech crowns in the Ústecký
region.56 A heated discussion is taking place now as to who shall pay the penalty and who is
responsible for the failure. The regions state firmly that the Ministry of Finance is to blame,
while the Ministry insists on the contrary. One of the problems stems from the fact that the
NUTS II regions have been created artificially and were assigned no legal personality. That
gave rise to the different approach adopted by each of the regions, in both cases with the tacit
support of the state. The Ministry of Finance has commented the issue in that regions may
borrow the financial means whilst Regional Committees may not. This situation originated in
the non-systemic division of regions in 2000 when the region boundaries were not laid out
logically, in discontinuity with the NUTS nomenclature.
What happens to the companies and municipalities that do not obtain the promised financial
means from the European subsidies? Their indebtedness will logically increase, which may
eventually result in bankruptcy. The mistakes of the whole system will be paid for by those
who have not participated in creating them. Ludwig von Mises comments on the government
expenditure: ‘It is obvious that if governments make it impossible for their subjects to
accumulate and to invest additional capital, responsibility for the formation of new capital, if
there is to be any, devolves upon government. The welfare propagandist, in whose opinion
government control is a synonym for God’s providential care that wisely and imperceptibly
The findings are based on the outcome of the Personnel and Organisational Audit at SŽDC and the
information from the Ministry of Transport and Communications obtained by BNV Consulting
56
Aktuálně.cz Ústecký kraj nezaplatí pokutu za chyby v čerpání dotací 18:49 | 25.3.2013
55
leads mankind to higher and more perfect stages of an inescapable evolutionary progress, fails
to see the intricacy of the problem and its ramifications.’57
By returning to the previous case of ROP NW, we may claim that Mises’s words suggest that
the consequences of the faulty subsidy policy should be dealt with by the state administration
rather than the end-user of the subsidies who accepted the state bid. The question now is
whether the government and the regions will bicker about who is to pay the penalty for so
long that the European Commission will lose patience and stop the financial funding for ROP
NW indefinitely.
The Financial Independence of Municipalities and Regions as a Condition of the
Decentralization
What is the real situation of the financial independence of municipalities, which I hold
fundamental for the decentralization and the condition for fulfilling the subsidiarity
principles? According to the data of the Ministry of the Interior, more than a half of the
municipalities are indebted. The Ministry of Finance states that the debt of the regional selfgoverning units increased by CZK 2.5 billion in 2012. The year 2013 anticipates the debt to
grow by CZK 1.9 billion, out of which approximately a half falls to the municipalities. 58 In
2010 the amount of the debt of the municipalities including the chartered towns totalled CZK
80.6 billion, out of which credit loans constituted CZK 55.8 billion.59
Considering the structure of the municipality income, the Ministry of Finance presents the
following outline for the year 2013:
Table no. 2 The structure of municipality income in the Czech Republic in 2013:
Item
%
Tax income
66,3
Transfers
17,7
Non-tax income
12,2
Capital income
3,8
100
Source: Designed by the author based on the information provided by the Ministry of Finance.
Considering in detail the income structure of a municipality with extended powers (the
income of the town of Hustopeče in the year 2012 in our case), it is as follows:
Graph no. 1 The income structure of a municipality with extended powers
57
Mises Ludwig von., Human Action: A Treatise on Economics, p. 758
Ministerstvo financí ČR, Rozpočty územních samosprávných celků, dobrovolných svazků obcí a regionálních
rad regionů soudržnosti, č.j. MF- 53 900 /2012/11-114
59
Peková, J. Veřejné finance, p. 532
58
Tax income - state - RUD
2%
Tax income - Fees for service
provided by the municipality
Tax income - Real estate tax
22%
40%
Non-tax income
4%
Capital income
17%
6% 9%
Subsidies - subsidies for the
execution of state administration
Subsidies - other subsidies
Source: Designed by the author based on the information provided by MěÚ (Municipal
Authority) Hustopeče
The graph clearly shows that the income from the state makes up for 62%. While the only
stabile income of the municipality is the real estate tax that only constitutes 6% of the income.
The volume of other parts of the income may change year by year. The municipalities are
obviously dependent on state financing by more than half of their income, and what is more,
94% of the income may vary considerably on a yearly basis. This reveals an insufficient
financial decentralisation and disadvantaged position of the municipalities in the sphere of
financial planning as they are prevented from successfully predicting the level of the income
in future years. These findings are also summarised in J. Peková’s book Veřejné finance
(Public Funds): ‘In the Czech Republic the allocating function of public funds is decentralized
in quite a significant way. (…) The redistributing function of public funds is less
decentralized, although in a relatively larger extent on the level of regions. Nevertheless, the
regions have not aggregated enough funds so far so that they would be able to offer subsidies
to municipalities from their own budgets at their own discretion, especially in the framework
of the regional policy. (…) Nowadays a combined model of fiscal federalism is applied in the
Czech Republic. (…) Neither municipalities nor regions are financially fully self-sufficient.
The largest tax revenue flow into the state budget. (…) Although the rate of fiscal
decentralisation in the Czech Republic has proceeded significantly, (…) the crucial part of
public income still passes into the state budget.’60
60
Peková, J. Veřejné finance, pp. 455-457
The majority of municipalities implement investment operations through various subsidy
programmes. However these suppose co-financing on the part of the municipality, which may
cause serious problems. The municipalities do not have enough own funds at their disposal;
therefore they often take loans. That is the source of their significant debts, which are
considerably increased in case they do not receive the promised subsidy.
Transparency and Trust
The European Union encourages its Members to adopt transparent and open politics. Which
should increase the trust of both the citizens and enterprises in the public sector, in its
decision-making and consequently in the EU itself. That poses a question that we have to
elaborate on; and that is how much does the public administration and the EU institution
actually cost us, and how many people they employ. The task of finding out the number of
civil servants in the Czech Republic is rather complicated. The total number of employees
receiving a salary is over 614 thousand according the Ministry of Labour and Social Affairs of
the CR, which constitutes over 6% of the population. The Ministry of the Interior states that
the number of civil servants was 159 854 in 2010, out of which the number of central state
administration bodies employees was 16 977.
The EU itself does not present a good example. The information about the number of
employees in EU institutions is very hard to reach. The book by P. Konig reveals the
following numbers:
Table no. 3 The number of employees of selected EU institutions
2006
2008
Institutions
permanent
staff
contemporary
staff
permanent
staff
contemporary
staff
EP
4883
918
4998
935
European Council
3393
47
3461
36
European Comission incl.
ECSC
23680
486
25530
483
Court of Justice
1346
411
1453
429
Court of Auditors
657
134
714
140
European Economic and Social
Committee
642
34
668
27
Committee of the Regions
425
34
446
35
European Ombudsman
13
44
15
42
European Data Protection
Supervisor
24
Total
35063
Growth in %
32
2108
37317
2127
6%
1%
Source: Petr Konig and coll. Rozpočet a politiky EU, příležitost pro změnu (The EU Budget
and Policies, an Opportunity for a Change)
However, neither is this is a final list. The European Union establishes a whole number of
agencies. These agencies are divided into three main categories. The first group is formed by
the so-called ‘decentralized agencies and bodies’. There are more than 30 of them in total
seated in various Member States. The EU declares that: ‘They have an important role in the
implementing of EU policies especially tasks of a technical, scientific, operational and/or
regulatory nature. This frees up the EU institutions, especially the Commission, to concentrate
on policy-making.’61 Furthermore it lists six so-called ‘executive agencies’ and the
EURATOM agencies and bodies where there are two agencies. Besides the institutions listed
above the EU structure includes the European Data Protection Supervisor; the Publications
Office the task of which is to publish information about the EU; European Personnel
Selection Office that recruits staff for the EU institutions and other bodies; the European
School of Administration that provides training in specific areas for members of EU staff; and
the European External Action Service. A more detailed investigation would certainly discover
some more institutions. The number of EU employees is the topic of many discussions; some
sources state a number reaching up to 170 thousand employees, for instance the data
published on Marek Knapp’s Blog. He also counts the employees of agencies, experts
working in various groups, employees dealing with EU issues in the Member States, etc.62
We shall content ourselves with the information that the EU expends approximately 6% of its
budget on salaries and building management. If the growth of employment is one of the EU’s
strategic priorities, it may be declared that the EU itself strives intensely to do so. However,
the fact that it is not willing to publish more detailed data about the number of people it
employs is not encouraging trust in it.
The above-stated information again proves the criticism of excessive bureaucratization. As
long as the EU reacts to every problem by establishing a new regulatory and supervisory
agency, the number of its employees will be rising interminably.
Conclusion
We can conclude from some of the above-presented examples that, unfortunately, the EU has
taken the direction of gradual centralisation and excessive regulation, and it is reaching a
‘socialistic’ way of government. Loosely expressed in Mises’s words, interventionism is a
method of adopting socialism in parts.63 The more plentifully the principles of
decentralisation and subsidiarity are discussed, the less they are observed. On the contrary, we
experience a growing number of areas that the EU intends to control centrally. The European
Union is significantly turning away from the neoclassical economic theories and theories of
the Austrian School; it is continually strengthening its institutions and carrying on the policy
of redistributing subsidies. As the conversion of the EU policies to the Keynesian economy is
61
The European Commission/Agencies
Knapp, M., čtvrtek 13. listopad 2008 08:05, ‘EU zaměstnává 170 000 úředníků a ne 25 000’
63
Misses, L. von, 1958
62
obvious, it is a question whether the principles of fiscal federalism can at all be applied
successfully in the framework of the EU.
The EU partially realises the present bleak situation. For instance the Committee of the
Regions adopted the following resolution on its 100th plenary session on 11th and 12th April
2013:
‘3.
points out that in many policy areas, decentralised executives are significantly more
efficient, both from the point of view of cost and in terms of the quality of services and their
proximity to the public
22.
regrets the growing trend towards centralisation that has been noticeable since the
economic and financial situation began to deteriorate, a trend that is based on the mistaken
assumption that transferring public services to the central government level will make them
more cost-effective;
23.
is firmly opposed to the economic and debt crises and the austerity measures that are
required across Europe being used in some Member States as an excuse to further centralise
powers, to devolve powers without providing corresponding financial resources or to
rationalise, reduce or abolish sub-national bodies altogether, which will end up weakening
local and regional democracy;
24.
vigorously opposes such a policy, which violates the European principle of
subsidiarity, according to which political and regulatory decisions should be taken at the most
appropriate level in order to achieve the desired goals and as close as possible to the people;
46.
also recalls that the Lisbon Treaty made it explicit for the first time that the
subsidiarity principle applies to the whole range of EU governments, at European, national,
regional and local level. The principles of subsidiarity and proportionality are prerequisites for
multilevel governance to work in practice;’64
If we return to the formulated hypothesis, the principles of decentralisation and subsidiarity
are still the main EU targets, at least according to its written documents. The real worry that
prevails is that these principles will gradually disappear as a result of the need to solve any
new crisis. The crucial issue is whether the time has not come to implement real reforms of
the EU and re-evaluate its intervention into the Member States economies. Unfortunately, the
goals of the policies defined in the Lisbon strategy for the period of 2000-2010 have still not
been reached. The question is whether the strategic vision of Europe 2020 will be fulfilled
successfully.
We are left with no choice than to hope that the EU takes the recommendations of the
Committee of the Regions to heart and steps out of the vicious circle of excessive regulation
64
Draft Opinion of the Committee of the Regions, 11th and 12th April 2013
and the boosting of the bureaucratic apparatus. And that this happens before the EU is no
longer ‘United in Diversity’ but killed resisting regulation.
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[2]
[3]
[4]
[5]
[6]
[7]
[8]
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2003, ISBN 80-7179-788-X
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