Volume 62, Issue 1

The economic crisis of 2007 caused a worsening of the public budget in almost all developed economies. Especially GIIPS-countries (Greece, Ireland, Italy, Portugal and Spain) were hit hardest and each of them is posed to the challenge to solve its fiscal crisis. Default, consolidation by inflation and budget consolidation could be considered for crisis management. Furthermore, the European Stabilisation Mechanism was set up permanently to provide relief payments in case of a fiscal crisis of a Eurozone member. There is much to be said for it, but markedly negative incentives are against it. Minimizing the negative effects should be the objective here. Prospectively, the way the reformed Stability and Growth Pact will be executed will be crucial. If the tightening of the pact will be inadequately implemented, the equilibrium within the Eurozone will be shifting permanently to an unopposed free riding.

The comprehensive package of measures proposed by the European Commission on 29 September 2010, and presented to the European Parliament provides the most comprehensive attempt to create a European "economic governance" since the introduction of the Economic and Monetary Union. In view of the shortcomings of existing legislation they aim at a wider and improved monitoring of fiscal policies but also of macroeconomic policies and structural reforms. New enforcement mechanisms for member states which act against the rules are also planned. With an eye on the very important and decisive package of the Commission which includes six legislative dossiers, this paper attempts to identify missing or superfluous and / or unusable items. Furthermore, it is checked what measures beyond these proposals out are, if at all, still missing to make the whole package of governance reforms and overall feasible. These potentially include mechanisms for crisis resolution and debt restructuring, a European Monetary Fund, Project Bonds and / or Euro-bonds. The main focus of the analysis, however, is on the European Monetary Fund, which is called the preferred method. Finally, this paper expands its focus on current events such as the sequence EU summits in 2010 and 2011, which laid the institutional foundations of the European stability mechanism. It is discussed at length whether the looming prospect of a permanent rescue mechanism (ESM) from 2013 on in conjunction with the previously- installed European Financial Stability Facility (EFSF), have the potential to trigger a vicious circle of imminent further increases in interest rate differentials and rising debt in the euro zone. For this purpose, it is sketched from an “Ordnungspolitik” perspective, how a long-term response to crises indebtedness in the euro area should look like. Taking this as a starting point, the paper identifies the reasons for continuing market pressures in the euro zone and derives institutional deficiencies of the found institutional solutions for dealing with the illiquidity and the insolvency of euro area member states. The paper concludes with an outlook and provides an assessment of whether the euro zone debt crisis in their coming years will get a grip.

With reference to the current European crisis of highly indebted states and a common currency under pressure, the concept of a bankruptcy code for states is presented. The article examines the principles of such a code, analyzes interdependencies to other institutional parts of the economy and financial markets and discusses all pros and cons of such a proposal. Connected to the framework of a bankruptcy code, the idea of an international insurance system for government bonds is developed. Countries with poor economic performance and a high debt ratio have to pay higher premiums so that a direct incentive exists in order to implement a more solid budget policy.

In this paper the authors argue that the problem of abusive short selling is not caused by short sales per se. For this purpose they focus on Eucken’s dialectic view on market structures and instruments and propose an institutional framework to avoid abusive short selling. Supervision and disclosure rules are suggested to be part of this framework. In general, the authors support commerce in short sales because of their informational utility for the market.

Destabilizing speculative bubbles are important for the evolution and preservation of a free market society. In the absence of speculative thinking in scientific theories of risk management and financial markets, market speculation accelerates cultural selection and adaption. It further enables market participants to learn how to deal with economic risks. Speculative profits have a bad reputation since neither the value of speculation for society nor the merit of the speculator can be seen directly. Preventing speculation by the regulation of capital markets is likely to fail. Therefore the legislator should pass general rules which allow for speculation. These rules should ensure that a country’s market order is not endangered by political pressure and civil conflicts.

German education policy is currently dominated by many separate interventions. This paper discusses a unifying framework and concrete fields of action in the institutional arrangements of the different levels of education that confront the current challenges of education policy in Germany. It is argued that over people’s lifecycle, financial responsibility should shift from a dominant role of the state to the private. The public operation of many educational institutions should be replaced by private engagement and competition. Several additional features of the institutional framework at the different educational levels require reform to ensure efficient production of and equitable access to education in Germany. The suggested overall concept for education policy entails ten concrete measures in which the need for action seems particularly pressing.

Using the example of the drug relief system, which is one of the ground-breaking parts of modern welfare policy, the effects of different models of welfare states can clearly be seen and also why neo- or ordoliberal oriented policies are most likely to succeed in gaining sustainable control of problems regarding drug addiction and addiction aid. Paternalistic and activating strategies, on the other hand, get bogged down in contradictions in the context of the intentions of welfare states, the interests of helping institutions and the associations behind them, the dynamics of the illegal black market and the unpredictability of the everyday life inherent logic of addicts and people in danger of becoming addicted.

This paper analyses the institutional framework for the German pharmacy sector, which is characterised by significant competition deficits. Based on this diagnosis a pharmacy fee model is proposed as therapy, according to which the complex financial flows between pharmacies, patients and insurance companies are largely abolished and patients directly pay for pharmacy services instead. For this model we analyse the competitive effects and annual saving potentials, which may amount to up to 448 m. EUR.

Walter Eucken strongly rejected the institution of limited liability. From his point of view, only unrestricted full liability was in conformity with the market order. This perspective misses important insights, as is shown with recourse to the modern microeconomics of risk allocation: Firstly, one can realize welfare gains by providing organizations with the status of limited liability. Second, one can realize further welfare gains within organizations by means of incentive contracts to solve principal-agent problems between equity holders and managers, e.g. by convex payment schemes that provide a kind of limited liability for managers. Both aspects are of vital importance for entrepreneurial innovations and thus for the dynamism of market economies. The main proposition is that limited liability within organizations should not be regulated by intervention, but by a second-order politics of institutional design. The article concludes with comments regarding the relationship between the politics and the ethics of institutional order

The German Corporate Governance Code is a means of co-regulation to set standards of good and responsible management. Prior research has shown that overall the Code meets with great approval. However, the Code also contains some standards that are not applied by the vast majority of the German listed companies. In longitudinal studies three pathways are identified how the acceptance of a specific Code standard evolves over time. More specifically, the Code norm can obtain rather high degrees of acceptance from the outset, acquire increasing rates of acceptance over time, or remain to gain comparably low rates of approval. The present article describes these trajectories in more depth and provides a discussion of how the Code norms may contribute to an effective standardization of corporate governance in Germany. The analysis reveals that Code standards can be designed differently but will in general only succeed if the norm addressees utilize their inevitable discretion in a responsible manner.

Since the latest corporate corruption scandals, the private sector is asked to get involved in developing and implementing anti-corruption practices. Particularly in highrisk regions and sectors, businesses are trapped in dilemmas where no single firm can escape the corruptive run. The solution is combating bribery collectively. However, the problem remains of how to seduce competitors to commit to collective action. An adequately designed collective anti-corruption pact may make business perceive the inherent, but intangible benefits deriving from collective action, such as the reduced cost of doing business, a level-playing field, a discussion forum, or enhanced reputation, and change the incentive set of the situation. Yet, anti-corruption pacts are only as effective as their enforcement. The firms’ commitment must be followed by a credible implementation of written stipulated principles. Herein, collective action encounters endogenous, process-inherent challenges, as well as exogenous, context-related challenges. As long as no credible implementation of the anti-corruption pact is reached, business will lack public credibility and recognition. At the same time, the collective effort needs to be backed by an enabling environment that rewards the companies’ attempts to fight corruption. This paper investigates these challenges for collective action enforcement using the example of a private sector anti-corruption pact among pipe manufactures in Argentina and identifies crucial factors for success. Lessons learned from the failed Argentinean experience include the importance of commitment and trust of the intending signatories, the certification of the activities combined with an independent audit, as well as the promotion of the initiative to entice new members. But an enabling environment, in terms of an apt political and economical framework and a civil society, is also necessary. In the end, to make collective action sustainable, it is about getting the incentives right.

This article analyzes interdependencies between a macroeconomic regulatory framework and Corporate Governance. It is argued that a scope of action leads to a utility maximization in public as well as private ordering regardless of externalities on third parties. Due to a total utility maximization strategy, management’s and stakeholders’ interests are aligned and subsequently become concurrent. While, in private ordering, structural deficits of Corporate Governance are projected on the regulatory framework in the form a decision consensus and therefore constrain the functioning of public ordering, deficits of the regulatory framework are transmitted to Corporate Governance structures. These circumstances imply the necessity of a normative shaping of Corporate Governance as well as an embedding in macroeconomic regulatory framework. Thus, a competitive system must be established, which allows for prisoners dilemma constellations among market participants and, additionally, contributes to the reduction of moral hazard.

Unfortunately, the significance of constitutional political economy has been on the wane in academic circles. The reasons for this decline can be found, among other things, in the theory-intrinsic conditions of the research program of constitutional economics, which represent an obstacle to the practical economic, social and political implementation of its ideas. This paper analyzes these theoretical components and demonstrates that to overcome these difficulties a dynamic perspective focusing on an enduring agreement between individuals is needed and the concrete and recursive interactions between different levels of action and rules must be taken into account. Subsequently, we discuss the conceptualization of a modern brand of constitutional economics, one that should be developed based on the recognition of social inequality and guided by the idea of inclusion. With this in mind, theory-based constitutional economics should give way to a theory of constitutional political economy grounded in reality and constantly verified in practice.

The king of the small South Asian state of Bhutan declared in the late 1970’s that for his country Gross National Happiness is more important than Gross National Product. As a definition, Gross National Happiness can be understood as a multidimensional and sustainability oriented structure of social and economic order in Bhutan. Based on Buddhist principles and values it aims for an equilibrium of economic growth and other goals of development as well as for the preservation of national identity and the environment. This article analyses Gross National Happiness from an ordo-liberal perspective. The reconstruction of the existing frame of economic order shows that the “interdependence of orders” in the tradition of Eucken also prevails in Bhutan. The unifying element of the constituent and regulating factors is a basic ethical norm shaped by Buddhist principles. The analysis shows certain parallels of Gross National Happiness and the Social Market Economy. Differences become apparent through factors contrarious to the social and economic order.

In this paper, we intend to clear in the first place, how today’s sciences of psychology and sociology define and understand shame and guilt. In a second step, we document how experimental and psychological game theories as well as traditional economic theory intend to detect the occurrence of shame and guilt. Now as it stands, both the political economy of emotions, the psychological game theory and experimental economics seem to show a great deal of insecurity and lack of sharpness when making use of these two notions. Thereafter, we discuss the guidance and the selection functions which are associated with the feelings of shame and guilt during competition on markets and/or as a part of bargaining processes. Finally, we ask whether it could become a task for policy makers to take action vis-à-vis the emotions of shame and guilt by means of a weak paternalism. Conclusions and the scope for future research end the article.

This paper is concerned with fundamental epistemic and methodological issues in economics. Its core argument is that economics should be conceived and understood as a part of the humanities: that is, a part of the broad study of man, and of academic endeavour that seeks to explain both individual and social action. It raises the central question of how human action can be adequately perceived and conceptualised in economics, and views critically the behavioural approach, which is currently quite prominent. One of the shortcomings of behavioural economics is that it does not distinguish clearly enough between behaviour and action. It consequently overlooks, or at least underplays, the symbolic representations that underlie all human action. In elucidating this theme the paper questions the naturalistic approach to economics, and also the discipline’s pretensions to be, like physics, a predictive science. With recourse to the works of Ernst Cassirer in the field of philosophy and logic of the humanities, this paper argues for an approach to economics that eschews the traditional stress on determining and defining laws, and instead interprets economics as a symbolic form of thought, through which the human world is both created and can be understood.

The voting out of a government or the disempowerment of a dictator may fail if there is no incentive for the individual to participate. A strategic approach is developed which shows the election-participation-decision as an N person chicken-game. With the introduction of selective benefits, the problem is solved insofar as there is only one Nashequilibrium in which everyone participates. The participation in a revolution can be represented as an N person prisoner's dilemma, which can be transformed into a coordination problem - though only if the first-mover-problem that arises can be solved. The result of the strategic approach is that the "stay-in-power-restriction" is mandatory for democratic governments only. Therefore this paper provides one more theoretical explanation for the positive correlation between the degree of democracy and prosperity in cross section comparisons.

The essay discusses from a constitutional economics perspective the issue of what ethical requirements can be properly applied to the economic order in a free society and how, in light of these requirements, the ethical quality of the market economy is to be judged.

Initially, two competing schools of thought on economic integration and unification policy are introduced: The variant proposed by German liberals such as Hayek, Eucken and Röpke and that developed by Saint-Simon and his supporters. Exploring the development of the European Coal and Steel Community, the European Common Agricultural Policy, the Maastricht Treaty and European Monetary Union, it becomes evident that the development of the European Union is characterised by the rejection of the liberal thought on economic integration and unification policy. Moreover, the research identifies that the dominant French ideas on how to achieve economic integration and unification suffer from basic economic and political misconceptions and self-deceptions with fatal consequences for the policies developed. The proposals to salvage the Euro only serve to highlight the inadequacies and delusions of the French approach. Considering the development of the European Monetary Union the author explores the reasons why the chance to utilize the Euro to apply and popularise liberal ideas about economic integration and unification has been missed. Consequently the Euro has developed not into the glue or cornerstone, which promotes and consolidates European integration, but into a potential blasting agent. It does not seem feasible that the key mistakes made at the inception of the European Monetary Union, to fail to align decentral economic and fiscal policies with central monetary policy, can be remedied by enforcing fiscal solidarity between member states. Such proposals, which are based on Saint-Simon’s school of thought, are geared towards an increasing politicisation of the European Central Bank and a debtor-friendly socialisation of fiscal policy. This is more likely to promote the demise rather than to safeguard European economic integration. The article concludes by considering the benefits and challenges of a philosophical and political reorientation towards the liberal thought on economic integration and unification.

At first (Part I), it will be shown that the economic consequences and the conditions of success of the European currency union established by the Maastricht Treaty of 1992 have been either ignored or overlooked by the politicians in charge. As a much praised crowning of the European integration, the Euro as the single currency of the currency union soon revealed weaknesses of growth and competitiveness of the members of the currency union located at its periphery, which provoked public policies financed by budgetary deficits. The same held true for the reactions on the world financial crisis. The growing public debts led to a transfer problem for the currency union and the Euro (Part II). The international loans made to cover the public debts had to be serviced by emitting new loans. To service these loans, finance had to come from balance of payments surpluses, which again led to problems of competitiveness. On the other hand, the growing public debts led to a violation of the deficit criterion self-inflicted by the member states of the union. This in turn made international loans more expensive to the emitting countries and provoked speculation against the key currency of the union, the Euro. The reaction of the members of the currency union was an irritating actionism (Part III) by employing questionable instruments as parts of a placebo-policy designed to calm down an irritated public. To settle the debt problem, signaled by the deficit criterion, resort was taken to a sharp depressive policy to squeeze out the resources of their economy needed to finance the international debt. This policy went as far as obliging a debtor country to carry out a policy designed by the so-called Euro-group, the European Central Bank and the IMF, implying a blunt violation of the sovereignty of the country in question, e. g. Greece (Part IV). Finally, (Part V) and given the rising problems of the European currency union and its Euro, it will be proposed that the crisis of the currency union could be resolved by and admittedly painful and risky return to before Maastricht, i. e., to the European Currency System with its flexible exchange rates, which implies a return to the highly esteemed, while stable D-Mark.

Globalization is observed with large skepticism by a lot of people in western countries. This paper argues for the legitimacy of the globalization process by applying a historical- genetic approach. Thereby, it will be shown that western societies have developed a productive dualism of a particularistic and universalistic ethics. However, living together in a society and especially in the world community cannot be solely based on a large value consent, as the project “Weltethos” promoted by Hans Küng suggests. Instead, a conceptual framework for a world economic system has to take into account the interests of individuals and peoples. Thus, a recourse to the ideas of the social contract theory and the public choice theory as advocated e.g. by James Buchanan is more promising.

In his book „Beyond supply and demand“ (1958), Wilhelm Röpke castigates the social trend towards materialism and secularism. People allegedly view everything from a calculating economic perspective, they lose access to the spiritual source of moral values. According to Röpke, the market is a net consumer of morality. If morality doesn‘t regularly receive new input from separate sources such as religion, it disappears - and with it the basis for the market. But does it make sense to posit such a fundamental dichotomy between the market and morality? For the individual, both spheres overlap. Its institutional character set apart, the market is only an abstract name for the interaction of people in society. It is within a feedback process generating reciprocity that not only the economic wealth of nations comes about, but also their moral wealth - the evolving social capital that is foundational for society, consisting of values, shared religious and other beliefs, morals and traditions