The main goal of the paper is to explain the role of expectations in austerity cycles during financial bailouts. The paper presents a political economy model of bailouts, where the conditions, their implementation, and market reception are considered as forms of a social dilemma. In such situations, expectations about the actions of other actors approximated by the concepts of trust or distrust play a critical role. An environment of trust is conducive to mitigating the size and effects of fiscal contraction, while an environment of distrust is likely to magnify both. It is also argued that the credibility of government is the key driving force in these self-reinforcing cycles. The crisis management experiences of Greece and Ireland serve to illustrate the theoretical model.
The main question of the paper, in the context of European economic governance reforms, is to assess whether strengthening fiscal institutions will resolve the problem of budgetary imbalances in countries prone to the deficit bias. The central argument is that the commitment behind the institutional changes — signaled by the composition of fiscal consolidation and the role of external actors — is critical for the success of reforms. In order to examine this thesis the contrasting experiences of Hungary and Slovakia are analyzed. While both have struggled with fiscal imbalances and eventually introduced far-reaching institutional reforms, these were successful in Slovakia while reversed in Hungary. The major implication of these cases is that changes in fiscal management cannot be treated as mere technicalities and are inseparable from the broader economic policy agenda. In countries where short-term considerations dominate decision-making, rules are implemented only under strong external pressure and are likely to be circumvented.
Following their accession to the European Union, new member states are now facing the next step in the integration process: the adoption of the common currency. While there is a relative agreement about the overall benefits of joining the European Monetary Union (EMU), the timing of entry has been subject to significant controversy. A gradual path of accession is often suggested since the contractionary effects of fulfilling the fiscal criterion of the Maastricht Treaty might contradict the objective of real convergence. The author argues against this position by showing that even without EMU entry it is the self-interest of the new member states to pursue policies in accordance with its rules, considerations of competitiveness make the usual options of financing further deficits (inflation, accumulation of debt, or increasing taxes) very costly in terms of long-term growth prospects. Slovenia and the Baltic countries have already recognised this and have achieved a virtuous circle of low deficit, low debt and high growth rates. In contrast, the Visegrád countries are struggling with the fiscal criteria. In their case accession into the euro-zone opens a window of opportunity to introduce reforms, which are conducive to the long-term sustainability of their finances.
The paper surveys the challenges of researching soft concepts in economics through focusing on trust. Although there is increasing evidence about its importance for macroeconomic outcomes, tensions with the homo oeconomicus model as well as the difficulties of conceptualization and measurement imply significant difficulties for research. The paper argues that comparative economics with its systemic analysis and traditional openness to interdisciplinary approaches is particularly well-suited for resolving these challenges, and it could also provide a contribution to trust research through integrating macro-, meso- and micro-level analysis.
EMU Enlargement to the East and the West CEPR/ESI Conference. Report of the 8th annual conference of the Centre for Economic Policy Research (CEPR) and the European Summer Institute (ESI) held in September 2004 in Budapest, Hungary. (Conference report by Edin Mujagic); Dilemmas around the future enlargement of the EU-EACES Conference. The European Association for Comparative Economic Studies (EACES) held its 8th biannual conference at the Faculty of Economics in Belgrade on September 23-25, 2004. (Conference report by Dóra Gyõrffy and László Jankovics)
Book reviews: (1) T. Szentes: The Political Economy of Development. Globalisation and System Transformation (Budapest: Akadémiai Kiadó, 2004, 439 pp.) (Reviewed by György Csáki); T. Erdos: Fenntartható gazdasági növekedés (Sustainable Economic Development) (Budapest: Akadémiai Kiadó, 2003, 518 pp.) (Reviewed by Dóra Gyõrffy); J. Winiecki - V. Benacek - M. Laki: The Private Sector after Communism, New Entrepreneurial Firms in Transition Economies (Oxfordshire - New York: Routledge, 2004, 170 pp.) (Reviewed by Éva Voszka)
László Csaba: The New Political Economy of Emerging Europe (Budapest: Akadémiai Kiadó, 2005, 359 pp.) (Reviewed by András Blahó); George Kopits (ed.): Rules-based Fiscal Policy in Emerging Markets:Background, Analysis and Prospects (Houndmills, Basingstoke, Hampshire, New York: Palgrave Macmillan, 2004, 286 pp.) (Reviewed by Dóra Gyorffy); J. Barkley Rosser, Jr. - Marina V. Rosser: Comparative Economics in a Transforming World Economy (2nd edition) (Massachusetts, Cambridge, London: MIT Press, 2004, 646 pp.) (Reviewed by Tamás Kovács); Bruno S. Sergi: Economic Dynamics in Transitional Economics: The Four-P Governments, the EU Enlargement, and the Bruxelles Consensus (New York, London, Oxford: Haworth Press/International Business Press, 2003, 234 pp.) (Reviewed by Qerim Qerimi)