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financial markets • exchange rates • price level • interest rates goods markets labor markets • economy • sales expectations •labor costs •workers’ qualification company as a system government technology • innovations • know-how foreign countries • financial policy • laws and regulations Competing on: •location •innovation •gov. policies •prices 1 economic schools of thaught goals of economic policy economic agents central bank government partners of wage agreement monetary policy fiscal policy wage policy application of instruments to achieve goals discretionary (occasional control) regulation bound (active, passive) automatic effect of instruments 2 supply-side long-term demand-side short-term (Neo)Classical Keynesianism creation of appropriate conditions for market dynamics (stability of private sector) active stabilization policy to compensate instability of private sector steady, regulation bound growth policy anti-cyclical discretionary characteristics theoretical basis government view strategy real GDP stabilization policy growth real GDP trend time time 3 unemployment rate in % 1995: 8,8 2000: 9,3 10 9 8 7 6 5 4 3 net exports (exports - imports) in % of GDP 2 1 5 1995: 0,6 2000: 1,9 4 3 2 1 1 2 3 4 5 growth of real GDP in % 1995: 1,7 2000: 3,0 1 2 3 4 year 2000 5 inflation rate in % (consumer prices) 1995: 1,9 2000: 1,4 year 1995 4 Level of goals contents macroeconomic level • price stability • high employment • appropriate economic growth • foreign trade equilibrium • fair distribution of income and property •environmental protection • balanced budget meso-economic level (structural goals) • balancing of regional wages • efficient supply of energy • reduction of subsidies microeconomic level • freedom of decision-making for companies and private households • freedom of contract • competition European level • continued, non-inflationary and ecologically sustainable growth • high employment level • high level and stable social net • increase in quality of life • convergence of economic output among member states 5 objective stability of price level appropriate, continuous growth high employment level foreign trade equilibrium stable gov. financing: „Budget criteria“ of the Maastricht Treaty „fair“ income distribution indicator (measurable) objective result projection change of cost-of-living-index or of harmonized consumer price index in % < 2% growth of real GDP in % 2-3% unemployment rate in % < 10% part of exports and imports balance in % of GDP current budget deficit in % of GDP current government debt in % of GDP difference 1,5-2% < 3% < 60% growth of wages in % < 2% growth of profit in % < 3% 6 time “gap analysis” (comparison of target/actual values) no need for action need for action retaining of previous economic policy cause analysis choice and application of instruments evaluation of effects of applied instruments 7 • order inflows • building permissions • orders • share prices • profit expectations business climate consumption climate income expectations early indicators -9 -6 -3 • production • investment • consumption • capacity utilisation unemployment retail sales prices present indicators late indicators 0 wages 3 6 months 8 central bank (autonomous) • national • European parties, parliament government • national (Federal Government and the Länder) • European (Council of Ministers) associations bureaucracies unions and management • ministries • EU-Commission population (electorate) 9 differentiation criteria examples intensitiy of governm. intervention • big command • production prohibition, production commandment • medium inducement • changes in taxes and interest rates • small voting • wage negotiations arranging • qualitative • reduction of bureaucratic restraints • quantitative • changes in taxes and interest rates scope for decision-making • big discretionary, occasionally • changes in taxes and interest rates in discretion • small bound by rules • obligations of intervention in the EMS II • sanctions of the Stability Pact • none automatism • due to progressive taxation - automatic loss of taxes in recession - automatic surplus of taxes in boom 10 directorate president four other members vice president • nomination by EU Council of governments heads • single period of 8 years, re-election not possible administration of current transactions extended by Non-EMU members • GB • DK • CH ECB Council (supreme committee of decision of ESCB) D GR F I A E IRL P B L FIN NL presidents of national central banks from the current twelve member states of the EMU • nomination in national procedure • period 5 years, re-election possible 11 M Pn Yr U reference value for 1 year M3 = 4.5% stable development of prices P n < 2% potential growth of real GDP Yr change of velocity of money circulation = 2 to 2.5% If M3 > 4,5%, inflationary risk will be signalled result due to the forerun character of money supply U = - 0.5 to -1% In-depth analysis of causes if necessary application of instruments of monetary policy 12 fiscal policy Re-distribution stabilisation allocation anti-cyclical cycle-independent discretionary rule bound built-in flexibility 13 department objective (examples) minister of finance • allocation • distribution • stabilization • fiscal objectives minister of economics minister of social affairs and labour superior: • improvement of production conditions of location Germany • safeguarding competitive environment • sustained economic growth • reduction of unemployment • financing of social security systems (e.g. pension funds) 14 GDP growth trend business cycle time budget 0 time + budget surpluses in boom budget deficit in recession; limited by Art. 115 Constitution and criteria of Maastricht 15 tax policy stabilization influencing of economic situation and growth (fiscal policy) distribution allocation correction of income and property distribution influencing the use of factors of production and the consumption of goods & services 16 income tax burden in % 50 48,5% 42% 40 marginal tax burden tariff 2002 30 tariff 2005 20 average tax burden 19,9% 15% 10 taxable income in EUR 0 0 5 10 15 20 25 30 35 40 45 50 55 60 17 example 1999 figures in billion EUR government expenditure 1 wide analysis 2 tight analysis (expenditure concept) 3 tight analysis (consumer concept) 941 = 0,4863 = 48,63% GDP (nominal) 1.935 government consumption expenditures 369 GDP 1.935 collective consumption = 0,1906 = 19,06% 154 = 0,0795 = 7,95% GDP 1.935 Ad 1 inclusive monetary transfers of social security, attributable property transfers Ad 2 without monetary transfers of social security Ad 3 without direct attributable property transfers of government to private households 18 government deficit, loan-financed (+) government fixed capital formation (+) gross domestic product, nominal (+) money market effect interest rate (+) price level (+) negative effect on other Components of aggregate demand 19 net borrowing = revenues - expenditures (of one financial year) net borrowing of government deficit ratio = GDP (nominal) debt ratio debt per capita interest payment burden ratio = = = total government debt GDP (nominal) total government debt population interest payment of government debt GDP (nominal) or government expenditure 20 bill. EUR expenditures 250 21 253 net govern- 15 ment borrowing 238 257 0 5 budget surplus 10 247 revenues 229 2002 2003 2004 2005 2006 2007 21 autonomous partners in wage negotiations trade unions employers objective high wage increases to improve income distribution position of employees, depending on national economic labor market situation: wage restraint where necessary, if jobs are created in return low wage increases; high net profits and flexible labor market regulations, which give scope for investment and meet the companies‘ needs 22 companies employees‘ contribution to social security taxes disposable income real disposable income net wages gross wages employers‘ contribution to social security compensation of employees private households prices 23 key figures 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. production result working hours productivity of labor (1:2) wages per hour sum of wages (2x4) unit labor costs (5:1) material costs/unit other costs/unit costs/unit (6+7+8) selling price revenue (10x1) costs (9x1) profit (11–12) profit/sum of wages (13:5) initial position 4.000 1.000 4 16 16.000 4 25 10 39 40 160.000 156.000 4.000 0,25 EUR EUR EUR EUR EUR EUR EUR EUR EUR EUR output-related wages policy 4.200 1.000 4,2 16,8 16.800 4 25 10 39 40 168.000 163.800 4.200 0,25 (+ 5%) EUR (+ 5%) EUR EUR EUR EUR EUR EUR EUR EUR EUR (+ 5%) results: a) No cost push from wage increases and hence no price increase b) increase of productivity will be equally distributed on labor and capital (5%) c) income distribution (profit/sum of wages ) remains unchanged 24 feedback if missing of goal is persistent recognition lag • information effect lag decision lag • diagnosis • cause realization lag • starting • development time internal lag external lag 25