64

Financial fragility theory substantiation theoretical

postminskian synthesis in contemporary economical
researches1

PhD Candidate Sanda Mihieanu

Abstract: A taxonomy of financial fragility phenomenon classifies it

systemic triggers action both at micro and macroeconomic level. If, at the
micro level, signaling financial fragility becomes evident even from the
companies balance sheet level (assets and liabilities are extremely
sensitive to changes in interest rates, in global income, in the rate of fixed
assets depreciation, etc.), also from the level of the expectations regarding
funding sources or operational risks from current firms activity, at the
macro level, financial instability is characteristic to a system that financial
problems affects prices stability, employment, and, ultimate, occurs
through processes by debt deflation.

Key-words: financial fragility, postminskian economic approaches

JEL Code: E44, G01

Introduction

Following a general explanation, financial fragility is due to market

imperfections and also to individual imperfections and can interrupts long
periods of economic stability. (E. Tymoigne, 2012). We believe that, more
accurate would be to circumscribe to the individual imperfections of
market, the individual imperfections, the mentioned formulation only
joining them. But individual imperfections would be unrelevant without the
market imperfections.

1
Article realised under the PhD in fundamental sciences the beginning of a top career
in research project, cofinanced by EU and Romanian Government from the European
Social Fund Sectorial Operational Programme Development of the Human Resources
2007-2013, financing contract number POSDRU/107/1.5/82514
 65

U.S. financial crisis officially started in September 2008 showed that the
capitalist economic philosophy of the triangle competition-rationality-
efficiency was unprepared to cope with shocks arising from breach of the
principle of rationality itself. Following an irrational speculative fervor
spreads over many years, the power of markets self-correcting proved to
be limited; the post emotional shock was so great that Alan Greenspan had
begun to lecture at international forums that "Thus of us who have looked
to the self-interest of lending institutions to protect shareholders' equity,
myself included, are in a state of shocked disbelief."(New York Times,
October 23, 2008).

This paper aims to answer at two questions: was the theory of financial
fragility such an unknown to governments or policy-makers, in order to
generate this economic disaster happened since 2008 or were not firm
enough all the economists in explaining the phenomena generating crisis,
recession or negative growth?
We agree with V. Beker (2012), most economists failed in their mission to
warn the policymakers about threats of an often fragile system, the latter
ignoring completely and willfully irresponsible the work of those who did it.
Even after the crisis started in the U.S., for a long time, many economists
have not admitted the evidence, and, from this point of view, the degree of
indifference to the potential risks was visible.

The continuous, dynamic, evolutionary, multiplied and scaler systemic

fragility for decades, influenced by endogenous and exogenous factors
derived maybe one from other, or stand alone determines the economic
crisis. Today, when it calls into question even the functioning of the
capitalist system as we know it today, explaining systemic instability as a
normal event in the world economy continue to generate theoretical
diatribes, because, the economic crises are the result of systemic fragility
and may even be derived from the measures to combat the potential
negative results.

Answering to the first question, there existed also theoretical premises, but
the final conclusion is clear: political and economic decision makers, in the
last 30 years, have not been at all thinking at Marx, Schumpeter, Keynes
and Minsky and, ignoring the visible manifestations of financial fragility by
the government's ongoing led to a general, chronic, economic instability,
 66

visible more and more after 1985. For example, the Reagan strategy,
implemented in the USA in 1981, laid the groundwork for inflation, crisis
and severe recession, even if the recovery based on deficits seemed, at
that time, to advocate for a policy success of the Reagan Administration.

Postminskian theoretical synthesis in contemporary economic research

The "binomial" stability-instability, in its entirety and transcendence, based

on a antithetical concept principle, is seen by the authors through the
experiences recorded in real economies. For a substantiation of the
financial fragility theory, we believe that it is necessary to study, primarily,
the sources of this financial instability, and specifically how were perceived
and identified the effects of these sources, rendered to the real financial
balance.

Critically not excluding any of the cognitive contributions noted in this

paper, the financial fragility is that vulnerability to factors that may affect a
macro-economic activity, causing a crisis. Or, we consider also the
definition of R. Lagunoff and S. Schreft from 1999 related to the idea that,
in macroeconomics, financial fragility term can be used, with reference to
the financial system, as its susceptibility to widespread financial crisis
caused by small and routine economic shocks.
Expository and descriptive developments we will subsume to historical
moments.

Previous to 1980s theoretical boundaries

The characteristic of this period reveals a relatively limited extra-minskian
conceptualization. The general observation that any economy what is
based on uncontrolled flows, "eventually" will yield (J. Galbraith, 1958) is
continued by M. Friedman and A. Jacobson, Schwartz (1963), arguing that
the economic impact of banks failure translates into a lower money
quantity, seeing here an unfortunate combination of economics with
politics. So, the crises tend to be the consequences of repeated monetary
policies errors pursued by the authorities, errors leading ultimately at
changes in the political regimes, unable to determine in advance the price
risk. Friedman-Schwarz assumptions were taken and reinterpreted by L.
Christiano, R. Moto, M. Rostagno (2004).
 67

The period between 1980-2000 and its theoretical observations

The theoretical works who developed the analysis of various causes and
transmission financial fragility mechanisms intra and extra systemic were
summarized, in turn: the reducing of the growth rate, a deteriorating
balance of payments, an increasing inflation, exchange rate volatility, the
surge in number and value of transactions conducted on the financial
markets, the surge in prices of assets, excessive credit expansion, reducing
the competitiveness of exported goods, the deterioration of trade
relationship, the quality of banking supervision, the availability of
appropriate instruments of exchange rate control, the existence of
insurance schemes deposit, the existing legal framework, the standards
and codes of good practice, etc..

It starts to note the authors focuses on the close relationship of the

intrinsic phenomena manifestations of fragility versus banking financial
instability. This relationship was originally issued by J. Guttentag and R.
Herring in 1984 and resumed in the analysis by the same R. Herring and S.
Wachter in 1999 and 2002. In the context of uncertainty in the financial
system, a reduced lending activity in the economy indicates that, in the
pursuit of competitiveness, the determinants mechanisms of the credit
leading to an underestimation of the risk of financial instability, accepting
concentrated risks only in certain parts of the economic system. These
elements facilitate, when shocks occur, the increasing of credit
rationalization.
Based on a structure similar to the Schumpeterian logic, M. Wolfson (1986)
examined various theories of financial crises corresponding to the business
cycles.

B. Bernanke and M. Gertler (1990) define the point of view of a central

banker, arguing that, financial instability or fragility arise when
entrepreneurs who want to start investment projects depend heavily on
external financing, which makes the cost of investments to be very high.
These high costs lead, ultimately, to small and inefficient investments. In
other words, the high costs of attracting external financing leads investors
to be wary in sizing the effective investment volumes, which brings them to
a clear reduction of the potential direct implications in the formation of a
lower Gross Domestic Product, of course, lower than the potential GDP.
 68

Sir A. Crockett (1996, 1977) considers financial instability as a case where

there is an imbalance of economic performance, caused by the changes in
the prices of financial assets and by the financial intermediaries ability to
meet contractual obligations. The author defines opposite "financial
stability" as "absence of instability", i.e. the situation in which the
economic performance is not potential affected by the fluctuations in the
asset prices or by the inability of financial institutions to fulfill their
obligations. We see the Crocketts statement under some reserves, its
generality being vitiated by the fact that, the economic performance of an
economic entity, having a very high degree of sensitivity to any exogenous
stimuli or factors that influence it (even the smallest shock could have
effects on asset prices), the idealization of an economic situation being not
in the benefit of analysis. In a system ground by influences, the constant
financial stability is the exception, not the rule.

The nature of financial instability is explained including by the asymmetric

information and corresponding costs, which issues contracts grafted
responsible for market failures (in relation to the moral hazard and to the
adverse selection in the system). In that moment, solvent but facing
liquidity shortage firms may be forced to go into bankruptcy, especially if
are founded to be unable to "run" its debt. (B. Bernanke, J. Campbell, M.
Friedman, L. Summers, 1988)

There are, at this time, manifested theoretical concerns related to the

discrepancy between the volume and the quality of a multilateral known
information transaction, as a potential vicious source of the subsequent
selection for best applicant process, regardless of the nature of the
transaction. This informational asymmetry has another important facet in
the foundation of the financial instability, namely moral hazard. For
example, if the lender knew that the borrower intends to leave the country
after signing the loan and receive the money in the account, the credit
would not have occurred. (F. Mishkin, 1991). In the same manner, but
viewed from an opposite direction, the same author goes on to his analyze,
considering that financial instability occurs when shocks in the financial
system interfere with information flow in such a way that the financial
system is no longer able to perform its functions and to channel the
resources to the most productive destinations. (F. Mishkin, 1999).
 69

All these are analytically course and hypotheses to substantiate the theory
of financial fragility.

Relevant theorizing occurred after 2000s

Is the period when theories become more, analytical and structured. Some
authors make, already, a clear separation between the conceptual notions
of family instability-fragility. Thus, they believe that financial fragility refers
to the vulnerability of a country's domestic financial system, while external
vulnerability related to the exchange rate of the currency of that country.
More specifically, the term "financial fragility" is associated by the
economists with a risk of internal financial crisis, while the term "external
vulnerability" is made in relation to the risk of a currency crisis. But, even if
exist these types of analytical nuances, it is accepted a priori that, between
the "fragility of the financial system" and the "external vulnerability" of the
economy, there are many interdependencies.

Conversely, the policy-makers choosing of an exchange rate regime and of

a certain foreign policy should take into account the need to ensure
financial stability, and thus, not expose the financial sector to excessive and
unjustified risk. This is because, the two states of affairs have many
common causes, their forms of expression are similar and their effects
reinforce each other. As a result, the literature often emphasizes that, in
the current free movement of capitals, the strength of the financial sector
is an essential element of sustainability of a particular exchange rate
regime. (D. Begg, B. Eichengreen, L. Halpern, J. von Hagen, C. Wyplosz,
2002).

J. Chant (2003) believes that financial instability still refers to conditions on

the financial markets, affecting or threatening to affect the economic
performances through the impact they have on the financial system. This
view is also shared by A. Alawode and M. al Sadek (2008). I wanted to point
the opinion of these noted Arabs authors to highlight the
transnationalization hearing for sensitivity of the financial phenomena and
researches related to it in different economic environments.

Booms were, commonly, associated with the perpetuation of debt and

debts have increased the "sensitivity" of debtors to more shocks. For
example, in the early 1980s, there were crises in several developing
 70

countries, especially in cases due to accumulated debts in excess. Japanese

crisis of the 1980s was associated with massive government loans and
Nordic countries crisis followed similar after a period of indebtedness. In
1997 came the crisis countries of South East Asia, where high leverage
again played an important role. Global crises followed the same tripartite
loan pattern boom "burst the bubble". (G. Soros, 2009)

R. Ferguson Jr. (2003), from his the position of Vice President of the Board
of Governors of the Federal Reserve System, describes financial instability
in a more technicist manner, as that situation characterized by several
factors: some important categories of financial asset prices deviate sharply
from fundamental principles and / or market action and credit availability
(domestic and international) were significantly transformed, leading the
phenomenon that aggregate consumption deviate significantly from the
normal producing ability of the economy, so that, the economy does not
produce as usual and aggregate consumption significantly deviates from
the presumptive.

The 2000s brought other conceptualizations. For example, for H. Gabrisch

(2002), financial fragility is a multiplier combination between the
vulnerability of the financial system (banking) and exchange rate
vulnerability; also D. Tsomocs (2003) sees it in a more limited sense,
referring only to the banking system, as being the situation in which the
banking sector profitability decreases and the number of bankruptcies in
the banking sector, but also in other sectors of the economy, increases. In
contrast, the external vulnerability is associated by Tsocomos with the risk
of currency crises (or of the balance of payments).

Kindleberger-Aliber-Minsky paradigm reveals also the psychological

component: when an unexpected event stops the growth of asset prices,
some indebted investors are forced to sell assets owned and to pay their
debts. These unexpected sales flooding the market, following the general
laws of supply and demand and cause the price decline of those assets. The
result: panic can occur (C. Kindleberger, R. Aliber, 2005). To avoid this
extreme situation, the authors emphasize for the need of a systematic and
consistent balance between debts and income flows of the companies.
 71

For W. Allen and G. Wood (2006), financial instability is the existence of

those "events" where a large number of people, being households,
businesses and government entities have to face to financial crises that are
NOT determined by their previous behavior, these crises having serious
adverse macroeconomic effects.

In such period, banks and other lenders are extremely suspicious to any
loans activity, so, the loans price increases, often to a point where
business, simply do not can realize. (C. Whalen, 2007). Most of the financial
world has not provided, prior to 2005-2007, that a big indebtedness may
create a problem so serious. Even argued that, these financial conditions,
running continous the "race" of debt, would perpetuate endlessly. (A.
Greenspan, 2007). After these authors, the assets and the net property of
the companies were in an unprecedented growth and fundamental fact of
modern life constitutes into a "debt increase similar with progress of
society." Derived from this idea, the cultural, economic, social,
international community has encouraged borrowing. (Woods, 2009).

Significant players on international financial markets thought they could

become even richer as they are run more debts, even indefinitely, sinking
themselves into a debt volume higher and higher, in the hope of potential
future profits. (A. B. Wiggin and Bonner, 2006). The more so as, in a not
distant past, companies used the method of financing by loans were even
rewarded by capital markets (S. Hans-Wener, 2008)
P. Davis and D. Karim (2008) argue that financial market innovations, the
complexity and opacity of financial instruments led to increase the
uncertainty and the appearance of a chaotic behavior during the crisis.
Multi-structural nature and complex financial products that was available
on the market involves difficulties regarding pricing, amplifying the risks
taken by investors (especially in deepening of the financial instability).
Often, in times economically favorable, companies borrow heavily, without
much worry about the future repayments. Indebted conglomerates
companies, regarded macroeconomic, experience after serious difficulties,
on long periods of time, when confidence collapses, lenders disappear and
the crisis hit. (C. Reinhart and K. Rogoff, 2008)

Portes R. and K. Rogoff, M. Obstfeld (2009) believes that, low interest rates
offered in the market led to what was called "the pursuit of efficiency,
 72

involving an unrealistic expansion, a distortionary assets market,

specifically, an overvaluation of the real estate market.
Following a globalist vision, international capital volumes traded at global
level increased massive and the unregulated sufficiently monetary policies
contributed significantly to the growth of emerging countries debts, having
that, huge capital flows from developed countries to determine the
phenomenon of over-leveraging and underestimating of the potential risks
(C. F Bergsten, 2009)

M. Brunnermeier (2009) specifically defines four mechanisms contributing

to increased the vulnerability in the financial system: the effects of poor
financial performance of the borrowers create two liquidity spirals (the
asset prices owned by these reduce, the capital of the financial institutions
erodes, such, as a reaction, lending standards become restrictive and the
need for funding reduced); then, the so-called "credit channel" can shrink
when the banks become concerned about the access to the capital markets
and begin to create a liquidity reserve (here occurs the moral hazard
monitoring of the borrowers meeting difficulties in obtaining external
funding and the possibility of other shocks); massive withdrawals facing
some financial institutions causing erosion of capital; the effects type-
network (bottlenecks that can occur when financial institutions are
creditors and borrowers at the same time, following the cash flow
differentials occurred in dynamic).

On the other hand, the theory of Modigliani - Miller encouraged the

accumulation of enormous debts that "erupted", especially since the
1980s. Financial strategies were abandoned and saving the cash by a
company was not accepted. Firms who hoard cash were viewed
suspiciously in almost all economic environments. Almost everyone
adopted a behavior type "borrow and spend". This philosophy has
competed with "saving and spending" and the first quickly replaced it. (D.
Rapp, 2009). The probabilistic future revenues that have not been saved
already has been spent!

From a fiscal standpoint, D. Schoenmaker and W. Wagner (2011) argue

that, there are two aspects that highlight the contribution of this financial
crisis, namely: the budget deficits (which were not sufficiently reduced
during the pre-crisis period) and the tax structure, oriented towards debt
 73

financing through deductibility of interest payments (this process leads to

increased the leverage and enhance private sector vulnerability to shocks).
S. Claessens (2010) and S. Claessens, Giovanni Dell Ariccia, Deniz Igan, Luc
Laeven (2010) are based on the global economic situation prior to the
occurrence of financial stress. In their view, the factors that led to increase
the instability and hence the triggering international crisis can be divided
into two categories: traditional and new factors. A source of the
imbalances was the increase of asset price (traditional factor), especially in
the U.S., UK, Iceland, which, in combination with a rapid increase in lending
(new factor) led to the extension of financial leverage.

The existence of lower equity volumes in banking institutions may become

another factor that engage multiple weaknesses shocks. Specifically, the
transfer of financial products involving significant risks, disseminate high
possibility of loss in the system. This idea is shared and complemented by
C. Goodhart (2010), indicating a pro-cyclicality in the banking system, with
negative effects on the quality of the loan portfolio and the liquidity risk
caused by insufficient liquid assets and by deficiency balance sheet
structure. These financial phenomena caused major crisial episodes,
affecting mainly developing countries (Mexico, Asia, Russia, Argentina), but
were present also in developed countries.

These crises were sufficiently numerous to allow generalizations, including

at terminological level, a consequence being the appearance of "twin
crises" (T. Kevin, 2009). In the '90s, around the world, there were currency
and financial crises, which most often occurred simultaneously, in different
geographical areas. A. Iancu (2010) believes that, due to the high degree of
financialization and complexity reached by developed economies and the
world economy, economic cycles in recent decades has determining
financial-monetary cash flows and the economic change from one phase to
another of the cycle is determined by significant changes occurring in these
monetary and financial flows.

Another consequence of the myriad crises with debut in 1990s is the

tendency of authors to partial overlap of the two semantic definitions,
"financial fragility" and "external vulnerability", both of which are
considered paradigmatic, as designating a state of economy when the risk
of a crisis is high.
 74

F. Allen and D. Gale (2007) partially resumed the definition of 1999 by

Roger Lagunoff and Stacey Schreft and discuss about financial fragility as
being determined by "multiple significant effects caused by small shocks".
Both formalize this idea, considering the case of an economy in which the
sizes of financial shocks, individually, approach zero. The authors show
that, even in such a case, there will be effect-fluctuations in the economy,
described as "disproportionate". In their view, banks are institutions type
"risk sharing", where deposits are designed to ensure depositors against an
impossible situation of having access to money. Even small shocks can
cause resets of the cost of money. This conclusion contradicts the too
general statement of Crockett from 1997.

It reinforces the idea that the term "fragility" seeks, usually, at quite a few
theorists, internal overall financial situation of a country, while the term
vulnerability is used to refer to the external global situation. Most of
times, "fragility" (external financial) is considered to be the opposite of
"stability" (financial or external), the latter being a state of the economy in
which the probability of crises, including financial / currency is reduced.
Recently, appeared in the literature several works that aim quantifying
financial fragility and external vulnerability and, sometimes, mathematical
calculation of the probability of a crisis. Thus, due to mentioned crisis from
the 1990s, many economists have tried to build models to signal a financial
crisis and / or currency near.

A more substantial review of methods to measure financial fragility and

correlation with macro-prudential risks required after 2000 (G. Galati, R.
Moessner, 2011, S. Schroeder, 2009). The direct study analyzes the trend
of macroeconomic variables and controls some how these fluctuations
generate economic recessions.
Another group of authors have developed a strategy developed that aim to
detect different stages of financial fragility. Some of them even try to
develop methods of detecting all three minskian stages (S. Schroeder,
2009, Foley 2003). Other authors focuses only to detect a specific stage of
fragility, as Ponzi finance (M. Seccarecia, 1988) or to determine a set of
fragility index, showing the general dependence of operations. (LF Paula, AJ
Alves Jr. , 2000).
 75

We especially appreciate a formulation that notify the fact that, detection

the concept of financial fragility depends, in part, on it specific modality of
definition. Following the most part of post-Keynesian economists, financial
fragility is a process that can culminate in financial instability (occurrence
of a particular event). Also, for most of the neo-Keynesian economists,
financial fragility, traditionally, has been defined by some specific shock,
occurred in a country, shock which itself triggers financial instability. More
recently, however, most economists have reformed their previous
definitions as delimiting a particular form of financial instability, namely an
actual and specific event. Each definition of financial fragility is intimately
linked to the theoretical foundations on which it was made. It carries many
implications for the ability of politicians to assess and control the health of
the economy. (S. Schroeder, 2009).

Conclusions

Moral hazard is always an element of financial fragility, and implementing

various types of economic policies, by various governments belonging to
different political orientations, determine, certainty and realistic, the moral
hazard on economic and financial system. Into a modern financial sense,
moral hazard means that, if you were once saved, there are many chances
to be saved a second time. What happened, both with transnational banks,
also with countries. Many banks are still based on moral hazard: if there
will be a deadlock, maybe its will be saved once again, ultimately by the
taxpayer. Or, in these circumstances, macroeconomists can predict, honest
and correctly, financial fragility?

To induce more confusion in this debate, many American economists

preach, years ago, to Europeans, their typical American crises exit, by
accepting budget continue deficits, "rolled over" from year to year. What
they forget was what some authors called "the American excellence" based
on "technological supremacy, cultural, diplomatic and military." (V. Lazea,
2012). All that makes foreign investors have further confidence in the U.S.
economy and invest there.

Economics has not, yet, successful and guarantying solutions to "stabilize

an unstable economy." Since the financial crisis erupted, the debate about
the means to overcome the crisis is becoming more vigorous. In these four
 76

years, two trends emerged. On the one hand, the proponents of applying
stimulus measures, widely by the national authorities. On the other hand,
there are those who advocate for a rapid introduction of austerity
measures.

The message from 2012 of German Chancellor Angela Merkel, concerning

the need for governments to reduce their deficits, is seen by some as
extreme and dogmatic; the opponents stressing that the situation in many
countries of the South Europe (especially Greece and Spain) will worsen.
Their credo, to impose austerity measures in recession times, only will
worsen the overall depressed state. The main proponent of this theory is
Paul Krugman. In his works, he sharply criticizes EU heads of government,
which thought, apparently, that can not generate economic growth than in
the form of austerity measures. This moralistic view can not work, consider
Paul Krugman, and, as soon Europe will emerge from this path, the better.

A more nuanced position had, in 2011, Jeffrey Sachs, considering that

putting the issue in general terms of austerity versus growth (both as a
form of manifestation of economic growth, each could present fragility
characteristics) is extremely simplistic. In fact, he believes that this problem
faced not two, but four schools of thought possible: Keynesians (partisans
favorable to a growth fundament on deficits and favorable to a strong state
interventions in the economy), the advocates of the free market (which
advocates for a minimal state and which are not 100% against big deficits),
the radicals (supporting clear deficit reduction by cutting the spending),
structuralisms (partisans for reducing the deficit only by increasing taxes).

It is extremely good for the theoretical and practical analysis of financial

fragility phenomenon to address the issue in a heterodox manner, highly
analytical, as it is to consider many possible solutions that can cover the
wide range of economic and social reality surrounding and thus finding the
best contributions to early detection of shock, warning the decision makers
and monitoring the evolution of the specific financial fragility.
 77

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 82

Speculation under crisis

PhD Candidate Mircea Ciolpan

Abstract: From my point of view, at a macroeconomical level, speculation

is dangerous, because of all the uncertainity and tentations which
generates. Even so, to interdict this kind of operation is not something
desirable, because of the difficulties which may appear on the derivatives
market, when such operations happen. In order to avoid this, I think that
the participation of credit institutions on the capital markets should be
regulated better.

Key-words: financial crises, speculation, derivatives

JEL Code: E44, G01, G15, G21

Speculators represent the biggest category present on the market of the

financial derivatives products. The desire to achieve profit from the
difference between the selling and the buying price is something common
from the moment when profit first appeared in human society. Therefore,
the essence of speculation resides in anticipating the variation of the asset.
The particularity of the financial derivativesmarket is given by the
posibility of short selling the desired asset. With this type of transaction
the specuator may obtain profit through the decrease of the transacted
asset quotation. The purpose of such transaction is not to cover an
immediate or future need but a potential price difference.

Speculation was strongly blamed once the 2007 financial crisis has begun
and till then has an important role in the good development of the
transactions from the capital markets. If the speculative operations would
be forbidden, the hedging operations would face major problems. The
costs of covering the lack of speculators would be too high and it would
discourage the execution of such deals. The lack of speculators can also
create problems if an open position is to be removed. Speculators are the
ones who offer liquidity to the capital markets. Therefore, hedgers and
speculators are strongly united by their specific needs, even if these are
sometimes totally different.
 83

Following the speculative operations, the results are related to profit or to

capital loss. There is no way for two speculators who have identical
contracts, but different positions and to obtain the same result for a
specific transaction. Depending on the investors expectations, the
speculation can be a la hause, when it comes to some estimations
regarding the rising of the price or a la baisse speculation when rising
prices are expected to happen. Speculators operations are antagonistic,
depending on the expectations. The expected turnovers are correlated
with the risk and with the costs of the transaction, because speculators
understand the the nature of the risk and they act according to it. Between
risk and profit size exists a directly proportional relationship.

One aspect which needs to be clarified is the difference between

speculation and investor. Which is the difference between the two
operations? The investors are the ones who buy transacted products and
keep the same position on a long term. When the position is canceled, the
efficiency of the operation can be seen: either profit or loss. From the point
of view of results the difference (resemblance) between investor and
speculator is identical, both of them are interested in profit. The only
difference is represented by the period of time in which the deal is
performed. Taking into account the character of the financial derivatives
products, the participants may keep an investment till the date of
payment. Consequently, the character of the transactions limits the entire
period of time of the operation. The problem of the dichotomy of the
investment operations versus speculators undesirable operations, is
connected to the predictability of the capital markets; if the period of time
in which an investment is made is longer, than the profit mathematical
expectations become inaccurate. Basically, investors and speculators are
interested in gaining profit and they all prefer taking risks; thats why the
difference between them is one of image and not of content.

Speculation has the following characteristics on the capital markets2:

1. Risk transfer is one of the most important feature of speculation. This is
the reason why speculation is strongly connected to hedging. Speculators
take over the risk from the hedgers, hoping to gain a future profit.

2
Gheorghie Maria, Tranzacii bursiere cu produse financiare derivate, Doctorate Thesis,
2003;
 84

2. The uniqueness of price, speculators are one of the most prepared

categories on the market. Their activities push the price towards
equilibrium, through an efficient integration of informations. As traders
benefit from more and more informations, the tendency of the price is to
go down.
3. Prices stabilization. The fluctuations between demand and offer are
attenuated by the speculators. This feature may be debatable, because in
some conditions it cannot be verified, or is quite contrary. Speculators,
being attracted to risk, will try to increase their profits through the
development of the fluctuations of the transactioned assets.
4. The evolution of future prices. Theoretically speaking, the futures
exchange correctly predicts the price evolution of the basic asset. If
everyone would respect this aspect, than predictions would be accurate
and speculators would dissapear. This is the speculators role: to identify
the differences between spot and futures and to increase the interrelation
between the derivative product and basic asset.

Among the three operations from the capital markets, speculation is the
one which creates debates regarding the fairness of its operations. There
are two directions for the criticism3 with regard to speculation: the moral
and the economical one. Over the centuries the moral standards of the
economical transactions have modified a lot. We have to remember the
problem of the interest in Medieval Europe or nowadays when islamic
banks dont accept any interest in their activity. Another example is the the
slave commerce which lasted for so long because the moral standards of
the human civilization have allowed this commercial activity; but our
society cannot accept and understand such an activity. Thats why, from a
moral point of view, speculation can be fair or not, depending on how is
seen by the others. Morality is strongly connected to desires and
necessities from a certain period of time of the human society.

From an economical point of view, we can talk about the difficulties

produced by speculation on the capital markets and about the
contamination of the national and international economies. The pro
speculation arguments presented by Ms. Gherghies, in the already quoted
paper can be argued through the fact that the financial derivatives market

3
Gheorghie Maria, op. Cit.
 85

is a zero sum-game. In other words, the gained sums are always equal to
the lost ones. The figures presented by mass media in the last 5 years show
that these markets have incredible losses. This aspect shows also the thick
end of the stick, it shows that some traders have registered not only profits
but also losses. Therefore, the fact that the speculators profits arent too
high isnt totally true. The same thing happens when we talk about
canceling an open position by adopting the opposite one, which means
that the market influence is minimum; here, we have to interfere and say
that on any capital market, the emotional tendency determines the
orientation of the market. In other words, introducing on the market
selling orders, followed at a certain period of time by the necessary selling
process, will generate different tendencies on short, medium or long term
(depending on the majority of operations), fact which will bring
unforeseeable effects on the market.

From my point of view, at a macroeconomical level, speculation is

dangerous, because of all the uncertainity and tentations which generates.
Even so, to interdict this kind of operation is not something desirable,
because of the difficulties which may appear on the derivatives market,
when such operations happen. In order to avoid this, I think that the
participation of credit institutions on the capital markets should be
regulated better. And a good example is the Volker Rule, which has been
included in Dodd Frank Wall Street Reform and Consumer Protection
Act4, this regulation has given the banks the possibility to make
investments on the capital markets, complying with the banks capital.
From a legislative point of view, US is trying to reestablish the equilibrium
lost when Glass-Steagall Act5 was abrogated and to protect the
commercial banksclients of the risks from the capital markets. Researchers
consider that exceptions from the Dodd Frank Wall Street Reform and
Consumer Protection Act limit the power of the normative act to produce
similar effects as Glass-Steagall law did in 1993.

4
Dodd- Frank Wall Street Reform and Consumer Protection Act- this law has entered into
st
force in 2012, July 21 ;
5
Glass-Steagall Act has established the difference between commercial and investition
banks (between 1933-1999);
 86

EU leaders have agreed on this normative act and are looking for solutions
of such an implementation in the European space, too. There are many
member states which decided to postpone the decision of establishing a
legal and correct background for the transactions from the capital markets.

Another option for correcting the disequilibrium on the market produced

by the speculators, is a proposal made by James Tobin, Nobel Laureate in
Economics. He is the one who suggested in 1972 to introduce a tax for the
financial transactions. At that time the implementation of such a tax would
have stabilized the currency market, but now this tax should focus on the
speculation operations (for example on short selling deals). Tobins tax had
a value of 0.5%, fact which brought to many debates. It seems that the tax
can have limited effects on speculators and the collected amounts could be
not very high; this is shown by the mathematical calculations and the
empirical studies. And another thing, big markets will have even more
speculators and will collect important amounts from this tax. The effects of
this tax will be relatively reduced and the volatility will come down, in a
marginal way. Something different will happen with the small markets,
where the number of speculators will decrease, a decrease which may
bring problems (as we already seen, the presence of speculators has an
important role the volatility of the market can be improved). Another
problem is the calculation of tax and its collection. A large number of
speculators consider that the methods of calculation and collection will be
difficult.
 87

References

1. Chance Don M., Brooks Robert, Introduction to derivatives and risk

management, 8th edition, SouthWestern Cengage Learning, SUA, 2010;
2. Gheorghie Maria, Tranzacii bursiere cu produse financiare derivate,
Doctorate Thesis, 2003;
3. Hull C. John, Options, Futures and other derivatives, 5th edition,
Prentice Hall, New Jersey, SUA, 2002;
 88

The testing of the connections intensity and of the

dependence significance between the economic indicators in
the Sectoral Operational Programme for Transport

PhD Daniela Florescu

PhD Petre Brezeanu
PhD Candidate Anaida Iosif

Abstract: The recent years have brought a significant dynamics at the

European Union level, in a domain that is still under a consolidation
process the territorial cohesion. Its philosophy represents the expression
of a balanced, coherent and harmonious territory development, in terms of
economic and social activities, in terms of environment endowment,
accessibility and quality, and also in terms of the existence of equitable
living and working conditions for all the citizens, irrespective of the place
they live in. The main objectives that were covered consisted of studying
and determining the factors that led towards a reduced absorption degree
and implicitly with the passing of time towards an enhancement of
disparities between the regions of our country and the ones at the
European Union level.

Key words: absorption capacity, convergence, correlations, Sector

Operational Programme for Transport.
JEL Code: F36, F43, O19

1. Introduction

The current cohesion policy is essential for the construction of the

European Union, one of the fundamental objectives is strengthen of the
economic cohesion by reducing the regional disparities. This is also the
reason why the member states participate to a European regional policy
financed from European funds, which confers a concrete and immediate
meaning for the communitarian solidarity. The European funds do not
represent an inward purpose, but instruments in reaching the objectives
established at the level of the European Union, of the EU member state,
 89

based on the implementation documents. Given the communitarian

budgetary limits, obtaining the favorable effects of the cohesion policy
must be also supported by an integration strategy providing the cohesion
of the national and communitarian policies for the purpose of achieving a
balanced development in the Community. Furthermore, recent economic
theories confirm this approach through many case studies that prove the
fact that Geography matters, however the regional policy can change
things.

After 1987, when the programming approaches was introduced, the

Member States whit advanced governing systems Great Britain, the
Netherlands, the Scandinavian countries have an important advantage, as
they had already got used to this kind of planning technique. The strategic
planning model extended to the use of structural funds with certain
difficulty, mainly generated by overlapping and lacks in coordination
between the regional development programs and other regional programs,
like the Local Action Plans for Environment, Rural Development Strategies.

The access to Social and Cohesion Funds offers Romania a possibility

to develop the regions which are lagging behind, to modernize transport
and environment infrastructure, to support rural development, to create
new employment opportunities, to sustain social policies which will lead to
the growth of the standard of life.

2. The Sectoral Operational Programme for Transport

The Sectoral Operational Programme for Transport has been

adopted by the European Commission on July 12th, 2007 by means of the
Decision no. 3469 dated July 12th, 2007 for the adoption of the operational
programme Transport of community aid from the part of the European
Regional Development Fund and Cohesion Fund, in accordance with the
Convergence objective in the regions of Romania.
The total budget is of approximately 5.7 billion EUR, out of which:
- Cohesion Funds and European Regional Development Fund: 4.57
billion EUR;
- State Budge: 1.09 billion EUR.
 90

Sectoral Operational Programme for Transport (SOP-T), is a

strategic instrument elaborated based on the objectives of the National
Strategic Reference Framework, which establishes the priorities, the
objectives and financial allocation for the development of the transport
sector in Romania with community aid, in the period 2007-2013, based on
the following specific objectives:
- modernization and development of the TEN-T priority axes, with
the implementation of the measures necessary for the environment
protection;
- modernization and development of the national transport
infrastructure, in accordance with the sustainable development principles;
- promotion of the rail transport, waterborne and intermodal
transport;
- supporting the development of the sustainable transport by
minimizing the adverse effects of transport on the environment and the
improvement of the traffic safety and human health.

Figure1. Distribution of the axis of the funds allocated funding in the SOP-
T, during the period 2007 2013

Source: author, s processing based on data provided by National

Strategic Reference Framework 2007 2013
 91

3. The testing of the connections intensity and of the dependence

significance between the economic indicators in the Sectoral Operational
Programme for Transport.

The main beneficiaries of the Sectoral Operational Programme for

Transport are the national administrations of the railway, road transport
and infrastructures, and the national and regional administrations of the
airport infrastructure. The operators of the public rail passenger transport
can also be potential beneficiaries under the priority axis no.2.

With zero experience in implementing projects with grant the

beginning of the program, the authorities, submitted projects with low
value, only after February 2009 there is an accelerating process of
submitting projects with a peak in October 2009, when they submitted
projects worth 23 times higher than the allocations for the same period,
Unfortunately this return was overshadowed by a period of 6 months
(November 2009 April 2010) it was not submitted any project, the
operation giving the signs of recovery until after July 2010. A special
particularity of this operational program is the way of approval and
contracting projects, over the period observed value of contracted projects
following closely the value of projects approved (July 2009, October 2009,
December 2009 - January 2010, September-October 2011, March-April
2012), which shows that institutions have submitted projects have all the
resources required to implement the projects submitted. Regarding of
payments indicator, the Sectoral Operational Programme for Transport, is
the program with the worst results, deficiencies and its features often
leads to blocking the process.
 92

Figure 2. The situation on the submission, approval, contracting and

financing of grants, the Sectoral Operational Programme for Transport, in
the period January 2008 - April 2012

Source: author, s processing based on data provided by: Authority for

Coordination of Structural Instruments

Observing the great differences that exist between the values of the
five variables submitted to the analysis, one could wonder what is not
functioning in the process of accessing the grant funds. In order to answer
this question, I tested the significance of the dependence existing between
the five variables, simultaneously measuring the connection intensity
between them, as well by means of a linear model of multiple regression
using the spreadsheet program Excel, as well as the informatics program
Eviews.
 93

3.1. The analysis of indicator data series related payments to

beneficiaries of structural and cohesion funds.

From the next figure we can notice the growth trend for the value of
payments made to beneficiaries of structural and cohesion funds in the
Sectoral Operational Programme for Transport for the analyzed period,
with a more significant quantitative point of view after 2010.

Figure 3. Graph data series on financing investment projects of

European funds, the Sectoral Operational Programme for Transport, in the
period January 2008 - April 2012

Source: author, s processing based on data provided by: Authority for

Coordination of Structural Instruments

Upward trend, but uneven, can be observed by analyzing the

descriptive statistics for the data series analyzed in relation to a normal
distribution.
 94

Following the descriptive statistics analysis were separated the

following distribution characteristics:
- mean, an indicator of central tendency that characterizes the
average payments made to beneficiaries of structural funds in the Sectoral
Operational Programme for Transport in amount of 26.7 million RON;
- median, value recorded in the middle of the period analyzed, the
data series that divides into two equal parts, are square to a period where
no payments recorded;
- extreme values of the period with a maximum of amount 709
million RON recorded in March 2012 and a minimum of any RON registered
within 33 months of the 52 analyzed (the first two years only in July and
November 2009 payments were made);
- Standard deviation of individual values from the mean value: 102
million RON;
- because the coefficient of asymmetry of the data series around its
mean (skewness 5,9) recorded a positive value, we conclude that the
distribution is asymmetrical at right, valorile extreme fiind situate n
dreapta mediei;
- kurtosis = 39,39, shows that the distribution of the data series is a
type leptokurtic;
- therefore, Jarque-Bera test, based both on the coefficients
skewness and kurtosis, shows that the series of indicator payments is not
follow a normal distribution.
 95

Figure 4. Distribution histogram data series on the development value

of payments, the Sectoral Operational Programme for Transport, in the
period January 2008 - April 2012

Source: author, s processing based on data provided by: Authority for

Coordination of Structural Instruments

3.2. The testing of the connections intensity and of the dependence

significance between the allocations value, the solicited value through
the submitted projects, the value of the approved projects, the values of
the contracted ones and the absorption capacity, through dispersion
analysis (ANOVA)

Given the small proportion of payments in the total projects

submitted I suggest the use of the method of simple regression analysis for
the verification of the existence of the link between the five indicators, in
the period January 2008 - April 2012. Knowing that the regression function
means the mathematical relation existing between two, or more,
independent variables showing, also indicates, how the resultative
parameter y (total value of projects implemented) is modified only after
the modification of the values of the independent parameter x (allocations
 96

value, total value of projects submitted, total value of projects approved,

total value of projects contraced), other factors, that might influence the
phenomenon are considered to have a constant action.
The results obtained by processing the data are:

Tabel 1. The testing of the connections intensity and of the dependence

significance between the allocations value, the solicited value through the
submitted projects, the value of the approved projects, the values of the
contracted ones and the absorption capacity, in the period January 2008 -
April 2012

Regression Statistics
Multiple R 0.641397998
R Square 0.411391392
Adjusted R Square 0.361297043
Standard Error 81894917.97
Observations 52
ANOVA
df SS MS F Significance F
Regression 4 2.2E+17 5.51E+16 8.212331 4.159E-05
Residual 47 3.15E+17 6.71E+15
Total 51 5.36E+17
Standard
Coefficients Error t Stat P-value Lower 95% Upper 95%
-
Intercept 83434401.48 45802497 -1.82161 0.074881 -1.76E+08 8708336.33
Allocations 0.283317791 0.142391 1.989713 0.052459 -0.003137 0.56977212
Submitted -
projects 0.003373438 0.008216 -0.41058 0.68325 -0.019903 0.01315577
Approved
projects 0.05277341 0.011795 4.474256 4.85E-05 0.0290451 0.07650169
Contracted -
projects 0.010521671 0.011524 -0.91301 0.365899 -0.033705 0.01266205
,
Source: author s processing based on data provided by: Authority for
Coordination of Structural Instruments
 97

After analyzing these data is found:

Multiple R = 0.641397998, indicates a positive link between the
payments and the four independent variables studied (allocations,
submitted projects, approved projects, contracted projects);
R Square = 41,39% shows how the change in payments is explained
by the influence of four independent variables (allocations, submitted
projects, approved projects, contracted projects);
The F test (F = 8.21), shows a positive value, which validates the
linear regression model describing the relationship between the payment
projects and the allocations, the submitted projects, the approved projects
and the contracted projects.
Intercept in the amount of -83,434,401 RON, shows that as the
payments could be made given that there were no amounts allocated not
submitted any project on any of the axes of funding and obviously had not
approved and contracted any project. Because P-value = 0.07 (more than
0.05), means that this coefficient is not significantly (for a probability of
about 99.99% > 95%, as has been established initially). In fact, that the
lower and upper confidence interval (-175,577,139 0 8,708,336) for this
parameter haven't the same sign indicates that the parameter of the
general community is not significant.
The only significant parameter is the variable exogenous projects
approved, an increase of 1 RON the value of this parameter leading to a rise
in the value of 0.053 RON payments. Also, as t Stat = 4.47 and P-
value=0.000049 (less than 0.05), means that this coefficient is significantly
(for a probability of about 99.99% > 95%, as has been established initially).
In fact, that both the lower and upper confidence interval (0,029045128
3 0,07650169) for this parameter is pozitive shows that the general
community is a significant parameter.

3.3 Checking disturbet interdependence in relation to their values.

Because between the payments and the four independent variables

studied (allocations, submitted projects, approved projects, contracted
projects) there is a close link, but the parameters: allocations, submitted
projects, contracted projects proved to be statistically insignificant, the
model can be used in the future to achieve a predicted value of payments
developments within the Sectoral Operational Programme for Transport.
 98

As a result, next step of this study was to eliminate insignificant

variable, that the value of: allocations, submitted projects, contracted
projects, recovery model and verifying the existence errors autocorrelation.

Figure 5. Testing autocorrelation errors, the Sectoral Operational

Programme for Transport, in the period January 2008 - April 2012

Source: author, s processing based on data provided by: Authority for

Coordination of Structural Instruments

Following analysis of results shows that between the payments and

the independent variable approved projects remaining in the study there
is a close link (Multiple R = 0.6008) and only 36.09% of the payments is
explained on the basis of these independent parameter.

However, if the relationship between variables is not very strong

and the linear regression model is not properly estimated, all most model
parameters were found to be statistically insignificant, that min model can
be validated due to autocorrelation errors. Since the dcalc = 1.83, also upper
 99

and lower limits of determination range autocorrelation by method Durbin-

Watson, for 2 degrees of freedom and the 52 observations are 1.50,
respectively 1.59, see that the calculated value is included in the range [dup;
4 - dup], more precisely between [1.59; 2.50], which indicates the absent of
positive autocorrelation of residue values.

Conclusions

The used methodologies took into account both a quantitative

analysis and especially a qualitative one, regarding at once the amounts
allocated from the European Union budget, the solicited amounts through
the financing demands that were submitted to the management
authorities, the approved amounts following the projects evaluation, the
contracted amounts in view of implementing the projects and, last but not
least, the payments towards the beneficiaries of the European funds.
The test result led towards the idea that even though the series of
data regarding the payments index does not follow a normal repartition,
the connection between this endogenous index and the other four
exogenous indexes (allocations, total value of the submitted projects, total
value of approved projects and total value of the contracted projects) is an
extremely powerful one (64.13%). The model parameters were not found
to be statistically significant, only significant parameter proved to be one of
the approved projects. In the case of all five coefficients of the multiple
linear regression model, there were confidence intervals estimated, the
statistic insignificance of them being also underlined by the fact that in the
case of four coefficients, the inferior and superior limits of confidence
intervals have not the same sign. Even if the errors are not autocorrelation
this model can not be used in the following period in order to realize a
prognosis regarding the evolution of the payments value.
As a consequence, the final conclusion is that we need reliable and
realistic projects corroborated with an effective management of European
funds. The existence of a powerful institutional structure is necessary, able
to assure the formulation and the application of public policies, the
deployment of inter-ministerial coordination processes, national programs
implementation, the growth of partnerships applications between the
private sector and the local administrations. The logic is simple. Better
roads mean higher productivity and of course, quantity of goods per unit of
time or distance, higher.
 100

References

1. Dolzer Rudolf, Christoph Schreuer (2008), Principles of International

Investment Law. Oxford: Oxford University Press;
2. Florescu, D (2011), The determinant elements in the process of
accessing structural and cohesion fund. In 18th International Economic
Conference IECS 2011 Crises after the crisis. Inquiries from a
national, European and global perspective. Publisher house
Universitatea Lucian Blaga, Sibiu, May, ISBN 978-606-12-0139-6, p. 297-
302.
3. Florescu, D.(2010), Romania's ability to attract Structural Funds in
comparison with other member states of the European Union and
determining the connection between the total projects submitted and
total projects approved. n Proceedings of the 5th International
Conference on Business Excellence, Editura Infomarke, Braov, October,
ISBN 978-973-1747-23-1, vol.1, p. 182- 186.
4. Socol, C., Socol A. (2006), European Model: Growth, Convergence and
Cohesion, Theoretical and Applied Economics, 13(8), p. 61-66.
5. http://www.ancs.ro
6. http://ec.europa.eu/regional_policy/sources.htm
7. http://www.eufinantare.info
8. http://www.fonduri-ue.ro
 101

Lifelong Learning the core of the Lisbon Strategy. A new light

on the importance of education

Pavel Triandafil

Abstract: Lifelong learning is the focus of the Lisbon 2010-process. The

future progress of European Union economy as well as its recovery from
the actual financial crisis will depend on its ability to promote knowledge,
creativity and lifelong learning. The solution consists in the capacity of the
human being to restore the equilibrium based on its creative and
intellectual capacities. These precious abilities will generate the
enhancement of the economic growth. The main supportive element that
enhances these opportunities consists of lifelong learning.

Key words: lifelong learning, Lisbon strategy, economic growth, social

welfare, innovation
JEL code: I21, I25, O19

1. Introduction

Lifelong learning implies high quality education throughout lifetimes,

envisaging to diminish school drop-out rate, vocational training systems
that are suitable for students and employers' needs and motivations to
build up new competencies throughout careers. The Lisbon Growth and
Jobs Strategy propose to convert Europe's education and training systems
into world leaders. Lifelong learning enables people for change and access
to more challenging professional environments.

Lifelong learning has a wide are, integrating a range of contexts (formal,

non-formal, informal) and levels (pre-school, primary, secondary, tertiary,
adult, continuing) of education and training.
A lifelong learning strategy should include flexible learning possibilities and
effective migration opportunities between all systems and levels of
education and training in order to avoid interruptions. In the actual social
and economic context, really affected by an increase of the education costs
 102

and by a reduction in the qualitative level of the living standards, lifelong

learning becomes a viable strategy that could support the unemployment
reduction and the professional and school insertion of socially
disadvantaged people. This strategy concentrates on building up
relationships with various categories of stakeholders (including policy
makers at national, regional and local levels, social partners, learners and
representatives of civil society). The effective implementation as well as
the propagation of the positive effects require real efforts and financial
resources that in the initial stage could be burdensome, but subsequently
determines long term advantages.

2. The EU focus on the education on a permanent basis

The agreements from the 10-year work program of the European

Commission, Education and Training 2010, constitute the EU strategic
framework of co-operation in the fields of education and training, and are
implemented through the open method of coordination. Member States
have concentrated on three major goals to be achieved in the interest of
the EU citizens:

To improve the quality and effectiveness of EU education and training

systems;
To ensure the accessibility of the EU education and training systems;
To open up European education and training system to the international
dimension.

Over the last five years the Education and Training 2010 Work Program of
the European Commission has made a vital contribution towards achieving
the main objectives of the Lisbon Strategy: growth and jobs working
together for Europes future. The Education Council adopted for the first
time in 2001 the future objectives in terms of quality, accessibility and
openness of education and training systems, to be achieved in practice by
2010.

These objectives were followed-up in 2002 by a detailed work program. In

2002 it also adopted a resolution committing the Member States and the
European Union to developing national lifelong learning strategies. The
Copenhagen Process was launched in 2002 by the Ministers responsible for
 103

vocational education and training in cooperation with the social partners

and the European Commission, with a view to improving cooperation in the
field of vocational education and training.

The Education and Training 2010 Work Program incorporates these various
policy orientations and the implementation of the Mobility
Recommendation and Action Plan. It also takes into account the outcomes
of the Bologna process in the field of higher education. It establishes
cooperation between 32 countries and involves different stakeholders,
including social partners and international organizations.

Several researches (Citi and Rhodes (2007)) revealed that education and
training are fundamental variables that determine EU's long-term
potential for competitiveness as well as social cohesion, bringing forth that
investments in education and training produce high returns which
substantially outweigh the costs and reach far beyond 2010. In 2007, the
European Council meeting highlighted that education and training
represent variables of a high importance that impact to a high extent the
welfare of the economy and of the society. Moreover, the relevant triangle
education -research innovation set forth fundamental dimensions for the
economic growth that they support by the intermediary of job creation.
Recent researches (Armstrong, 2008) highlighted the elaboration of
innovative theories such as the zone of mutual trust (ZMT). This theory
places a special emphasis on a better access to learning or through
increased learner awareness of skills etc.

It is quite a complex process to provide for a clear definition of the ZMT,

but a common understanding is required. A zone of mutual trust is an
agreement between individuals, enterprises and other organizations
concerning the delivery, recognition and evaluation of vocational learning
outcomes (knowledge, skills and competences). ZMTs is supportive to the
decision making process regarding the value of qualification and
certification, further learning and recruitment. These zones are
characterized by a dynamic nature and might be more flexible according to
the interests of the stakeholders involved.

At European level, it is remarkable the European Commissions initiative of

integrating various educational and training activities under a single
 104

umbrella, the Lifelong Learning Programme. With a significant budget of

nearly EUR 7 billion for the period 2007 - 2013, the new programme
replaced the existing education, vocational training and e-Learning
programmes, which ended in 2006. The new Lifelong Learning Programme
enabled individuals at all stages of their lives to pursue stimulating learning
opportunities across Europe.

It consists of four sub-programs: Comenius (for schools), Erasmus (for

higher education), Leonardo da Vinci (for vocational education and
training) and Grundtvig (for adult education).
This program is supportive to the Europe conversion into a real area of
lifelong learning, and in consequence is a key in promoting social inclusion
and peoples employability and adaptability.

3. Innovative theories in the light of the Lisbon Strategy

The Lisbon Strategy relies on a fundamental manner on some innovative

theories that could be successfully implemented in practice, determining
positive effects:

productivity enhancement by the intermediary of knowledge

valorization;

the improvement of the qualitative standards of the production

structures, with important effects on the social and economic welfare.

One of these theories is represented by the complexity theory that

developed in the context of systems and chaos theories; the substances of
this theory consists in demonstrating why the entire universe is greater
than the sum of the parts and how all its components come up together to
generate overarching patterns as the system learns, evolves and adapts.
There are a few differences between chaos theory and complexity theory;
in the case of the former, the iterated principle is constant, while in case of
complex systems, the adaptation and evolution on a continuous basis is
fundamental.
 105

This theory is of a high importance in the field of knowledge management

as well as in the field of corporate management. But are the complex
systems capable to adapt as fast as the external system impose this?

Padoan and Mariani (2006) revealed that this theory enables the creation
of a conceptual framework, that is supportive to the enhancement of the
business management systems and to the future economic progress.
In the context of the actual financial crisis, when a new economic paradigm
is demanded, the solution might be represented by the power of
education, enhanced by long life learning; knowledge, creativity and
entrepreneurial spirit, lifelong learning, through a coherent, inclusive and
proactive modern policy could determine the build up of a new economic
system. The main component of this new economic system would consist
of entrepreneurial initiative and innovation capabilities.

The essence resides in the intellectual power of the human being, which is
able to build societal and organizational systems that generate collective
intelligence and continuously facilitate co-evolution and innovation among
the employees, in order to make them able to re-create themselves and
positively contribute to the economical growth.
The result will be the creation of new social and organizational forms
through co-participation of all those directly affected. Thus, it does not
matter if we are speaking about a developed market or an emerging one,
the importance of the entrepreneur not only through his management
skills and employee administration but also through the decisional process
concerning organizational development and human resources training, it is
critical.

The change of the systems way of thinking can be generated by both

something apparently insignificant or by a huge reform. A small, but
critical, change of the system way of thinking can make the deep,
unimportant, thoughts of the human being to become tremendously
powerful.

Another innovative theory grounding the Lisbon strategy is represented by

the strategic learning spiral. Accordingly to this theory, missing connections
and communication during the entire existence of an organization has as
outcome the insecurity of the future. Consequently, any strategy
 106

developed, in these circumstances, will be incremental and short-term. An

improved communication within the organization, by using both formal
and informal channels and the promotion of formal and informal training,
will maximize the entire activity, by creating a balance not inside the
system but in the system development process.

Information is of no use unless it can be communicated. Therefore a work

environment allowing and promoting employees development it is
compulsory for the organizational survival and growth, the transfer of
managerial know-how constituting a key mission. The spiral model
combines rigorous investigation with intuitive synthesis and use the
operational intelligence of the entire system, promoting and facilitating
continuous development and learning.

Conclusions

The paper brought forth the correlation between education and Lisbon
Strategy. Europes tomorrow society needs to make learning a lifelong
endeavor which should support people to develop continuously their skills.
The Lisbon Growth and Jobs Strategy propose to convert Europe's
education and training systems into world leaders. Lifelong learning
enables people for change and access to more challenging professional
environments.

A lifelong learning strategy should include flexible learning possibilities and

effective migration opportunities between all systems and levels of
education and training in order to avoid interruptions. In the actual social
and economic context, really affected by an increase of the education costs
and by a reduction in the qualitative level of the living standards, lifelong
learning becomes a viable strategy that could support the unemployment
reduction and the professional and school insertion of socially
disadvantaged people. This strategy concentrates on building up
relationships with various categories of stakeholders (including policy
makers at national, regional and local levels, social partners, learners and
representatives of civil society). The effective implementation as well as
the propagation of the positive effects requires real efforts and financial
resources that in the initial stage could be burdensome, but subsequently
determines long term advantages.
 107

References

1. Alary, P., B. Amable and I. Ledezma (2006) Institutions, innovation and

productivity: an international comparison at the industry level, Draft
CEPREMAP.
2. Alesina, A. and F. Giavazzi (2006) The Future of Europe: Reform or
Decline, Cambridge MA: MIT Press.
3. Armstrong, K. (2006) Implementing the Lisbon Strategy: Policy Co-
ordination through Open Methods , in S. Smismans (ed.) Civil Society
and Legitimate European Governance, Cheltenham: Edward Elgar.
4. Armstrong, K. (2008) Governance and Constitutionalism after Lisbon,
Journal of Common Market Studies, 46 (2), 415-426.
5. Arnull, A. and D. Wincott ((eds.) (2002) Accountability and Legitimacy in
the European Union, Oxford: Oxford University Press.
6. Borras, S. and K. Jacobsson (2004) The open method of coordination
and new governance patterns in the EU, Journal of European Public
Policy, 11 (2), 185-208.
7. Citi, M. and M. Rhodes (2007) New Modes of Governance in the EU:
Common Objectives versus National Preferences, European
Governance papers (EUROGOV), No N-07-01.
http://www.connexnetwork.org/eurogov/pdf/egp-newgov-N-07-01.pdf
8. Collignon, S. (2003) The European Republic: Policy proposals for a
Future Constitution, Centre for Applied Research Working Papers, No
10/03.
9. Gruner, H. P. (2002) Unemployment and Labour market Reform: A
contract theoretic approach, Scandinavian Journal of Economics, No
104, 641-656.
10. Hartwig, I. and C. Meyer (2002) Towards Deliberative Network
Governance? Theorizing Socio-Economic Policy Coordination in the
European Union, GOVECOR Working Paper, December 2002.
11. Hartwig, I., K. Jacobsson, J. Le Cacheux, I. Linsenmann, A. Maurer, C.
Meyer and W. Wessels (2002) EU Governance by self co-ordination?
Towards a collective gouvernement conomique, State of the Art
Report, paper for the research project GOVECOR, April 2002.
12. Heckman, J. J. (2002) Flexibility and Job Creation Lessons for
Germany, NBER Working Paper No 9194.
 108

13. Padoan, P. and F. Mariani (2006) Growth and Finance, European

Integration and the Lisbon Strategy, Journal of Common Market
Studies, 44 (1), 77-112.
14. Pisani-Ferry, J. and A. Sapir (2006) Last exit to Lisbon, Bruegel Policy
Brief Issue 2006/02 (prepared at the request of the Austrian
Presidency), Brussels: Bruegel.
 109

Stability and Economic Growth Pact

PhD Vasile Neaca

Abstract: Established at the European Council meeting held in Amsterdam

on June 17th, 1997 the Stability and Economic Growth Pact (SEGP) is the
emanation of the Treaty of Maastricht (February 2nd, 1992) regarding the
convergence criteria of European economic and monetary policies for a
better integration of countries from the EU. SEGP enables Member States
to choose together the priority areas and common goals to be achieved.
Obviously, the ultimate goal unwritten but implied through the documents,
would be the economic development of the EU member states and
improvement of living standard of the population of Europe.

Key-words: integration policies, economic growth, EU

JEL Code: F51, M38

European Financial Stability Mechanism (EFSM) is a program of emergency

funding guaranteed by the EC It works under the supervision of EC and
aims granting financial support to EU Member States, which identify as
being in difficulty. He was budgeted at 60 billion euros and is expected to
cease activity in 2013.

In early formulation of the SEGP are fixed, even rigid, two "golden rules" as
EU leaders at that time had to call them. Thus, a country's budget deficit
should imperatively be limited to less than 3% of GDP and public debt
should be less than 60% of GDP. In principle, these budgetary rules, strictly
enforced, would prevent any member country to slide down on the
unwanted and dark slope of recession, once thought.

We note only two structural elements of the memorandum of SEGP as the

most important and which draw our attention. Interesting is that, these
two elements are mutually annihilated - in practice, bringing the Pact in
state of inoperability from the very beginning.
The first element is that SEGP to be part of community domain and
therefore applies to all countries signatory agreement, thus giving the
 110

European Commission an important role in what is assumed oversight of

SEGP implementation objectives. So, in other words, the degree of
freedom in terms of budget formulation and its management as financial
year is limited to a country party to the SEGP.

And the second element is that SEGP establishes sanction measures, taken
by the ECOFIN Council (Economic and Finance Ministers of the member
countries), which implies that ministers to decide to sanction each other.
This analysis will take into account principles, ideas emanating from our
European leaders and statistics that have a direct impact on the future and
on the European cohesion spirit:
1. That from 1997 to 2009 the whole EU economic growth
always stood at around 3% spectacular higher than that.
2. The second element which we will consider in our analysis
and which always indicates the degree of transposition of the SEGP
from declarative to effective level, is the ability of EU member
countries to reflect and give in negotiations, responsibilities and
national interests in the favor of group interests, in our case in the
interest of the European Union.
3. And the third and final element is that the ultimate objective
of the EU, as Mr. Barroso, President of the EC said, is the EU to
become a federation of nation states6. Knowing that the term,
federation of nation states, generated by today many debates and
disagreements between elites and past and present European
leaders.

This being the data of the problem, over the next pages we will try to
analyze to what extent SEGP, knowledgeably signed by some and a fortiori
by others, has a positive or negative impact on EU countries and people.
We will see also its derivatives arising from circumstantial necessity and /
or systemic rigidity.

6
Speech of Jos Manuel Barroso on "Star Nations, 2012" from September 12th, 2012 in
the European Parliament meeting in Strasbourg:. ("We have to direct it towards a
federation of national states. This is what we want. This is our political horizon... I said it,
knowingly that a federation of nation states in these troubled times and full of anxiety, we
should not let the defenses of nations in the hand of the nationalists and populists.
 111

Not ended well with trumpets and fanfare the launch meeting of the Pact,
and at the beginning of 2002, 4 countries are identified as being in need -
France, Germany, Portugal and Italy.
Germany, promoter of SEGP and the voice who showed her displeasure at
first for very mild conditions provided by the pact to others countries,
suddenly has nothing to say. France, also one of the promoters of the pact,
with her well-known boldly, refuses to accept the recommendations of the
EC to reduce her structural deficit by at least 0.5% since 2003 and to return
to the limit of "golden rules" established by her, among all the others. And
everything to be complete, Romano Prodi (Italy), President of the EC at
that time, stated simply that "it is a stupid pact" and Foreign Trade
Commissioner, Pascal Lamy (FR) would consider him only as "medieval".
Ten years later these remarks draw attention and initiate reviews among
European politicians

So, few years after the launch of SEGP, we have had on the table "a stupid
pact", "medieval" and even unobserved by its promoters. He became
completely unworkable and obsolete in the structures created. In other
words, European integration recorded evidence stagnation.

Under these circumstances, SEGP begins to generate political tensions and

discontinuities among signatory countries, leading to the need for entries
of multiple lifts and so, to the adjustment of the goals initially assumed.
Having the right causes:
A moderate overall growth, which most of the times amounted to annual
inflation factor;
The persistently nationalist sentiment promoted in Europe which has
affected all European past and present decision-making process;
Promotion of leaders of compromise at European level, with major
deficiencies in the professional field in relation to the position they
occupied;
Lack of a large-scale institutional reform, which often let place for
member states to express their opposition or prevent decision making in
the EU.

Decision-making jam in the EU, and especially the implementation of the

decisions, has been permanently installed. Perhaps, if the economic crisis
of 2008-2009 would have not been rapidly developed, the dolce far niente
 112

situation for European politics had been extended. But an European

population who gradually loses the basic privileges (right to work ...),
standard of living, generally becoming poorer, not only in relation to the
objectives set by EU leaders, had to wake up to reality on the latter. But
not completely, because many European politicians wrongly believed in
cosmetic surgeries to make them to pursue their privileges and continue to
promote national and state interests, in conditions in which the
globalization is deepening and countries like China, USA, Brazil, India,
dominate the world economy. But what is a single European state against
these giants of the world economy? They should have asked themselves.

Blocking situation created had two effects on European policy:

- shaping the idea of reform of the SEGP
- to form groups of countries in order to promote any palliative
solutions. This leads to the formation of a dynamics in terms of block
outputs. The searching process will generate later new financial budgetary
mechanisms of stability and re-sorption of present crisis.
So, as we said, the first major facelift has emerged in an environment as
can be confusing. Under these conditions, to improve the image and
especially the image of power and competence, European Media comes
into play, upon request, and begins to form a new image of the
negotiation process and of the exemplary way in which compromise
European leaders work to change and adapt SEGP (even If, they wrote
Stability and Economic Growth Pact initially). This type of devolution
evolution characterized the entire period until 2009, where positions and
actions taken, specifics to the interest of promoter state, who tried to
impose his virtual model type to the others' states too, were as inoperative
as possible7.

7
In 2003 Pascal Lamy, European Commissioner for Foreign Trade proposes that SEGP to
switch to an Anglo-Saxon model which does not define to achieve any real goal on short-
term - related to pubic deficit leaving on a medium term, to draw an objective. - In 2003
ECOFIN (meeting of EU Economic and Finance Ministers ) rejects the EC proposal to apply
sanctions against France and Germany and to suspend enforcement of SEGP for these two
countries, even if France was in the 3-rd consecutive year of deficit budget, exceeding the
3% limit recorded in the pact.
 113

On the other hand, the lack of loyalty of a part of member countries and
duality of various national leaders was the main obstacle to the
implementation of decisions taken at meetings in Brussels8.
All these political babbles characterized by nationalist involutive egoism,
led the European population, especially youth people "to feel their live is in
danger", "frustrated being" and powerless over the crisis who deepens
every day9. They constantly migrate to new horizons taking with them
creative anxieties and leaving behind them, increasing demographic
problems and professional issues formed in Europe10.

On this background of constant confrontation, disagreements began to

multiply. Spain, Netherland and Finland, partisan of a strict budgetary
fairness, require punishing of those who violated the pact (Germany,
France, Portugal, Italy) and states that it is well defined in the initial form.
To make things even more complicated, EUROGROUP (group which brings
together Ministers of Finance of the Eurozone Members) strengthens by
his statement that the pact is flexible enough to be respected by all
member states.

Obviously, entrance in scene of ''European heavyweight political persons''

at that time President of France, Jacques Chirac and Gerhard Schroder, the
German counterpart, became a necessity, if it was wanted that SEGP to
exist and mistrust to dispel among the EU countries.

8
Barroso. "Because when you are on a boat in the middle of the storm, absolute loyalty is
the minimum you demand from your fellow crew members.'' -" First, very important
decisions for our future are taken at European summits. But then, the next day, we see
some of those very same people who took those decisions undermining them "..." Is it
realistic to think that we can win the confidence of the markets when we show so little
confidence in each other? To me, it is this reality that is not realistic. This reality cannot go
on
9
"Citizens are frustrated. They are anxious. They feel their way of life is at risk ... In some
parts of Europe we are seeing a real social emergency. Rising poverty and massive levels
of unemployment, especially among our young people. The sense of fairness and equity
between Member States is being eroded. And without equity between Member States,
how can there be equity between European Citizens?
10
According to the statistics published by the Center for Equal Opportunities and Fight
against Racism (CECLR) in Belgium, in 2010 immigrated a number of 140,083 people and
emigrated 55,175 people. The balance is positive, with 84,809 persons entered on the
territory of Belgium
 114

The outcome of the first reform achieved at the EU Council in March 2005,
will bring essential changes, but permissive ones, so that the pact became
one as would have not been existed. It is a compromise between English
thinking and English school and Latin one. In other words, it is in all
directions and in fact in none.

After initially is stated that "the purpose of the pact is not to increase the
rigidity or flexibility of current rules but only to make it more functional"
and deletes by one phrase all the unproductive past of the last 8 years ("
Mistakes of the past that prevented us to achieve our medium-term
budgetary objectives, take us to the need of improving the SEGP
mechanisms by new agreements that Member States to assume. ") in an
apotheosis final, introduces the ambiguous concept which let place to
multiple and subjective interpretations of each state "budget close to
balance or in surplus" (Annex II, point 4). For the outcome to be more
inadequate, it is introduced the Medium-term Objective term (English
school) that should be taken in relation to country-specific economic
characteristics (Latin school). So, each defines its Medium-term Objective
(MTO) how wants, and in what time he wants without regard for others.

And all these in a context in which we are all part of the European Union.
Probably, should be mentioned also chapter 104, where is mentioned the
possibility of not being subject to sanctions if "other relevant factors"
interfere in the process of achieving that goal and make impossible to
achieve them. And defining of other relevant factors'''' is as generous as
possible, making impossible the missing of the emergency exit, before to
trigger sanctions.
 115

References

1. Vasile Neacsa, Teza de Doctorat-The Black Sea Economic

Cooperation as an element of regional Stability and Security,2004.

2. Octavian-Dragomir JORA, EUROPA INTRE MODELUL SOCIAL SI

STABILITATE SI CRESTERE, Revista Tinerilor Economisti (The Young
Economists Journal), 2006, vol. 1, issue 6, pages 126-140