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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. References [1] CANNAN, E. 1921. The Meaning of Bank Deposits. Economica, No. 1 (Jan., 1921), pp. 28-36, Published by: Wiley. [2] DAVIDSON, P. 1972. A Keynesian View of Friedman’s Theoretical Framework for Monetary Analysis. Journal of Political Economy, Vol. 80, No. 5 (Sep. – Oct. 1972), pp. 864 – 882, Published by: University of Chicago Press [3] DIRUZZA, R. 1984. Quelques commentaires sur le communication du Professeur Davidson. Mimeo, ISMEA, University of Ottawa Conference, October 1984 [4] FISHER, I. 1997. 100% Money, Pickering & Chatto, 1997, 312s s., ISBN 1851962255 [5] FONTANA, G. 2004. Rethinking Endogenous Money: A Constructive Interpretation of the Debate between Horizontalists and Structuralists. Metroeconomica, Vol. 55, No. 4 (2004), pp. 367-385. [6] EICHLER, M. 2007. Causal Inference from Time Series: What Can be Learned from Granger Causality? Department of Quantitative Economics, University of Maastricht, 2007 [7] FRIEDMAN, M. 1966. The Methodology of Positive Economics. In Essays In Positive Economics (Chicago: Univ. of Chicago Press, 1966), pp. 3-16, 30-43. [8] FRIEDMAN, M. 1992. Money Mischief: Episodes in Monetary History. New York: Hartcourt Brace & Company, p. 270, ISBN 978-0-15-661930-1 [9] GURLEY, J. G. 1960. The Radcliffe Report and Evidence. The American Economic Review, Vol. 50, No. 4 (Sep., 1960), pp. 672-700. Published by: American Economic Association [10] HOLMES, R. A. 1969. Operational Contraints on the Stabilization of Money Supply Growth. Federal Reserve Bank of Boston. Controlling Monetary Aggregates, June 1969, pp. 65–77. [11] HUME, D. 1987. Of money. In HUME, D. 1987. Essays, Moral, Political, and Literary. Indianapolis, IN: Liberty Fund, Inc. [12] HUŠEK, R. 1999. Ekonometrická analýza. Praha: Ekopress, 1999, 303 s. ISBN 808611-919-X [13] JESPERSEN, J. 2011. Macroeconomic Methodology: A Post-Keynesian Perspective. Edward Elgar Publishing. 2011, 272 s., ISBN 1849802122 [14] JÍLEK, J. – SVOBODOVÁ, J. 2013. Účetnictví podle mezinárodních standardů účetního výkaznictví (třetí vydání). Grada Publishing: Praha, 2013, s. 448, ISBN 97880-247-4710-1. [15] JÍLEK, J. 2006. Money and Monetary Policy: Current Practice. University of Economics in Prague: Institute for Economic and Environmental Policy, 2006, p. 274. [16] KALDOR, N. 1970. The New Monetarism. Lloyds Bank Review (March 1970), [17] KEYNES, J. M. 1930. A Treatise on Money: The applied theory of money. Virginia: AMS Press, 1930, 424 s., ISBN 0404150020 [18] KEYNES, J. M. 2006. The General Theory of Employment, Interest and Money, John Maynard Keynes. Atlantic Publishers & Distributors (P) Limited, 2006, 400 s., ISBN 8126905913 [19] KORDA, J. 2007. Kauzalita jako metodologický problém ekonomie. E-LOGOS: ELECTRONIC JOURNAL FOR PHILOSOPHY, 2007, ISSN 1211-0442 [20] LAUBACH, T., WILLIAMS, J. C. 2001. Measuring the Natural Rate of Interest. Washington, D.C.: Board of Governors of the Federal Reserve System, November 2001. [21] LIN, L. 1937. Are time deposits money? The American Economic Review, Vol. 27, No. 1 (March 1937), pp. 76-86 [22] LOPUŠNÍK, O. 2010. Různá pojetí endogenity peněz v postkeynesovské ekonomii: Reinterpretace do obecnější teorie. IES Working paper: 5/2010. Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague [23] MANKIW, G. 2001. Macroeconomics, 5th Edition. University of Harvard. ISBN 0716752379 [24] MENGER, C. 1892. On the Origins of Money. Economic Journal, volume 2, 1892, p. 239-55. [25] MISES, L. W. 1998. Human Action: A Treatise on Economics. Auburn, Alabama: Ludwig Von Mises Institute, 1998, p. 952, ISBN 0-945466-24-2 [26] MOORE, J. B. 1991. Money Supply Endogeneity: "Reserve Price Setting" or "Reserve Quantity Setting"? Journal of Post Keynesian Economics, Vol. 13, No. 3 (Spring 1991), pp. 404-413 [27] POLLIN, R. 1991. Two Theories of Money Supply Endogeneity: Some Empirical Evidence. Journal of Post Keynesian Economics, Vol. 13, No. 3 (Spring 1991), pp. 366396 [28] pp. 1-17. [29] POTUŽÁK, P. 2012. Some Elucidations in the Austrian Business Cycle Theory. Journal of International Scientific Publications. 2012. sv. 6, č. 3, s. 96 - 132. ISSN 1313-2555. [30] ROCHON, J.-P. 1999. The creation and circulation of endogenous money: A circuit dynamique approach. Journal of Economic Issues. Vol 33., No. 1 (Mar 1999). pp. 1-21. Published by: ME Shartpe, Inc. [31] ROCHON, L., P.; ROSSI, S. 2006. Endogenous money: The evolutionary versus revolutionary views. Gennaio, No. 14, 2006. [32] ROUSEASS, S. W. 1992. Post Keynesian monetary economics (2nd Edition). New York: M. E. Sharpe, 1992, 136 s. ISBN 1-56324-082-3. [33] SCHUMPETER, J. A. 2006. The History of Economic Analysis. Taylor & Francis eLibrary, Routledge. 2006, s. 1321, ISBN 0-203-98391-2 [34] SOJKA, M. 2002. Postkeynesovská teorie peněz, peněžní a úvěrová politika a postavení centrální banky. Working paper UK FSV – IES, No. 20 (December 2002). [35] WICKSELL, K. 1962. Interest and Prices: A Study of the Causes Regulating Value of Money. New York: Sentry Press, 1962, ISBN 978-1-61016-059-9. [36] WILLIAMS, J. C. 2003. The Natural Rate of Interest. San Francisco: Federal Reserve Bank of San Francisco Economic Letter, October 2003 (No. 32). 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. References [1] [2] [3] [4] [5] [6] [7] [8] HOLMAN, Robert. Makroekonomie. Středně pokročilý kurz. 2. vydání, Praha : C.H.Beck, 2010 424 s., ISBN 978-80-7179-861-3 KADEŘÁBKOVÁ, B., Úvod do makroekonomie, Neoklasický přístup. C.H. Beck, 2003, ISBN 80-7179-788-X KONIG, P. a spol. Rozpočet a politiky EU, příležitost pro změnu, 2. aktualizované vydání, Praha: C.H. Beck, 2009 ISBN: 978-80-7400-011-9 MISES, L., von., Lidské jednání Pojednání o ekonomii. 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