The first part of this project analyses the consequences of European integration for human capital formation and social provision. With current rules, increasing mobility of labour may not only reduce national incentives to invest in internationally applicable education, but it may also undermine fundamental principles of the welfare state. A number of possible solutions will be explored, including graduate taxes or income-contingent loans, and transferable individual accounts in the area of pensions and welfare payments. The second part studies the incentives for structural reform in the European Union. In particular, the timing and size of the costs and benefits of reforms will be examined. The aim is to provide insights as to whether the apparent lack of progress on the reform agenda is because the short run costs appear large compared to benefits which are rather uncertain and only accrue in the long run. The two parts of the project are potentially interrelated through the impact of the Growth and Stability Pact (GSP). There are two components of the linkage to social provision and education. First, budgetary restrictions and the GSP may reduce social and education expenditures, thus reducing productive capacity and human capital in the long run. Second, greater market flexibility will reduce the need for social provision and education expenditures. The project will make an attempt to study to what extent these opposite effects net out.
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