Monetary Policy and the Economy Q2/05

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• Monetary Policy and the Economy Q2/05 (PDF, 1.5 MB) June 2005.

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• Editorial (PDF, 121 kB) Monetary Policy and the Economy Q2/05 en Jun 30, 2005, 12:00:00 AM

• Temporary Slowdown of Economic Activity in Austria Expected to Be Overcome Fast, but Downside Risks Increased — Economic Outlook for Austria from 2005 to 2007 (June 2005) (PDF, 345 kB) Fenz, Scharler. Fenz, Scharler – Monetary Policy and the Economy Q2/05 According to the June 2005 economic outlook of the Oesterreichische Nationalbank (OeNB), Austria's real gross domestic product (GDP) is projected to grow 2.0% in 2005 and to advance to 2.2% both in 2006 and 2007. Fueled by the oil price surge, inflation as measured by the Harmonised Index of Consumer Prices (HICP) will rise to 2.3% in 2005 before dropping noticeably below the 2 percent mark in subsequent years. The second stage of the tax reformwill result in the budget deficit (Maastricht definition) declining temporarily to 1.8% and 1.7% of GDP in 2005 and 2006, respectively. In 2007, the budget balance will improve to —1.3% of GDP. en Economic Forecast Jun 30, 2005, 12:00:00 AM

• 10 Years of Austrian EU Membership: Elements of an Overall Economic Assessment (PDF, 307 kB) Mooslechner. Mooslechner – Monetary Policy and the Economy Q2/05 Austria has been a member of the EU for ten years now. Although accession to the EU would have been economically feasible much sooner, for political reasons, in particular, it had to wait until the end of the Soviet era. On balance, this has been quite a positive decade, though so many relevant changes took place simultaneously — worldwide liberalization trends, the opening up of Central and Eastern Europe, and the establishment of monetary union, to name a few — that it is hardly possible to identify which effects stem solely from EU accession. It is equally inadvisable to see the process of European integration, in its all-inclusiveness, purely under economic aspects. Accession to the EU has fundamentally changed the institutional landscape, which today is dominated by Europe. It has also left its imprint on financial markets and foreign trade as well as the labor market and the regulatory framework. Many of those changes would have been unavoidable even without EU accession. However, in many cases accession was the catalyst for a renewal; in its absence, many structural adjustments would have probably occurred either later or not at all. en Austria, EU membership, 10 Years, Economic Assessment Jun 30, 2005, 12:00:00 AM

• 10 Years of EU Membership: The OeNB in a Changing Environment (PDF, 240 kB) Dvorsky, Lindner. Dvorsky, Lindner – Monetary Policy and the Economy Q2/05 This study discusses the integration developments which have had an institutional, legal and functional effect on the Oesterreichische Nationalbank (OeNB) since Austria joined the European Union. The first stage of Austria's EU membership (1995 to 1998) brought about three major challenges for the OeNB: integration into European bodies and forums, achievement of economic and legal convergence and preparation for monetary union. Once Stage Three of Economic and Monetary Union (EMU) began on January 1, 1999, the OeNB became a member of the European System of Central Banks (ESCB) and the Eurosystem, which went hand in hand with fundamental changes in the structure of the OeNB's tasks in almost all business areas. The introduction of euro banknotes and coins on January 1, 2002, an undertaking requiring an effective communication policy coupled with sophisticated cash logistics, posed a formidable challenge. The OeNB has succeeded in maintaining its role as a think tank and decision-making body for economic policy in Austria, and in making a contribution to stability and peace in the enlarged EU within the framework of European institutions and the Eurosystem. en Central Bank, EU Membership, Austria, Institutions Jun 30, 2005, 12:00:00 AM

• EU and EMU Entry: A Monetary Policy Regime Change for Austria? (PDF, 363 kB) Gnan, Kwapil, Valderrama. Gnan, Kwapil, Valderrama – Monetary Policy and the Economy Q2/05 Economic and Monetary Union (EMU) has changed the monetary policy regime applicable in Austria in many respects, but the stability orientation of Austria's monetary policy has been maintained. EMU's institutional framework and the actual monetary policymaking of the Eurosystem have secured Austria's legacy of monetary stability at the European level. Decision making at the Oesterreichische Nationalbank (OeNB), which had been shaped by the system of social partnership, is now characterized by a greater degree of formal central bank independence. The assignment of various economic policy goals to specific policymakers or institutions, an approach Austria had already followed under the hard currency regime, was maintained under EMU. Like the hard currency policy, the Eurosystem's monetary policy has a medium- to longterm orientation. EMU stabilized Austria's nominal effective exchange rate even more than the hard currency policy could. Therefore, low domestic inflation and wage moderation play an even more important role in maintaining price competitiveness than in the past. The stable real effective exchange rate bears witness to the success in achieving this up to now. Monetary Conditions Indices and Taylor rules suggest that the monetary policy framework has eased for Austria under EMU. EU and EMU entry may have changed various channels of the monetary policy transmission mechanism. en EU, EMU, Monetary Policy, Austria Jun 30, 2005, 12:00:00 AM

• Price Developments in Austria after EU Accession and in Monetary Union (PDF, 380 kB) Fluch, Rumler. Fluch, Rumler – Monetary Policy and the Economy Q2/05 Austrians widely expected prices to fall on account of EU accession, participation in the Single Market and the resulting stepped-up competition. In hindsight, this assessment was partly correct. In the course of the decade from 1995 to 2004, the inflation rate dropped by half to 1.5% per annum from 2.7% (1987—1994). Initial price declines, e.g. in the food sector and later also in some service industries (such as the insurance industry), however, turned out to be mostly short-lived. By contrast, a number of technical industrial goods, such as computer equipment, saw sustained and in part huge price reductions. Liberalization entailed price effects in network industries, with prices in the telecommunications sector a case in point: they decreased over extended periods. Conversely, prices in many service industries have been continually uptrending. Overall inflation hardly changed following the street debut of euro banknotes and coins at the beginning of 2002; yet, prices of some items bought on a day-to-day basis have increased sharply since then. An analysis of the prices of individual items points to frequent price adjustments that coincided with the euro cash changeover in January 2002. Since upward and downward price adjustments roughly balanced each other out, no marked effect on the aggregate inflation rate was observed. To date, European integration has steadily caused price levels to converge, albeit at an altogether modest pace. en Prices, Inflation, Austria, Monetary Union, EU Accession Jun 30, 2005, 12:00:00 AM

• In & Out – A Country Comparison Reflecting on the Enlargement Round of 1995 (PDF, 305 kB) Pointner. Pointner – Monetary Policy and the Economy Q2/05 This paper provides an overview of the economic effects EU membership has had on the countries Austria, Finland and Sweden since their accession in 1995, primarily focusing on implications for price stability and GDP growth. EU accession has led to an intensification of competition or opened up industries to competition in the first place. This, in turn, has dampened prices, in particular in previously sheltered sectors like the agricultural sector. Economic integration has also had a positive effect on GDP growth, increasing annual growth by approximately 0.5 percentage point. As a non-EU member, Switzerland did not experience these benefits. en EU Enlargement 1995 Jun 30, 2005, 12:00:00 AM

• The Impact of EU Accession on Austria's Budget Policy (PDF, 281 kB) Katterl, Köhler-Töglhofer. Katterl, Köhler-Töglhofer – Monetary Policy and the Economy Q2/05 This paper analyzes Austria's budget policy prior to accession to the European Union (EU) and budgetary action taken to support the opening up of the domestic economy and its integration into the EU. Moreover, it assesses the impact that joining the European monetary union has had on Austria's fiscal strategy. The analysis reveals several regime changes over the past few decades: While the fiscal policy goal of the 1960s was, in essence, that of achieving a balanced budget, the government's commitment in the 1970s to developing the welfare state and to pursuing a stabilizing role in addition to its allocation function fundamentally changed the fiscal framework. The rapid rise in the debt ratio that ensued in the second half of the 1970s triggered a debate on the necessity of enforcing upper limits for budget deficits (as a percentage of GDP). This debate led to the proposition of the so-called Seidel formula, with which the federal government's budget deficit regained significance as a fiscal policy target. The government indeed responded to the rising interest payments on the spiraling debt with — heavily debated — consolidation measures. While EU accession as such in 1995 was not deemed to create substantial need for fiscal action, a general government deficit ratio in excess of 5% of GDP called for significant consolidation measures in its own right in 1996 and 1997 in order to ensure that Austria would be among the founding members of the euro area. The new coalition government coming into office in 2000 staged a fiscal policy turnaround in so far as it propagated the goal of a balanced general government budget, which was indeed reached in 2001. Yet given the ongoing weakness of the economy, the goal of achieving strictly balanced budgets has since been redefined into balancing the general government budget over the business cycle. With its decision to design another tax reform, not fully financed right away, Austria recently changed its fiscal policy strategy yet again, incurring a “temporary deviation” from the medium-term target under the Stability and Growth Pact en EU, Accession, Austria, Budget Policy Jun 30, 2005, 12:00:00 AM

• The Impact of EU Accession on Austria's Financial Structure (PDF, 304 kB) Waschiczek. Waschiczek – Monetary Policy and the Economy Q2/05 The trend toward deregulation in the Austrian financial system has gained considerable momentum owing to the country's EU accession in 1995. The relative importance of bank intermediation has declined, while the competitive pressure of euro area banks has remained fairly low to date. Austrian banks reacted to the challenges posed by EU membership by adopting, in essence, three strategies: stepping up the number of mergers and acquisitions, cutting resources and internationalizing their business activities, moving especially into the financial markets of Central and Eastern Europe (CEE). The spectrum of enterprises' financing options has increased considerably as a result of EU membership, whereas hardly any effects have been observed on households' investment decisions. en Financial Structure, Austria, Eu Accession Jun 30, 2005, 12:00:00 AM

• The Internationalization of Austria's Financial Sector since Accession to the European Union (PDF, 356 kB) Fuchs. Fuchs – Monetary Policy and the Economy Q2/05 Since the mid-1990s, Austria and many other industrialized countries have experienced massive growth in their external asset and liability positions. However, Austria's high degree of real economic integration due to its position as a small, open economy only partly explains this development. Autonomous financial transactions, effected independently of external trade financing from a profit motive, are increasingly determining cross-border movements of capital. Legal measures adopted in the run-up to Austria's accession to the EU (e.g. the full liberalization of the Austrian financial sector) favored this development, as did the country's participation in Economic and Monetary Union (EMU). In terms of the rate of internationalization, Austria has as high a degree of financial integration as Finland and Sweden. However, it lags well behind Switzerland or the Netherlands in this respect. In terms of GDP, foreign equity holdings are on a far smaller scale in Austria than in these countries. Austrian securities investors prefer foreign debt investments. The euro area is Austria's most important investment and financing region — especially for securities. In the 10-year observation period, Austria's net income from foreign investments is in line with the European average. en Financial Sector, Austria, Internationalization Jun 30, 2005, 12:00:00 AM

• Financial Market Integration and Financial Stability (PDF, 274 kB) Pauer. Pauer – Monetary Policy and the Economy Q2/05 The present study deals with the consequences of Austria's integration into the Common Market and into Economic and Monetary Union for its financial stability. It shows that financial stability has been increased by a more efficient allocation of capital (as a result of intense competition), a higher degree of risk diversification, a reduced probability of asymmetric shocks and enhanced influence on the establishment of a harmonized framework. These positive effects have to some extent been weakened only by the increased risk of cross-border spillover effects and the growing importance of systemically relevant institutions. Setbacks in the earnings of financial institutions brought about by the integration process seem to have been offset at least in part by measures leading to higher cost efficiency. The cooperation of European countries in the regulation and supervision of financial institutions has promoted the positive integration effects of financial stability while weakening those reducing financial stability. en Economic Forecast Jun 30, 2005, 12:00:00 AM

• Has Accession to the EU and Monetary Union Changed Austria's Labor Market? State of Play and Need for Action (PDF, 329 kB) Stiglbauer. Stiglbauer – Monetary Policy and the Economy Q2/05 Amid increasing internationalization, the domestic labor market had undergone fundamental changes even before Austria joined the EU. In the ten years since, total employment has virtually risen as fast as in the decade before accession, while the increase in dependent employment has been more moderate. Total, long-term and youth unemployment has continued to be low by international standards. Modest growth of wages and unit labor costs has promoted price stability and reinforced Austria's competitiveness. Growth of real wages, however, has slowed down. Many structural problems on the domestic labor market were already in sight at the time of accession. Austria may yet better utilize its unused potential in the employment of women and, in particular, of older people. en Labour Market, Austria, EU, Monetary Union Jun 30, 2005, 12:00:00 AM

• Austria's EU Accession and Trade (PDF, 344 kB) Fidrmuc. Fidrmuc – Monetary Policy and the Economy Q2/05 This contribution discusses the development of Austria's trade with the European Union. First, a descriptive analysis shows that Austrian exports to the European Union were adversely affected by trade barriers during the 1980s and in the first half of the 1990s. As a result, Austria's market shares in the European Union declined steadily until 1995. Second, a gravity model for a panel of OECD countries confirms positive trade liberalization effects after the country's accession to the EU. More recently, the introduction of the euro in 1999 seems to have given a new impetus to trade flows between Austria and the countries of the euro area. en Trade, Austria, EU Accession Jun 30, 2005, 12:00:00 AM

• Sectoral Regulation in Austria before and after EU Accession — The Network Industries as a Case in Point (PDF, 353 kB) Janger. Janger – Monetary Policy and the Economy Q2/05 The network industries, which had been organized in a monopolistic fashion up to Austria's EU accession, were opened to competition following a number of EU Directives and are now mostly regulated by sector-specific authorities. This fundamental change to the regulatory system has so far developed quite positively, both in economic terms and from a regulatory perspective regarding the transparency of these authorities' decision-making processes. Accession to the EU served as an essential catalyst for reforming the relevant regulations, which had come to meet their original purpose of correcting market failures only in part. Thus, Austria's EU entry extended the principle of competition from the already exposed manufacturing sector to other sectors of the Austrian economy. However, chances are that the network industries would have been opened to competition even without Austria joining the EU, e.g. on account of its WTO membership or the discrimination against other sectors which would eventually have demanded such reforms. en Sectoral regulation, Network Industries, Austria, EU Accession Jun 30, 2005, 12:00:00 AM