Ülo Ennuste Economics

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A Paper

Ülo Ennuste. 2012. “Waiting for the Commission Strengthened Governance Coordination Leviathans: Discourse Memo for the Actors in the Macro-Game “European Semester”- Baltic Journal of European Studies“ Vol 2, No 1, 2012 p 139-164 : http://www.ies.ee/iesp/No11/articles/08_Ulo_Ennuste.pdf

 

Waiting for the Commission-Strengthened Governance

Coordination Leviathans: A Discourse Memo to the Actors

in the Macro Game ‘European Semester’

 

1

 

Ülo Ennuste

Tallinn University of Technology

Akadeemia tee 3,

Tallinn 12618, Estonia

e-mail: ylo.ennuste@mail.ee

Abstract:

 

This is an entirely applied paper for additional implementation

of extant rich macroeconomics knowledge resources to facilitate

 

the ‘European Semester’ processes

 

the novelty may be that

in this implementation the sensitive problems of deteriorating

 

institutions and destructive activities are not entirely disregarded,

 

and we are explicitly demonstrating that the quality of the agents’

 

knowledge structures may have the basic role and importance in

 

reaching effective equilibrium projections in this game.

 

From the viewpoint of Modern Heterodox General Macroeconomics

 

(Macro) the most powerful economic policy statement by the

 

European Union was made in the ‘Lisbon Strategy 2000’—the

 

economy should be knowledge based. This means that the policy

 

projections of the Union’s and the Member States’ socio-economic

 

institutions and strategies should be designed as knowledge based,

 

meaning that these should be based on modern high-level evolutionary

 

institutional theory, dynamic macro mechanism design theory

 

taking into consideration uncertainties and rare destructive shocks,

 

Bayesian learning, with limited rationality and strategically playing

 

actors, and national knowledge structure idiosyncrasies, etc.

 

From the Macro view, the latest important governance policy

 

invention from the Commission was the enforcement of the “Six-

 

Pack” Regulations—especially the central package, The European

 

Parliament and the Council of the European Union. 2011. Regulation

 

“on the prevention and correction of macroeconomic imbalances”

 

introducing the “European Semester” (ES) mechanism for ex

 

 

1

 

I thank András Inotai, Pekka Ahtiala, Alari Purju and the two anonymous referees of this

 

issue of BJES, whose helpful advice, comments and discussions allowed to significantly

improve the analysis.

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Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

ante activities in the prevention and correction of macroeconomic

imbalances of the Member States in real-, financial- and institutional

 

economic

designs, and strategic policy projections. Last but not least,

 

 

we add a field of in-depth central coordination enhancing the qualities

of national and central knowledge and statistic structures for thither

disclosure and transparency (Walker, 2007), and especially for

correcting and preventing informational distortions and destructive

logical or political skews (Cotton, 2012; Ennuste, 2007a).

Although the Regulation is a narrative it is easy to see that the

content may be adequately modelled mathematically as a dynamic

informational cooperative game with side-payments for design

of equilibrium institutional and strategy policy projections—in

the framework played by the actors such as the Commission’s

professoriate Committees, the EU Parliament, the ECB, the Member

States, and others, and complexly coordinated, combined horizontally

and vertically, as by consultations and side-payments (material and

moral) and by limit-constraints (Ennuste, 1978).

If so, it is most convenient mathematically to rigorously study

the necessary and sufficient conditions/postulates for the actors to

successively ensure that the game solutions will be implemented (see,

e.g., Liu & Luo, 2010; Serrano & Vohra, 2001)— the equilibrium

policy projections will be optimally balanced. Most importantly,

some of these postulates are in this paper formulated as Memopoints

for the Member States as well as for the Central coordinator,

and for discourse arguments of these points notes of extracts from

corresponding top-level peer-reviewed research papers are presented,

including Estonian examples. For a better clarification and to avoid

anxieties concerning the ‘variable geography’ (Pisani-Ferry, Sapir

and Wolff, 2012) of the after ESM reform developments in the EU

governance complexities, it may be very operational to introduce

into the narratives some elements of formalizations (some tentative

suggestions in this directions are made in the Annex).

Keywords:

 

European Semester, macroeconomics, mechanism design theory,

Modern Heterodox General Macroeconomics

 

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Waiting for the Commission-Strengthened Governance Coordination Leviathans:

A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

Baltic Journal of European Studies

Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

Introductory meta-remarks

Coordination theme is the basic socio-economic problem, as Friedman (1962,

p. 12) has postulated: “The basic problem of social organization is how to coordinate

the economic activities of large numbers of people.”

Coordination theme in the Modern General

Macro

belongs to the domains of

institutional/evolutionary economics and mechanism design theories

 

 

(N1)

—the

former is happily enough more or less a narrative one, while the latter is nowadays

 

rigorously formalized, based on heavyweight mathematics: “Mechanism design

 

theory is a branch of game theory […] and extends the application of game theory

 

to ask about the consequence of applying different types of rules to a given

 

problem” (Royal Swedish Academy of Sciences, 2007). See also, for example,

 

Ennuste (1978; 2003) on an example of theoretical optimization model of

 

building of national socio-economic institutional and real-economic structure in

 

interactions in a one complex-model—the decomposed solution of this model will

 

derive solution games in the same class presented in ES mechanisms (a complex

 

mechanism combining horizontal and vertical stimulating with side-payments

 

consultation coordination, see Ennuste, 1978; schematically in Fig. 1).

 

 

Figure 1. European semester of policy coordination.

Source: European Semester, 2010.

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From the

Macro

perspective, one of the most promising sections in European

Semester seems to be

 

 

Article 5: In-depth review

1. Taking due account of the discussions within the Council and the

Eurogroup referred to in Article 3(5), or in the event of unexpected,

significant economic developments that require urgent analysis for

the purpose of this Regulation, the Commission shall undertake

an in-depth review for each Member State that it considers may

be affected by, or may be at risk of being affected by, imbalances.

The in-depth review shall build on a detailed analysis of country

 

specific

circumstances, including the different starting positions

 

 

across Member States; it shall examine a broad range of economic

variables and involve the use of analytical tools and qualitative

information of country-specific nature. It shall acknowledge the

national specificities regarding industrial relations and social

dialogue. The Commission shall also give due consideration to any

other information which the Member State concerned considers to be

relevant and has communicated to the Commission. (Regulation of

the European Parliament, 2011)

Naturally, keeping in mind that “a broad range of economic variables” involve

social variables like economic inequality, poverty as well as institutions/

mechanisms structures, and national knowledge paces (Ennuste, 2008 with many

References), etc. and that “country-specific” idiosyncrasies involve an approach

broader than that, e.g. politically sensitive variables like ethnic heterogeneity, etc.

Here we have to remember that in the small Member States situated nearby big

States, the high ethnic heterogeneity may be such a deteriorating phenomenon

(Ott & Ennuste, 1996) and that the problem may not be solved endogenously

and deserves coordination on the higher political level.

And most importantly, at that we have to keep in mind Rothstein’s antidevolutionary

third argument: “The third argument is that it is unlikely that

such mechanisms will be efficiently designed/evolved/adapted endogenously

by market agents. Moreover, if such institutions have been created, we should

expect market agents to try to destroy them.” (Rothstein, 2009)

This kind of “endogenous impossibility” problems may be very important to

consider in the central coordination agendas; for example, specifically for the

effective institutional design and correction projections: it may be that some

mechanisms are coalition-politically skewed (Cotton, 2011) and to the banking

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Waiting for the Commission-Strengthened Governance Coordination Leviathans:

A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

Baltic Journal of European Studies

Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

and magnate lobbing askew—and there may be the case that the opposition

has endogenously not enough bargaining power to correct this endogenously

(Ennuste, 2009) without central coordination.

In the context of this ‘endogenous’ and outside coordination it seems that we

have to introduce here the term ‘semi-endogenous’, see here the interesting

extract by Boettke and Fink (2011):

We respond by stressing that institutions structure the incentives

underlying individual action, secure private property rights are

indispensable for prosperity, institutions have a first-order effect

whereas policies only have a second-order effect, successful

institutional change comes from within a society, and, given the

status quo of developing countries, first-world institutions are likely

not to be available to them.

 

(Boettke & Fink, 2011, p. 499)

Of course the article is not trying to advance the understanding that current

 

dominant Macro discourse on institutions, economic policies and development

 

should not be taken without any critical examination (see more N3 below;

 

Chang, 2011).

 

In the case of Estonia, one of the most urgent in-depth examination examples

 

in the

 

ES procedures may be the presently existing anomaly of ‘zero profit

tax’.

It is probably a politically skewed mechanism and, according to many

 

 

Macro

 

conceptions, dysfunctional in the aspects of sustainability—in favour of

the “haves” and probably the product of incompetent short-termism of the law

 

making and lobbing of the magnates (Ennuste, 2009). And it seems that there

 

is shortage of oppositional political bargaining power endogenously to correct

 

that in the foreseeable future without exogenous coordination. Indeed, a section

 

from the Estonian Government’s recent projection by 2020 postulates:

 

17. Continuing the gradual reduction of taxes on labour and profits

and to increase taxes on consumption and use of natural resources.

[…]

Efforts must be continued to harmonize indirect

taxes that have

 

a significant impact on the functioning of the EU internal market

and to abolish exceptions in the EU

 

. Direct taxes and tax systems

 

(rates) reflect every country’s specific and unique social and political

choices, and thus the principle of freedom of choice of member states

must remain in place in this regard.

 

(Estonia 2020, 2011, pp. 29–30;

emphasis in the original)

 

 

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It is easy to see that this section has fuzzy logic as:

a) the corporate profit tax in Estonia has been for about a dozen years

slashed to zero (sic!) and so a gradual reduction of it is an absurdity in the

macroeconomic context;

b) it is unethical to speak about local profit tax reforms neglecting harmonization

with the Member States especially in the aspect of competition on

capital markets, and incompetently neglecting dysfunctionality problems

domestically as well (see more in

N3

).

 

Deus ex machina

 

. It seems that the ES

process in the peripheral member

countries should first of all limit the implementation of bad policies’ mechanisms

due to incompetent governance based on low-quality public socio-economic

knowledge space. Obviously, some “small” governments of these member

countries have also not enough political bargaining power against devolutionary

camps for the rational implementation of knowledge-based policies and reforms

for sustainable development.

In terms of Estonia, sustainability regeneration ES mechanism equilibrium

policy does exist in the proper following of the

Macro

concepts proposed in

this Memo. Our political administration should focus on trying to apply these

 

efforts constructively.

 

The European Semester professoriate has an obligation to criticize and improve

 

 

those policy efforts in the field in institutional designs and as well in intervention

strategies, and most importantly not to close ayes in the cases of devolutionary

activities.

But if local devolutionary politics is allowed to split the discipline, and

communication discourse across that divide continues to break down, the

 

ES

 

game actors will forfeit what little administrative coordination power/respect it

commands and/or how little respect has been given to the

Macro

concepts and

tools especially in the Estonian case to social capital formation and institutional

 

skewness and most of all to the quality of

 

 

Macro

competence.

 

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Waiting for the Commission-Strengthened Governance Coordination Leviathans:

A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

Baltic Journal of European Studies

Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

Memo Notes

(A) Macro has progressed towards constructive operational theory (N1)

Especially technically in the field of mathematical mechanisms design (see, e.g.,

Royal Swedish Academy of Sciences, 2007), and in the field of institutional

economics, including political corruption modelling (e.g., Holcombe & Rodet,

2012), and thus also in the classical branches especially considering the limited

rationality and Bayesian learning (Royal Swedish Academy of Sciences, 2011),

and in the field of uncertainty considerations in the economic policy projections

(Phelps, 2006) and North

(

1990) on institutional change and economic

performance, market economic systems concepts (Pryor, 2005), and in general

 

by Phelps

 

 

(

2006) on the macroeconomics’ position for a modern economy.

McMillin (2012) writes:

 

 

In her article ‘Macro has progressed’, Kozicki argues that assessing

progress in macroeconomics by focusing on the use of DSGE

modeling is too narrow a focus, and, accordingly, she considers

advances in macroeconomics outside the core DSGE framework.

As evidence of progress in macroeconomics, she points to enhanced

understanding of financial crises, a broadening in the theoretical and

empirical treatment of expectations formation and how expectations

are incorporated in macro models, and improvements in our

understanding of linkages between the real and financial sectors.

(McMillin, 2012, p. 1)

We have to add here to this “narrow Macro” that especially great progress has

been made in including financial indicators into large macro-forecasting models

that had produced dozens of excellent results in the prediction of the previous

global crisis (Bezemer, 2009a).

In the Estonian empirical post-crisis conditions (Ennuste, 2009) and in the

framework of the

ES coordination mechanism the progressed Macro

concepts and

tools may be progressively implicated for the optimization of national economy

 

 

sustainability probability enhancement—first of all in the enhancement of the

quality of national public socio-economic knowledge structure, in the control

and regulation of human and real and social capital mechanisms and strategies,

and in other fields of public economics—instead of the regrettable presently

dominating incompetent use of micro- and meso-economics.

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(B) The SE-Estonian equilibrium socio-economic knowledge structures have to

be compatible and undistorted (N2)

Macro has many theorems verifying the important implications of the actors’

knowledge space credibility levels on the quality of the equilibrium solutions

(see, e.g., Ennuste, 2008 and References).

From this aspect, the extant low credibility and slowness of some Member

States’ public knowledge space should first of all be basically adapted to IT

 

technology

and harmonized with the Eurostat and ECB standards (that should be

 

also improved). This means that the overall statistics are made more transparent

 

 

and comprehensive, less politically distorted, and more efficient in equilibrium

designs and policy projections—for ex-ante prevention of macroeconomic

imbalances, and so with the Eurostat.

Unfortunately, at present such significant indicators as Estonia’s high national

gross external debt, current account and balance of payments, international

investment position are not integrated into comprehensive statistical framework.

More than that, in administrative statistics there are dominating indicators that

in

Macro

sense are not credible, such as PPS currency, especially in comparison

 

to the eurozone countries. In the same sense it is not sufficient to have in the

official statistics just one kind of inflation, especially in the Baltic Rim countries

(Finland, for example, has introduced two inflation indicators).

In the Estonian case, the national knowledge space is contaminated with

politically distorted concept

à la

“we are the best” to hide real strategies of

some political camps for the reasons of the political stability like (ironically)

 

“survival in the crisis only of the richest”, etc., and other

 

 

Macro

-theoretically

 

absolutely non-sustainable boasting concepts like “we have been the first

to come out of the crisis”, etc.—and filled with fuzzy logic plus populist

incompetent outdated market concepts based at best on microeconomics. And

the predominant understanding among local management seems to be “no

capital outflow taxes” although these may be improving welfare in present

situation (Kitano, 2011).

And we must not forget in terms of informational distortions the skewness

problems in the sense proposed by Cotton (2012), and that skewness angle is

easily measured on the complex plain (Ennuste, 2007b).

These regrettable phenomena, alas, also amplified by the Estonian mass media

are helping to play down cognition of the real severity of the present socioeconomic

hyper-crisis situation, and not enabling the making of high-quality

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A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

Baltic Journal of European Studies

Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

forecasts, and, in turn, significantly magnifying the national socio-economic

sustainability risks.

Unfortunately, most of the suggested points stand no chance of easy corrections

endogenously. Adopting

ES

coordination policies in these areas would require

high competence and quality of political leadership. According to the existing

 

policies, there is a lack of these qualities, and the current Commission staff in

 

Brussels seemingly prefers (according to the existing policies) not to notice

 

 

these local objective idiosyncratic shortcomings of economically insignificant

countries, at least in the bilateral consultation and harmonization processes.

(C) Coordination of institutional changes and designs first (N3)

This

Macro analytical paradigm is actively promoted by the

Journal of

Institutional Economics

 

 

and the Journal of Public Economics

. In a recent

publication, Ostrom and Basurto (2011, p. 317) argue: “In order to adequately

 

address the most pressing social and environmental challenges looming

 

ahead, we need to develop analytical tools for analyzing dynamic situations –

 

particularly institutional change.”

 

The most urgent in-depth institutional problems for the Estonian economy

 

 

are in the field of rationalization and harmonizations of the tax system and

corresponding reforms: in the sense of harmonization of investment competition

with the Member States and lowering the risks of domestic capital flight without

domestic taxing and avoiding worsening of the Estonian international investment

position. And, most importantly, presently there is a lack of coordination between

income tax law and national pension law—all these imbalances are increasing

risks of deepening the imbalanced economic inequalities, impoverishment and

emigration.

(D) Equilibrium economic correction and intervention policy (N4)

The crisis has shown that macroeconomic policy in the Baltic Rim region needs

to be better coordinated regionally, especially when it comes to protecting

the Baltic area from the “free” movement of “all kinds” of labour, credit,

investments, financial obligations, etc., considering the seemingly growing

economic differences between the Baltic and Nordic countries in the after-crisis.

(By the way, to euphemistically redress these inequalities, the Eurostat is using

the imaginary PPS “parity prices”, which are actually local deflators. These PPS

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prices are in

Macro

conceptions just blurring the picture and confusing effective

coordination and dissemination of grants, at least in sub-region).

 

 

As far as fiscal deficiencies are concerned, from the

Macro

angle it appears

 

first and foremost in this game as a symptom: in the Estonian case caused by

a highly toxic cocktail from dysfunctional institutions—zero profit tax with

complementary misbalanced social taxing, no taxes for capital outflows, plus

inflationary indirectly confiscating taxing, with political impossibility for

endogenous corrections no national bank’s interventions, etc.

Discourse Notes

 

2

 

(N1) Coordination in the Macro

The coordination theme in modern macroeconomics generally belongs to the

domains of evolutionary economics and mechanism design theories – the former

is happily enough more or less a narrative one, while the latter is nowadays

rigorously formalized, based on heavyweight mathematics, see:

a) The 2007 Nobel Prize in Economics: “

 

Mechanism design theory is a

branch of game theory

 

 

3 […] and extends4 (sic!)

the application of game

theory to ask about the consequence of applying different types of rules

 

to a given problem.”

 

 

 

And see also an example of theoretical optimization

model of building of national socio-economic institutional structure.

 

b) The 2011 Nobel Prize in Economics considers in the econometric models

 

limited rationality (Sargent & Sims, 2011)

 

As politicians and lawmakers (the implementers of institutions) as a rule do not

 

know and dislike mathematics and high-level tedious science in general, they try,

 

especially in this very crisis period to claim that mathematical macroeconomics

 

 

is to blame as the significant destabilizing factor, not able to forecast important

socio-economic events and is no good altogether and whatsoever.

However, this is absolutely not true (Bezemer, 2009a), and is actually

slander—first of all, the high level, such as the Nobel-domain, mathematical

macroeconomic theories are in mainstream credible, these contain all the

2

 

A caveat: all extracts of argumentation are strictly separated from credible peerreviewed

public non-commercial publications

 

 

3

NB! The generally dynamic Bayesian mathematical game theory –

Author’s note.

 

4

For example, in the field of social behaviour, animal spirit, etc. Author’s note

.

 

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Waiting for the Commission-Strengthened Governance Coordination Leviathans:

A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

Baltic Journal of European Studies

Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

uncertainties and moral hazards of

animal spirit

in all varieties (limited

rationality, strategic manipulative distortion of communication, incompetence,

 

greed, etc.), and these theories should be implemented especially in the times of

 

crisis (Bezemer, 2009b).

 

 

If those with political power benefit from corrupt institutions, rulers might not

adopt the rule of law so the ruling class can command a larger share of a smaller

pie. An empirical analysis reveals that the size of government is larger in those

countries that enforce the rule of law. If government expenditures provide some

measure of the ability of the ruling class to command resources, this suggests

that those with political power could benefit from imposing a fairer and more

objective legal structure. Another conjecture is that those in power maintain

corrupt governments to pay off their supporters and enhance their ability to

remain in power. However, the rule of law is also positively associated with

political stability, so better enforcement of the rule of law also enhances the

ability of incumbent governments to remain in power. (Holcombe & Rodet,

2012)

*

Several papers that address the issue of progress in macroeconomics are

presented in this section, which takes its title from an article entitled “Has Macro

Progressed?” submitted to the Journal by Ray Fair. We took the opportunity

of the submission of Fair’s provocative article to solicit the views of other

macroeconomists regarding progress in macroeconomics. Fair’s paper along

with papers by Peter Howitt, Sharon Kozicki, and Harald Uhlig are presented in

alphabetical order in this section. (McMillin, 2012)

*

The Royal Swedish Academy of Sciences has decided to award The Sveriges

Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 jointly

to

Leonid Hurwicz, University of Minnesota, MN, USA, Eric S. Maskin

,

Institute for Advanced Study, Princeton, NJ, USA and

 

 

Roger B. Myerson

,

University of Chicago, IL, USA “for having laid the foundations of mechanism

 

design theory.”

 

 

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The design of economic institutions

Adam Smith’s classical metaphor of the invisible hand refers to how the market,

under ideal conditions, ensures an efficient allocation of scarce resources.

But in practice conditions are usually not ideal, for example, competition is

not completely free, consumers are not perfectly informed plus privately

desirable production and consumption may generate social costs and benefits.

Furthermore, many transactions do not take place in open markets but within

firms, in bargaining between individuals or interest groups and under a host

of other institutional arrangements. How well do such different institutions, or

allocation mechanisms, perform? What is the optimal mechanism to reach a

certain goal, such as social welfare or private profit? Is government regulation

called for, and if so, how is it best designed?

These questions are difficult, particularly since information about individual

preferences and available production technologies is usually dispersed among

many actors who may use their private information to further their own interests.

Mechanism design theory, initiated by

Leonid Hurwicz

and further developed

by

 

 

Eric Maskin and Roger Myerson

, Has greatly enhanced our understanding

of the properties of optimal allocation mechanisms in such situations, accounting

 

for individuals’ incentives and private information. The theory allows us to

 

distinguish situations in which markets work well from those in which they do

 

 

not. It has helped Economists identify efficient trading mechanisms, regulation

schemes and voting procedures. Today, mechanism design theory plays a central

role in many areas of economics and parts of political science. (Royal Swedish

Academy of Sciences, 2007)

*

The paper uses the paradigms of the New Institutional Economics to quantify

a linear optimal choice model as a way of designing perspective institutional

clusters for a national economy. This model uses binary integer institutional

choice variables and structural parameter values based on subjective probabilities

collected from experts by calibration questionnaires.

The optimisation goal may be e.g. a high expected probability of stable

national economic performance under socio-economic development credibility

constraints, dependent on the realization of prospective significant events.

The model may be useful as a complementary tool for the social design of the

effective institutional structure, and especially for evaluation of the socially

optimal values of co-ordinating shadow prices and implementing side-payments

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Waiting for the Commission-Strengthened Governance Coordination Leviathans:

A Discourse Memo to the Actors in the Macro-Game ‘European Semester’

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Tallinn University of Technology (ISSN 2228-0588), Vol. 2, No. 1 (11)

in the political institutional design game. We use the Estonian case as an example.

The model variables and data calibration table illustrations are provided mainly

to demonstrate the broad spectre of issues that may be involved in this analysis.

(Ennuste, 2003)

(N2) The quality of national public socio-economic knowledge structures

The narrative meta-synthetic deduction (Gu & Tang, 2005) of rational conceptions

for implementing mechanism building of the public social knowledge structure

in the environment of the dynamic post-transformation society is extremely

complicated.

First of all, all extant definitions of the structure have their drawbacks

(Ramazzotti, 2005), and more importantly, private information of the actors in

this area is an intangible invisible asset of complex values: moral and material.

So also are the preferences of the actors.

We have stressed in our discussions the importance to tackle these public social

knowledge structures as active dynamic institutions: as the quality of these

structure is not having only relationships with general social developments, but

also directly, with future developments of the implementing mechanisms under

this very study.

Consequently, the studies comprising more or less the whole system may give

only very general results. Still, as this study has proved, this kind of wholeness

analysis based on the meta-synthetic design (deductive implementation theoretic

and inductive empirical-intuitional), might be highly justified, especially in the

case of post-transformation situations. In these cases of rapid structural changes

in many social areas the rational regulation/coordination of current beliefs,

opinions, expectations, and learning structures is extremely important.

The above abstract discussion argued that the adequate socio-economic

information structure implementing mechanisms design should have extremely

complicated configuration:

* Complex and parallel coordination networks (e.g., governmental and nongovernmental);

* Complex coordinating instruments (e.g., material and moral);

* Complex coordinating principles (e.g., incentives and constraints);

* Moral coordination should contain for actors indicators of credibility in

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dissemination of messages (non-distortion, non-erroneous and clear and full

disclosure), respectfulness in absorption and forwarding others messages,

and aggregate indicator of reputation;

* Complex incentive and restriction mechanisms (e.g., may be based on

complex number models);

* Complex sequentially interacting mechanisms should be preferred,

especially in the field of reduction super-uncertainties (coordinating agents’

strategies), and also for reducing fundamental uncertainties;

The results of the survey revealed the importance of taking into consideration

significant current idiosyncrasies of the societies under the study, e.g.:

* Types of political systems (e.g., partocratic democracy may be interested in

disseminating dominantly populist messages to the public and at irrational

closure of national statistics);

* Linguistic heterogeneities of the population (e.g., part of the newly arrived

population may communicatively belong more or less to some other society);

* Weight of academic community in the society.

An extremely interesting phenomenon revealed by the survey and deductive

speculations was that in the current Estonian context, enhancements and

extensions of non-governmental soft (based mainly on moral indicators and

self-analyses) coordinating networks and institutions was by the bulk of experts,

especially among academic people and high-ranking politicians, strongly

supported. The noteworthy exceptions in this point have been the opinions of

some governmental officials.

In general the study revealed that in the current Estonian context the reputation

factors of the actors in the public socio-economic structure building should be

more highly appreciated. Importantly, building the track for flexible mechanism

changes and adaptation in Estonia in this area should aim toward measures, by

adding complementary elements, not obstructing the work of the established

credible respective institutions and introducing new uncertainties, and should

aim at introducing first of all these policies which are connected with increasing

institutional credibility. (Ennuste, 2008)

On capital controls and welfare:

This paper computes welfare levels under different degree of capital

controls and compares them with the welfare level under perfect

capital mobility by using the methodology of Schmitt-Grohé and

Uribe (2007). We show that perfect capital mobility is not always

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optimal and that capital controls may enhance an economy’s welfare

level. There exists an optimal degree of capital-account restriction

that achieves a higher level of welfare than that under perfect

capital mobility, if the economy has costly financial intermediaries.

The results of our analysis imply that as the domestic financial

intermediaries are less efficient, the government should impose

stricter capital controls in the form of a tax on foreign borrowing.

(Kitano, 2011)

(N3) Institutional changes first

Most powerful analytical tools used in the social sciences are well suited

for studying static situations. Static and mechanistic analysis, however, is

not adequate to understand the changing world in which we live. In order to

adequately address the most pressing social and environmental challenges

looming ahead, we need to develop analytical tools for analyzing dynamic

situations – particularly institutional change. In this paper, we develop an

analytical tool to study institutional change, more specifically, the evolution of

rules and norms. We believe that in order for such an analytical tool to be useful

to develop a general theory of institutional change, it needs to enable the analyst

to concisely record the processes of change in multiple specific settings so that

lessons from such settings can eventually be integrated into a more general

predictive theory of change. (Ostrom & Basurto, 2011)

Our ‘Discourse Memo’ is theoretically very much inspired by Cotton (2012) and

specifically by the following claims considered there: “(1) the rich have better

access to politicians than less-wealthy groups, (2) this access advantage makes

the rich better off and skews policy in their favor, and (3) contribution limits can

reduce the rich group’s advantage and result in less-skewed policy […], which

results in more evidence disclosure and better policy.” (Cotton, 2012, p. 369)

Let us add here claims that from the modern heterodox macroeconomics position

probably (1) “the rich” (tycoons, oligarchs, magnates, CEOs especially of banks,

etc., VIPs, dependent think tanks, etc. who are from the macroeconomics’

perspective generally “laisser faire” and “small government” parlour) have also

better access to, for example, the national public press and formation of national

public socio-economic knowledge space, and (2) from the point of political

economics, these access advantages are probably skewing national economic

policies and national socio-economic knowledge structures in favour of certain

interest groups, and (3) national macroeconomics knowledge structures are most

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probably skewing towards sub-optimal short-termism and towards a preference

of myopic and outdated microeconomics market concepts and objectives in longterm

development projections, e.g.: short-term growth v. sustainability,

 

laisser

faire

 

 

 

v. taxes and audition, GDP v. NNI, stimulation v. intervention, forecasting

v. projections, horizontal v. hierarchical coordination, competitiveness v.

 

wellbeing, consolidation v. expansion, unemployment v. employment and fair

 

economic equality, populist growth indicators v. economic potential, and so on

 

 

– towards bad policies first of all from the coordinated economic wellbeing

of the Union’s central player’s long-term views with primary priorities

like convergence, sustainability, employment, alleviation of poverty, etc.

We develop a game theoretic model of informational lobbying between two

interest groups and a politician, in which the politician can require political

contributions in exchange for access. The analysis considers three claims: (1)

the rich have better access to politicians than less-wealthy groups, (2) this

access advantage makes the rich better off and skews policy in their favor, and

(3) contribution limits can reduce the rich group advantage and result in lessskewed

policy. We show that the rich do have better access, with the politician

always offering access to the rich groups and only sometimes offering access

to the less-wealthy group. This does not, however, mean that the rich group is

better off or that policy is biased in its favor. The politician sets access fees to

extract the greatest amount of rent from the political process. When only the

rich group has access, its expected benefit from gaining access is fully offset by

its payment to the politician. In this case, the less-wealthy interest group who

is not targeted by the politician is better off. Contribution limits decrease the

politician’s ability to extract rent, which improves the payoffs of rich interests

and decreases politician payoffs. Finally, the paper presents a novel benefit of

contribution limits: they can encourage the formation of lobby groups or the

search for evidence, which results in more evidence disclosure and better policy.

(Cotton, 2012)

And on institutional equilibrium also:

Institutions that serve the interests of an elite are often cited as an

important reason for poor economic performance. This paper builds

a model of institutions that allocate resources and power to maximize

the payoff of an elite, but where any group that exerts sufficient

fighting effort can launch a rebellion that destroys the existing

institutions. The rebels are then able to establish new institutions as

a new elite, which will similarly face threats of rebellion. The paper

analyses the economic consequences of the institutions that emerge

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as the equilibrium of this struggle for power. High levels of economic

activity depend on protecting private property from expropriation,

but the model predicts this can only be achieved if power is not as

concentrated as the elite would like it to be, ex post. Power sharing

endogenously enables the elite to act as a government committed

to property rights, which would otherwise be time inconsistent. But

sharing power entails sharing rents, so in equilibrium power is too

concentrated, leading to inefficiently low investment.

 

(Guimarães &

Sheedy, 2012)

 

*

 

A European Semester should encapsulate the surveillance cycle of budgetary

and structural policies

 

.

It would start early in the year with a horizontal review under which the European

 

Council, based on analytical input from the Commission, would identify the

 

main economic challenges facing the EU and the euro area and give strategic

 

guidance on policies. Member States would take conclusions of this horizontal

 

discussion into account when preparing their Stability and Convergence

 

Programmes (SCPs) and National Reform Programmes (NRPs). SCPs and

 

NRPs would be issued simultaneously, allowing the growth and fiscal impact

of reforms to be reflected in the budgetary strategy and targets. Member States

would also be encouraged, in full respect of national rules and procedures, to

involve their national parliaments in this process before submission of the SCPs

and NRPs for multilateral surveillance at the EU-level. The Council, based on

the Commission’s assessment, would subsequently provide its assessment and

guidance at a time when important budgetary decisions were still in a preparatory

phase at the national level. In this context, the European Parliament should be

appropriately engaged. (

Estonia 2020

, 2011)

Estonian Government projection by 2020 postulates:

 

 

17. Continuing the gradual reduction of taxes on labour and

profits and to increase taxes on consumption and use of natural

resources.

Greater taxation of wages and profit will limit economic growth more

than the equivalent amount of taxation on consumption and use of the

environment. For this reason, we must support at every level

 

a shift in

taxation from workforce (direct taxes) to taxation of consumption

and resource use (indirect taxes).

 

Besides geographic location and

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reputation of the state, taxation is one of the most important factors

that helps draw foreign direct investment to the country. Favourable

taxes are the linchpin for positive investment decisions in cases

where other prerequisites (basic infrastructure, education, security)

are ensured to a degree comparable with other countries. Thus, as

one measure to be established, a ceiling will be set on the pension

insurance component of the social tax.

Efforts must be continued to harmonize indirect

 

taxes that have a significant

impact on the functioning of the EU internal market and to abolish exceptions

 

in the EU

 

 

 

. Direct taxes and tax systems (rates) reflect every country’s specific

 

and unique social and political choices, and thus the principle of freedom of

choice of member states must remain in place in this regard.

Estonia must become the 28

th

tax system to support the uniform consolidated

income tax base on condition that it will simplify the functioning of the

 

entrepreneurial environment and that it is possible to maintain the current

 

Estonian corporate income tax principles. Simplicity, transparency, low

 

administrative costs are of key importance for Estonia in maintaining and

 

increasing the competitiveness of the entrepreneurial environment. (

 

 

 

Estonia

2020

 

 

 

, 2011, pp. 29–30)

It is easy for us to see that by all standards of modern heterodox macroeconomics

 

(synthesis of the evolutionary, institutional, Bayesian and other macro

 

theories, e.g., Keynesian and Friedmanian doctrines, etc) this section is

 

completely skewed towards the interests of the richer Estonian stakeholders

 

 

and this especially in the EU long-term context, and based first of all on myopic

outdated microeconomic and populist concepts such as: “Continuing the

gradual reduction of taxes on […] profits (sic! –

Author

) and to increase taxes

 

on consumption”“—(a) profit tax in Estonia has been annulled to zero (sic!)

for about a dozen years already, and is thus an absurdity in the macroeconomic

context: unethical and not harmonized in the international competition on

capital markets, and dysfunctional domestically as it pushes capital out of

domestic economy (Eesti Pank, 2012) and unfairly inflicting increasing labour

taxes and inflation, and (b) increase of taxes on consumption would first of all

be hitting most severely the population in-poverty-risk and material deprivation

and (c) this tax policy is macroeconomically almost certainly not sustainable

as, for example, indirectly it is stimulating outflows of capital and labour out

of the country, increasing domestic economic real inequality, etc., and with

great probability inflicting sub-optimal long-term development of the national

economy.

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And the statement “Estonia must become the 28

th

tax system to support the

uniform consolidated income tax base on condition that it will simplify the

 

functioning of the entrepreneurial environment and that it is possible to maintain

 

the current Estonian corporate income tax principles” is not only skewed but

 

also logically fuzzy in the interests of investors and in trying to perpetuate the

 

idea that the less-wealthy should pay for some public expenses connected with

 

 

the profit-making of the “haves”.

Most importantly, the current populist macroeconomic policy on the basis of

distorted low-quality national public knowledge space (dominated by myopic

populist liberal microeconomics doctrines such as “flat taxes and small

government” and “domestic devaluation”) has, in the recent years, turned

Estonia’s economy on a negative divergence trend in the EU-27 comparison

(see Fig. 1: Estonian GDP pc even in the decorative PPS currency in sigma

convergence has taken a downwards trend). Remarkably, there is a regrettable

Figure 1 but, myopically, no word of responsible explanation about this

significant dismal trend in this document. Probably a turn to unsustainability has

also taken place (recall as unbalanced amounts of capital and labour is flowing

out of the domestic economy)—all that regardless of substantial grants from

the EU budget. It is likely that the neglect to analyze these most important

negative tendencies becomes possible because Estonia’s administrative statistics

lacks a clear-cut rubric of ‘Sustainability indicators’.

Projections such as

Estonia 2020, Europe 2020

, etc., and clusters of official

 

statistical sustainability indicators must also contain information about macro

 

financial

flows and stocks, human capital macro flows and stocks, FDI flows

 

and stocks, different inflation indicators, relevant tax reforms time lines, poverty

 

 

indicators, etc.

In this respect, “the process of giving strategic guidance on policies to the

Member States when preparing their Stability and Convergence Programmes

and National ReformProgrammes” should be the central role of the

ES

. It may be

claimed that this mechanism has been designed according to modern standards of

 

the heterodox mainstream macroeconomics (especially Bayesian informational

 

coordination mechanism with side-payments theories). But as such it may be

 

 

skewed and in conceptual conflict with the national socio-economic managers

and administrators interests of most peripheral Member States and the local

interests of international banks and monopolies (high inflation, tax paradise,

low wages, etc

.

), and, most importantly, in contradiction with the national public

knowledge spaces mainly formatted on outdated liberal microeconomics’ tenets.

 

 

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This information asymmetry phenomenon may hamper or already has impeded

the optimal implementation of the European Semester coordinating game

mechanisms. And perhaps something has to be urgently done or regulated first

of all in this mechanism by the Commission, especially in the field of enhancing

the quality of macro-communication mechanisms and improving the quality of

national macro statistics (e.g., include sustainability indicators, etc., and publish

the comparative GDP growth rates of the member countries (Eurostat, 2012).

The article tries to advance our understanding of institutional economics by

critically examining the currently dominant discourse on institutions and

economic development. First, I argue that the discourse suffers from a number of

theoretical problems—its neglect of the causality running from development to

institutions, its inability to see the impossibility of a free market, and its belief that

the freest market and the strongest protection of private property rights are best for

economic development. Second, I point out that the supposed evidence showing

the superiority of ‘liberalized’ institutions relies too much on cross-section

econometric studies, which suffer from defective concepts, flawed measurements

and heterogeneous samples. Finally, I argue that the currently dominant discourse

on institutions and development has a poor understanding of changes in institutions

themselves, which often makes it take unduly optimistic or pessimistic positions

about the feasibility of institutional reform. (Chang, 2011, p. 473)

(N4) On socio-economic policy-strategy and institutions’ skewness

First, for a recovery from hyper-crisis perhaps Estonia shouldn’t all together

rush to exit from the variety of significant, direct regulation mechanisms and

instruments like fiscal stimulus and monetary relaxation, intervention policies,

etc., categorically. Perhaps it is not yet too late to ensure a proper sequencing

of these instruments complementary to budget cuts, with the goal of preventing

a hyper- unemployment (20%), massive euro loan-bankruptcies of households

and double-dip recession. This, first of all based on domestic recourses (e.g.,

from the Bank of Estonia, state bonds, etc.).

Second, Estonia should instantly rush to establish “harmonization” with the

European Commission regarding the amendment of the extant Maastricht

inflation criterion: in present form it is methodologically defective, non

 

transparent,

and with that may cause irretrievable socio-economic and credibility

 

losses for Estonia; and perhaps in the crisis situation, it may be rational for

 

Brussels to move beyond a rigorous adherence to the whole stability and growth

 

pact altogether (see also Sapir, 2009).

 

 

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Third, a reform of the Estonian tax system is probably instantly necessary: in the

sense of harmonization of investment competition with the member countries,

for enhancement of Estonian socio-economic sustainability, lowering the risks

of domestic capital flight without domestic taxing and avoiding worsening of

the Estonian international investment position. And, most importantly, presently

there is a lack of coordination between income tax law and national pension law,

etc. (Ennuste, 2009)

Annex

A sketch of formalization of the ‘geometry’ of the EU Macroeconomic

Governance Hierarchy according to the ESM Reform and Estonia’s Position

This sketch is mainly based on Pisani-Ferry, Sapir and Wolff (2012), and partly

on Estonia’s position as proposed by Purju (2012).

The euro crisis and subsequent policy responses have challenged the assumptions

underpinning the governance of the euro area, and the relationship between the

European Union’s euro- and non-euro countries. The euro policy regime has

become increasingly complex and difficult to manage, raising the question of

the accountability of decision-making to citizens. The complexity also threatens

to create frustration for euro-area members who fear that initiatives to strengthen

the euro will be hindered, and for non-euro members who fear that they will be

de facto deprived of their say in decisions of major relevance to them.

It is easy to see in this situation of the EU after the ESM reform developing

variable complex macro-governance hierarchy geometry with many overlappings

of the mechanisms and regulations—for the sake of clarity, it may be very

operational to introduce in the narratives some elements of formalizations as

on the hierarchical coordination levels as on the Member States’ position’s

structures, simply to classify the complex and multi-dimensional problems more

rigorously and transparently and alleviate complexity frustrations.

The General Geographic Model of the EU Macroeconomic Governance

Hierarchy (Country Matrix […] + Coordination Mechanism {…}):

R(EU)=EU[(Mec+Mep)+(Mnc+Mnp)]{LT+ESM}

Where

R – rebuilt; M – set/number of the Member States; e – euro countries;

n

 

– non-euro Countries;

c – core; p – peripheral; LT

– mechanisms based on the

 

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Lisbon Treaty;

ESM

– the European Stability Mechanism in complex (‘European

Semester’ … and rebuilt regulations and institutions; note the Regulation

 

Network on the Institutional Matrix).

 

 

Table 2. The increasingly complex decision-making.

Source: Pisani-Ferry, Sapir & Wolff, 2012

Remarks on the idiosyncrasies’ cluster of Estonia’s position in the European

Semester context in the Mep group (narratives based on (Purju, 2012)), e.g.

Cee = ( … Xc-… )

Where

X may mean Estonia’s convergence indicator in the Mep, c

– level not

satisfactory, and the minus sign indicating the worsening perspective.

 

 

Narratives for finding the most significant indicators

Estonia’s GDP growth was 7.6 per cent in 2011 and is expected to be 1.7 per

cent in 2012 after a 24 per cent decline during 2008–2009. The budget deficit is

expected to be 2.6 per cent in 2012. (Purju 2012)

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Estonia’s general convergence position regarding the EU countries at the time

is detonating—labour and capital is an anomaly flowing out of Estonia, inflation

is high, NNI pc is low, gross foreign debt is on the average level compared

to the payment facilities, and the tax system is unbalanced, general welfare

is declining and real inequality is high and increasing, the ethnic conflict is

impeding economic evolution and the country has not enough bargaining to

alleviate it, the quality of public national macroeconomic competence is low and

the ESM reform is increasing anxiety and populist policies, etc.

Estonia is interested in strengthening the euro area, the common financial market

and competitiveness of the EU. Economic and financial policy of the EU should

be sustainable and the Member States should fulfil the requirement of the SGP,

(

Estonia’s European Union Policy 2011–2015

, 2011). […] Estonia is looking

 

forward to that the budgetary rule introduced by fiscal compact will support the

achievement of EU priorities. (Purju, 2012)

*

Estonia is interested in sustaining its tax system, which is very strongly biased

toward indirect taxes, there is a proportional income tax and retained corporate

profits are taxed with zero per cent corporate income tax. At the same time,

Estonia is interested in harmonisation of rules for value-added tax and excise tax

(elimination of exceptions) and some kind of harmonised tax base for corporate

income tax, operating on the EU market. (Purju, 2012)

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