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February 27 2014

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February 13 2014

"TTIP: It’s Not About Trade!" by Dean Baker

Dean Baker, TTIP

Dean Baker

With TTIP, not all is as it seems. Officials from the EU and US would have citizens believe the promotion of trade is the impetus behind free trade negotiations. But slashing already-low tariffs is hardly worth the effort. Instead, the real goal is the implementation of a new regulatory structure. The result: an international policing mechanism unlikely to have been approved via the normal political processes in each country. This is bad news for Europe. 

The most important fact to know about the Transatlantic Trade and Investment Partnership (TTIP) is that promoting trade is not really the purpose of the deal. With few exceptions, traditional trade barriers, in the form of tariffs or quotas, between the United States and European Union (EU) are already low. No one would devote a great deal of effort to bringing them down further, there is not much to be gained.

The pursuit of free trade is just a cover for the real agenda of the TTIP. The deal is about imposing a regulatory structure to be enforced through an international policing mechanism that likely would not be approved through the normal political processes in each country. The rules that will be put in place as a result of the deal are likely to be more friendly to corporations and less friendly to the environment and consumers than current rules. And, they will likely impede economic growth.

In a wide variety of areas the EU has much stronger protections for consumers and the environment than in the United States. For example, the United States has a highly concentrated mobile phone industry that is allowed to charge consumers whatever they like. The same is true for internet access. As a result, people in the United States pay far more for these services.

Fracking for oil and natural gas has advanced much more in the United States than in Europe. It is part of TTIP because it is largely unregulated. In fact, the industry got a special exemption from laws on clean drinking water, so that they don’t even have to disclose the chemicals they are using in the fracking process. As a result, if they end up contaminating ground water and drinking water in areas near a fracking site it will be almost impossible for the victims to prove their case.

These are the sorts of regulatory changes that industry will be seeking in the TTIP. It is unlikely the governments of individual European countries or the EU as a body would support the gutting of consumer and environmental regulations. Therefore the industry groups want to use a “free-trade” agreement to circumvent the democratic process.

However the worst part of the TTIP is likely to be in its rules on patents and copyright. The United States has a notoriously corrupt patent system. A major food manufacturer once patented a peanut butter sandwich and of course Amazon was able to get a patent on “1-click shopping.” These frivolous patents, which are common in the United States, raise prices and impede competition. Europeans will likely see more of such patents as a result of the TTIP.

The deal is likely to have even more consequences for the cost and availability of prescription drugs. The United States pays roughly twice as much for its drugs as Europeans. This is due to the unchecked patent monopolies granted to our drug companies. A major goal of the pharmaceutical industry is to be able to get similar rules imposed in the EU so that they can charge higher prices.

Just to be clear, this part of the TTIP is 180 degrees at odds with free trade. The pharmaceutical industry will be seeking to make its patents stronger, longer, and more far-reaching, for example by applying protection to the data used to register drugs so that generic competitors cannot enter the market.

There is an enormous amount of money at stake in this battle. The United States spends close to $350 billion a year on drugs that would sell for around one-tenth this price in a free market. The difference is almost 2 percent of GDP or more than 25 percent of after-tax corporate profits. This amounts to a huge transfer from the public at large to the pharmaceutical industry.

The enormous gap between the patent-protected price and production costs gives drug companies an incentive to mislead the public about the safety and effectiveness of their drugs, which they do with considerable regularity. In short, an outcome of the deal can be much higher drug prices and lower quality health care.

None of the models used to project economic gains from a TTIP even try to estimate the economic losses that would result from higher drug prices or other negative consequences of stronger patent protection. For this reason these models do not provide a useful guide to the likely economic impact of a TTIP.

The notion that a TTIP will provide some quick boost to the economies of the EU and the United States is absurd on its face. The public should scrutinize whatever comes out of the negotiating process very carefully. If politicians demand a quick yes or no answer, then the obvious answer must be “no.”

This column was first published by

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"The Fed, The Dollar And The Damage Done" by Barry Eichengreen

Barry Eichengreen, Fed

Barry Eichengreen

The US Federal Reserve is being widely blamed for the recent eruption of volatility in emerging markets. But is the Fed just a convenient whipping boy?

It is easier to blame the Fed for today’s global economic problems than it is to blame China’s secular slowdown, which reflects Chinese officials’ laudable efforts to rebalance their economy. Likewise, though Japan’s “Abenomics,” by depressing the yen, complicates policymaking for the country’s neighbors, it also constitutes a commendable effort to bring deflation to a long-overdue end. So, again, it is easier to blame the Fed.

And, for the affected emerging economies, the Fed’s tapering of its massive monthly purchases of long-term assets – so-called quantitative easing (QE) – is certainly easier to blame than their own failure to move faster on economic reform.

Still, the Fed should not be absolved of all guilt. The prospect of higher interest rates in the US weakens the incentive for investors to pour capital into emerging economies indiscriminately. Though a confluence of factors may have combined to upset the emerging-market applecart, Fed tapering is certainly one of them.

It is striking, therefore, that the Fed has made no effort to take into account the impact of its policies on emerging economies or the blowback from emerging markets on the US. Emerging markets comprise more than a third of global GDP. They have contributed considerably more than a third of global growth in recent years. What happens in emerging markets does not stay in emerging markets. Increasingly, what happens there has the capacity to affect the US.

Yet Fed officials, while commenting copiously about their motives for tapering QE, have said nothing about the impact of doing so on emerging markets. They have given no indication of being aware that US monetary policy can affect events outside of their narrow corner of the world.

This silence is all the more remarkable in view of two other recent developments in Washington, DC. First, the US Congress, as part of the government’s recent budget deal, refused to authorize an increase in America’s quota subscription to the International Monetary Fund. The financial commitment was essentially symbolic, but it was part of a larger agreement reached at the Seoul Summit of G-20 leaders to regularize the IMF’s resources and enhance the representation of emerging economies.

This failure to follow through reopens old wounds and raises troubling questions about the legitimacy of an institution that, reflecting the long shadow of history, is dominated by a handful of advanced countries. Emerging-market officials have been increasingly reluctant to turn to the IMF for advice and assistance, undermining its ability to play an effective global role.

The other development was the decision to make permanent the dollar swap arrangements put in place during the financial crisis by the Fed, the European Central Bank, and the central banks of Canada, the United Kingdom, Switzerland, and Japan. Under these arrangements, the Fed stands ready to provide dollars to this handful of favored foreign central banks – an acknowledgment of the dollar’s unique role in international financial markets. Because international banks, wherever they are located, tend to borrow in dollars, the swap arrangements allow foreign central banks to lend dollars to their local banks in times of emergency.

Put these three events – the tapering of QE, the torpedoing of IMF reform, and the entrenchment of dollar swaps – together and what you get is a US that has renationalized the international lender-of-last-resort function. Simply put, the Fed is the only emergency source of dollar liquidity still standing.

But the US has offered to provide dollars only to a privileged few. And in its policy statements and actions, it has refused to acknowledge its broader responsibility for the stability of the world economy.

So what should the Fed do differently? First, it should immediately negotiate permanent dollar swap lines with countries such as South Korea, Chile, Mexico, India, and Brazil.

Second, the Fed should adjust its rhetoric and, if necessary, its policies to reflect the fact that its actions disproportionately affect other countries, with repercussions on the US economy. Might this mean that the Fed should slow the pace of its tapering of QE? Yes, it might.

The Fed may hesitate to extend additional swap lines, because to do so could expose it to losses on foreign currencies. Moreover, it may worry about antagonizing countries that are not offered such facilities; and it may fear criticism from Congress for overstepping the bounds of its mandate if its talk and policies acknowledge its global responsibilities.

If US policymakers are worried about these issues, their only option is to agree to quota increases for the IMF, thereby allowing responsibility for international financial stability to migrate back to where it belongs: the hands of a legitimate international organization.

© Project Syndicate

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February 11 2014

"Karlsruhe’s Underappreciated Threat To The Euro" by Andrew Watt

Andrew Watt

Andrew Watt

The euro area once again faces a potentially existential threat, following Friday’s decision by the German Constitutional Court in Karlsruhe. The funny thing is, hardly anyone seems to realise it.

To see why this is the case it is helpful to separate the procedural from the substantive issues, before bringing them together again.

The procedure: court vs. court

The GCC has taken the view – on a 6-2 majority verdict – that a key element of the monetary policy of the ECB, the Outright Monetary Transactions (OMT) programme, is incompatible with European treaty and other legal provisions. It has sought clarification of a number of issues from the European Court of Justice (ECJ). The GCC does not have jurisdiction over the ECB, of course. But it can rule that actions by German institutions (notably the Bundesbank but also the German government) in support of acts by the ECB that it has deemed illegal are themselves unconstitutional under German law and thus verboten. This is because the German constitution only permits the transfer of national powers to the European level under specific conditions, and this includes that European institutions play by the rules, as interpreted by a majority among Karlsruhe judges.

Commentators and the financial markets seem relatively unperturbed by this news. This seems to be because they believe that the GCC, by apparently passing over the matter to the ECJ, has agreed to defer to a higher court. And it is widely believed that the ECB’s policies will receive a far more favourable hearing from the judges in Luxembourg than those in Karlsruhe. While the latter supposition is almost certainly true, the basic presumption is incorrect. The GCC is not asking for a higher court’s opinion in order to stand corrected by the ECJ. Unlike a lower-level court in a national system, it is not saying: “our verdict is A, but if you say it is B, then B it is”.

Rather, it is calling on the ECJ itself to make a restrictive judgement on ECB policies (i.e. corroborate verdict A, or at least pronounce something rather close to it) to enforce changes that would render OMT constitutional once again in the view of the German court. But if, as expected, the ECJ does not do so, then the GCC ruling will still stand. Given that in Friday’s judgement it has rejected the ECB’s own defence of its policies – essentially that OMT is necessary to make monetary policy effective – Karlsruhe will not revise its stance unless the ECJ were to come up with persuasive new arguments. But this is rather unlikely. That is not the Court’s job, which is to decide which of the competing sets of arguments it considers plausible or of overriding legal importance.

Thus, and this is the crucial point, whatever the ECJ decides, the GCC’s ruling will in all probability remain binding for German authorities. The Bundesbank and the German government will be lastingly prohibited from participating in the OMT programme, or, at least, they will be highly reticent to do so fearing legal challenges.

The substance: OMT

To see why this could potentially be a major threat, we need to turn to the substance. Here the key points are as follows.

The GCC’s central contention is that by announcing the OMT programme the ECB has acted ultra vires – i.e. has gone beyond its allotted monetary policy powers – and/or that it has contravened the treaty ban on monetary financing of government debt. (Monetary financing means that governments do not sell the bonds they need to run deficits on the open market, but rather they are bought and held by the central bank, which merely “prints” the required money.) The OMT is correctly identified by the GCC as a programme that seeks to reduce the rate of interest paid by benefiting states on government bonds that is ex ante unlimited in scope, but subject to political conditionality. In the eyes of the Court the OMT provides financial aid, and this goes beyond monetary policy and enters the field of economic policy. This, however, is the prerogative of the member states. The ECB is only allowed to support the general economic policy of the Union.

The problem: euro area extremely vulnerable again

I will examine the specifics of the GCCs arguments in a separate post. Suffice it to say here: they are very weak. However, as indicated above, this does not actually matter. The problem can now be baldly stated: In the current context, and for the foreseeable future, the OMT is what stands between the euro area steadily, if much too slowly, pulling out of the crisis, and it descending back into chaos. But without the participation of the Bundesbank and the German government the operation of the programme lacks the credibility essential to its effectiveness.

Early and/or mid-2012 had seen huge spikes in sovereign interest rates for a number of euro area countries (see fig. 3, p.10 here). Ten-year sovereign bond rates touched 40% and 30% in Greece at the start and in the spring of that year; in Portugal around 17%. More worrying still, interest rates were at an unsustainable 7% in two large economies, Spain and Italy. Last but not least, a substantial interest-rate spread on German bunds had even opened up for French government bonds. Given the limited fiscal back-up facilities in place, such high rates, for so many and such important countries, quite simply threatened the viability of the entire monetary union. It was at this point that Mario Draghi, ECB President, announced his willingness to “do all it takes” to save the euro, and then, in early September, backed this up by announcing OMT. Rates fell rapidly, substantially and lastingly: they are now around 8% in Greece, 6% in Portugal and substantially under 5% in the other crisis countries. In short, OMT saved the monetary union.

It is important to note that the ECB broke the “death spiral” by which concerns about capital losses lead to higher interest rates which feed further fears of losses without firing a shot, or rather “spending” a single euro. And the reasons that this “miracle” was possible is that it was credible: markets took the view that given the ex ante unlimited nature of the programme, matched by the ECB’s unlimited resources, it was too risky to call Draghi’s bluff. Doubts expressed at the time, also by this author, related largely to the link with conditionality (i.e. austerity programmes). But the charm of the programme was that such doubts did not matter for as long as most market participants thought they did not matter.

But if the most important member state government and its central bank are banned by the country’s constitutional court from involvement, there must be doubts as to whether the OMT programme is really operational. After all, as Wolfgang Munchau points out, the German government has to approve any application by a member state for a programme with the European Stability Mechanism, which is an essential part of the OMT conditionality.  All it will take is a small shock, or an upward blip in interest rates followed by some real or perceived dithering by the ECB – understandable given the legal situation – and the whole edifice, until now held up by a sort of collective suspension of disbelief, could come crashing down as bondholders run for the exits.

To conclude, the decision by the GCC poses a substantial risk to the recovery of the euro area and arguably once again puts the currency area’s whole existence in question. Any shocks had better be positive ones. Given the centrality of OMT in the current context, the GCC has more or less said, presumably without realising it, that the continued existence of the euro violates the German constitution. That markets have for now seemingly shrugged this off is welcome, but unfortunately is, I suspect, because they have not understood all its implications, no surprise given that the text consists of more than 100 long, dense and jargon-written paragraphs available only in German.

Can we run Europe like this?

Let me close with a more general reflection, a concern which again I have not seen picked up in commentaries on this issue. There are currently 28 member states of the EU and 17 of the euro area. Many of them have constitutional courts. Can it be that right that policies that have been agreed, often in the face of a major crisis, by elected representatives of all the member states are under permanent threat from, in the extreme case, a small majority of a small number of unelected judges in the constitutional court of a single member state interpreting laws against an abstract legal text written decades before the economic crisis or indeed even before the European integration process began?

In Germany voices on both right and left have welcomed the GCC’s stand as a blow for (national) democracy against an out-of-control European technocracy. But imagine the uproar if – to construct an extreme,  hypothetical example – a European-wide plan to counter tax evasion were to gain unanimous support in the European institutions, but be rendered inoperable because the Luxembourg constitutional court, on a 5-4 verdict, considers it incompatible with the country’s constitution’s provisions on property rights. The Luxembourg Constitution dates from 1868.

I am not a legal expert, but it seems plain to me that Europe cannot function in this way.

"The Emerging Markets’ Death By Finance" by Dani Rodrik

Dani Rodrik, Finance, Emerging Markets

Dani Rodrik

How quickly emerging markets’ fortunes have turned. Not long ago, they were touted as the salvation of the world economy – the dynamic engines of growth that would take over as the economies of the United States and Europe sputtered. Economists at Citigroup, McKinsey, PricewaterhouseCoopers, and elsewhere were predicting an era of broad and sustained growth from Asia to Africa.

But now the emerging-market blues are back. The beating that these countries’ currencies have taken as the US Federal Reserve begins to tighten monetary policy is just the start; everywhere one looks, it seems, there are deep-seated problems.

Argentina and Venezuela have run out of heterodox policy tricks. Brazil and India need new growth models. Turkey and Thailand are mired in political crises that reflect long-simmering domestic conflicts. In Africa, concern is mounting about the lack of structural change and industrialization. And the main question concerning China is whether its economic slowdown will take the form of a soft or hard landing.

This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago.

First, emerging-market hype is just that. Economic miracles rarely occur, and for good reason. Governments that can intervene massively to restructure and diversify the economy, while preventing the state from becoming a mechanism of corruption and rent-seeking, are the exception. China and (in their heyday) South Korea, Taiwan, Japan, and a few others had such governments; but the rapid industrialization that they engineered has eluded most of Latin America, the Middle East, Africa, and South Asia.

Instead, emerging markets’ growth over the last two decades was based on a fortuitous (and temporary) set of external circumstances: high commodity prices, low interest rates, and seemingly endless buckets of foreign finance. Improved macroeconomic policy and overall governance helped, too, but these are growth enablers, not growth triggers.

Second, financial globalization has been greatly oversold. Openness to capital flows was supposed to boost domestic investment and reduce macroeconomic volatility. Instead, it has accomplished pretty much the opposite.

We have long known that portfolio and short-term inflows fuel consumption booms and real-estate bubbles, with disastrous consequences when market sentiment inevitably sours and finance dries up. Governments that enjoyed the rollercoaster ride on the way up should not have been surprised by the plunge that inevitably follows.

Third, floating exchange rates are flawed shock absorbers. In theory, market-determined currency values are supposed to isolate the domestic economy from the vagaries of international finance, rising when money floods in and falling when the flows are reversed. In reality, few economies can bear the requisite currency alignments without pain.

Sharp currency revaluations wreak havoc on a country’s international competitiveness. And rapid depreciations are a central bank’s nightmare, given the inflationary consequences. Floating exchange rates may moderate the adjustment difficulties, but they do not eliminate them.

Fourth, faith in global economic-policy coordination is misplaced. America’s fiscal and monetary policies, for example, will always be driven by domestic considerations first (if not second and third as well). And European countries can barely look after their own common interests, let alone the world’s. It is naïve for emerging-market governments to expect major financial centers to adjust their policies in response to economic conditions elsewhere.

For the most part, that is not a bad thing. The Fed’s huge monthly purchases of long-term assets – so-called quantitative easing – have benefited the world as a whole by propping up demand and economic activity in the US. Without QE, which the Fed is now gradually tapering, world trade would have taken a much bigger hit. Similarly, the rest of the world will benefit when Europeans are able to get their policies right and boost their economies.

The rest is in the hands of officials in the developing world. They must resist the temptation to binge on foreign finance when it is cheap and plentiful. In the midst of a foreign-capital bonanza, stagnant levels of private investment in tradable goods are a particularly powerful danger signal that no amount of government mythmaking should be allowed to override. Officials face a simple choice: maintain strong prudential controls on capital flows, or be prepared to invest a large share of resources in self-insurance by accumulating large foreign reserves.

The deeper problem lies with the excessive financialization of the global economy that has occurred since the 1990’s. The policy dilemmas that have resulted – rising inequality, greater volatility, reduced room to manage the real economy – will continue to preoccupy policymakers in the decades ahead.

It is true, but unhelpful, to say that governments have only themselves to blame for having recklessly rushed into this wild ride. It is now time to think about how the world can create a saner balance between finance and the real economy.

© Project Syndicate

February 10 2014

"Europe, The European Union And European Identity" by David Held and Kyle McNally

David Held, European identity

David Held

The European Union can only be understood against the backdrop of the catastrophic history of Europe in the first half of the twentieth century. The two World Wars, and the Great Depression between them, shattered any assumptions of certainty and stability that Europeans might have once had. The rise of Nazism, fascism and Stalinism, in particular, turned the Enlightenment on its head making Europe the centre of barbarism and brutality. It was not Islamic extremists, China, or other non-Western powers that had so disrupted global peace. It was, above all, Europe. And the catastrophic consequences of this went to the heart of postwar European thinking.

The European Union is, at its core, a project of Kantian peace, an attempt to create a peaceful union of European states that had been at war with each other for many centuries, but whose orgy of violence in the first half of the twentieth century left Europe exhausted. The Marshall Plan had reawakened hope for European development and the formation of the European Community in the postwar years created a vision of a European ideal that had been eclipsed by the fire and ashes of war. This ideal remains fundamental to the European project even though the reality is fraught with the compromises of geopolitics.  The EU has been through turbulent cycles of deepening and broadening – first the core states, then Spain, Portugal Greece, then, after the fall of the Berlin Wall, membership was extended to central and Eastern European states. But behind all the turbulent transitions, European leaders like Chancellor Kohl were eager to move forward the European ideal through the policy and practice of extending and entrenching the Union.

Kyle McNally, European identity

Kyle McNally

The EU in its most robust form stands at the pinnacle of this vision – an integrated Europe with a single market subject to common rules and a shared framework of human rights and justice. The plurality of European nations could flourish within an overarching shared commitment to democratic rules and human rights standards. Power and authority could be remoulded upwards and downwards: cities, sub-national regions, nation states and the supra-national structure of the EU could all exist together in a cosmopolitan structure defined by not to my nation right or wrong, but by a shared political culture of democracy, markets and social justice.

Of course, the idea of a people, whether national or European, is a complex social construct. By drawing lines on maps, by conquest and by other ‘top-down’ processes, elites carved out bordered spaces in which a diversity of peoples lived. The creation of national cultures was often initiated by elites to bind people into common territories. However, national cultures were never merely the result of such initiatives.  Elites never invented nations on arid ground. Rather, nations were created upon deep legacies of history and culture, a sense of common rights and duties, and a shared recognition of overlapping fates. The struggle to create democracy, moreover, was not just a struggle against the autocratic elites that has shaped European history so significantly.  The idea of a democratic people, just like the idea of a national culture, was the result of interplay between elite developments and popular pressure. The demoi that emerged in the late nineteenth and twentieth centuries were both catalysed by great democratic reformers and constituted through struggle to claim a democratic right of membership in community. The democratic rights that followed were often hard won in bitter struggles of labour movements and later in the conflicts surrounding the right to vote for women and marginalized minorities.

While Europe benefitted from the postwar boom and the virtuous circle of institution building and economic growth that pervaded the postwar settlement, tensions in the European project could be put aside by the sheer evidence of success. All national boats in Europe could rise together in a European Union where common governing structures could trump national states in critical areas, and where sovereignty was pooled in significant ways. This period of self-reinforcing European interdependence produced the noble development of the EU as a common political structure which recognized diversity and difference under a shared rubric of law and regulation. In the 1990s, the Euro-barometer showed the highest levels of European identification. It seemed that European politicians could have their cake and eat it too – a strong Europe in a land of plural states.

The build-up of economic pressures at the turn of the 21st century was temporarily masked by the continuing efforts of the US, the EU and China to accelerate ever more down the road of economic growth. The crash was never far behind. The collapse of Lehman Brothers was the match that lit the global financial crisis which at first could be characterised, as the Chinese did, as the North Atlantic Financial Crisis. But as time went on it was clear enough that this was too easy a characterisation and that many of the countries of the European Union were deeply implicated in the malpractices and misadventures of investment banking, subprime mortgages, excessive leveraging, and complex and volatile financial instruments. Moreover, the European Union governing structures which were once seen as a fine balance between centre and nation looked suddenly weak. The EU, although far from alone in this, had allowed a regime of light touch regulation in financial matters, and had been built on the quick sand of a single currency without wider fiscal and monetary controls.

Against this background, the question of European identity is once more raised in stark form. It is possible that this question could be once again set aside if the EU manages to stabilise the European economy and the recent evidence of renewed growth is affirmed. However, the financial crisis has raised fundamental questions about identity and politics. European culture, like all cultures before it, cannot simply be the result of elite efforts. It has to be built on a foundation of common values and beliefs, which need nurturing over the long term. There were opportunities to set down these roots in the postwar period but they were rarely explored. It was easier for the leaders of Germany and France, along with their allies, to shape Europe in their own image and interest. European governance was always a compromise between the interests of its leading powers and rarely, if at all, the product of wide scale horizontal communication between peoples. The great projects of European cultural integration were above all projects of infrastructure, science and institution building. These are important, but they do not touch the fuzzy core of the complex patterns of national culture.

Today the EU is under strain. The financial crisis exacerbated underlying tensions among member states, which in turn were compounded by the weakening monetary and fiscal position of several of them. In addition, the crisis gave an enormous impetus to emerging regions, particularly China and South East Asia, which put further competitive pressure on Europe. Against this background, signs have emerged of increasing social disintegration and a resurgence of nationalist sentiment; anti-Semitism, racism and far-right politics are re-established as the dark side of European culture never entirely addressed. European identity was the negative construct of a Europe torn apart by World War. It was a negative outcome of an attempt to end German Europe and to forge a European identity in the Cold War, squeezed, as Europe was, by the rivalry of the USA and USSR. But negative cultural formation cannot carry the day when the driving forces – the geopolitical threats to Europe – disappear. The questions then arise: who are we Europeans? What does it mean to be European after the Cold War? Can European identity survive the global financial crisis?

It remains one of Europe’s greatest achievements to have created a Kantian peace where there was once only devastation and war. The attempt to create common political structures rooted in human rights and rule of law remains one of the most inspiring political projects in a global world fraught by the contradictory pressures of globalisation and nationalism. In an era where global bads pervade – global financial instability, global economic imbalances, the risk of pandemics and epidemics, climate change and so on – coming together in large political blocs to deal with common challenges can only be the right way ahead. Yet this right way has to be built on solving common problems, enjoying common governance in the face of common threats and on the commitment to principles and procedures that alone can create peace, unity and freedom in a diverse world; that is, the principles of democracy and human rights.

European identity cannot be based on an integrated European culture. It can only survive as a way of solving problems, united by a common political culture inspired by Kant and embodied in the rule of law, multilevel democracy, and human rights. This remains a Europe worth having.

This column was first published by OpenDemocracy

February 06 2014

"Economic Stagnation By Design" by Joseph Stiglitz

Joseph Stiglitz, economic stagnation

Joseph Stiglitz

Soon after the global financial crisis erupted in 2008, I warned that unless the right policies were adopted, Japanese-style malaise – slow growth and near-stagnant incomes for years to come – could set in. While leaders on both sides of the Atlantic claimed that they had learned the lessons of Japan, they promptly proceeded to repeat some of the same mistakes. Now, even a key former United States official, the economist Larry Summers, is warning of secular stagnation.

The basic point that I raised a half-decade ago was that, in a fundamental sense, the US economy was sick even before the crisis: it was only an asset-price bubble, created through lax regulation and low interest rates, that had made the economy seem robust. Beneath the surface, numerous problems were festering: growing inequality; an unmet need for structural reform (moving from a manufacturing-based economy to services and adapting to changing global comparative advantages); persistent global imbalances; and a financial system more attuned to speculating than to making investments that would create jobs, increase productivity, and redeploy surpluses to maximize social returns.

Policymakers’ response to the crisis failed to address these issues; worse, it exacerbated some of them and created new ones – and not just in the US. The result has been increased indebtedness in many countries, as the collapse of GDP undermined government revenues. Moreover, underinvestment in both the public and private sector has created a generation of young people who have spent years idle and increasingly alienated at a point in their lives when they should have been honing their skills and increasing their productivity.

On both sides of the Atlantic, GDP is likely to grow considerably faster this year than in 2013. But, before leaders who embraced austerity policies open the champagne and toast themselves, they should examine where we are and consider the near-irreparable damage that these policies have caused.

Economic Stagnation And Austerity

Every downturn eventually comes to an end. The mark of a good policy is that it succeeds in making the downturn shallower and shorter than it otherwise would have been. The mark of the austerity policies that many governments embraced is that they made the downturn far deeper and longer than was necessary, with long-lasting consequences.

Real (inflation-adjusted) GDP per capita is lower in most of the North Atlantic than it was in 2007; in Greece, the economy has shrunk by an estimated 23%. Germany, the top-performing European country, has recorded miserly 0.7% average annual growth over the last six years. The US economy is still roughly 15% smaller than it would have been had growth continued even on the moderate pre-crisis trajectory.

But even these numbers do not tell the full story of how bad things are, because GDP is not a good measure of success. Far more relevant is what is happening to household incomes. Median real income in the US is below its level in 1989, a quarter-century ago; median income for full-time male workers is lower now than it was more than 40 years ago.

Some, like the economist Robert Gordon, have suggested that we should adjust to a new reality in which long-term productivity growth will be significantly below what it has been over the past century. Given economists’ miserable record – reflected in the run-up to the crisis – for even three-year predictions, no one should have much confidence in a crystal ball that forecasts decades into the future. But this much seems clear: unless government policies change, we are in for a long period of disappointment.

Markets are not self-correcting. The underlying fundamental problems that I outlined earlier could get worse – and many are. Inequality leads to weak demand; widening inequality weakens demand even more; and, in most countries, including the US, the crisis has only worsened inequality.

The trade surpluses of northern Europe have increased, even as China’s have moderated. Most important, markets have never been very good at achieving structural transformations quickly on their own; the transition from agriculture to manufacturing, for example, was anything but smooth; on the contrary, it was accompanied by significant social dislocation and the Great Depression.

This time is no different, but in some ways it could be worse: the sectors that should be growing, reflecting the needs and desires of citizens, are services like education and health, which traditionally have been publicly financed, and for good reason. But, rather than government facilitating the transition, austerity is inhibiting it.

Malaise is better than a recession, and a recession is better than a depression. But the difficulties that we are facing now are not the result of the inexorable laws of economics, to which we simply must adjust, as we would to a natural disaster, like an earthquake or tsunami. They are not even a kind of penance that we have to pay for past sins – though, to be sure, the neoliberal policies that have prevailed for the past three decades have much to do with our current predicament.

Instead, our current difficulties are the result of flawed policies. There are alternatives. But we will not find them in the self-satisfied complacency of the elites, whose incomes and stock portfolios are once again soaring. Only some people, it seems, must adjust to a permanently lower standard of living. Unfortunately, those people happen to be most people.

© Project Syndicate

February 05 2014

"How Mainstream Economics Failed To Grasp The Importance Of Inequality" by Jon D. Wisman

Jon Wisman (photo: American University), mainstream economics

Jon Wisman
(photo: American University)

The restricted focus of mainstream economists has meant that not much attention has been given to the economic and social consequences of changing income and wealth inequality. Jon D. Wisman critiques their restricted scope and contends that it impeded them from seeing how 30 years of wage stagnation and soaring inequality were generating excessive speculation, indebtedness, and political changes that set the underlying conditions for the financial crisis of 2008.

The financial crisis of 2008 launched the second most severe depression in capitalism’s history. Although its causes have been endlessly discussed, attention has remained fixed on surface reality or proximate causes such deregulation, inadequate oversight, low interest rates, “irrational exuberance,” and moral hazard. Ignored has been what was going on beneath the surface: 30 years of wage stagnation and exploding inequality—powerful forces that were churning up complex dynamics to make a financial crisis all but inevitable. During the 1920s, the same forces had set the stage for the crash of 1929, but the economics profession missed that one too.

The magnitude of exploding inequality since the mid-1970s is captured by the following: Between 1979 and 2007, inflation-adjusted income, including capital gains, increased $4.8 trillion — about $16,000 per person. Of this, 36 percent was captured by the richest 1 percent of income earners, representing a 232 percent increase in their per capita income. The richest 10 percent captured 64 percent, almost twice the amount collected by the 90 percent below. Between 1983 and 2007, total inflation-adjusted wealth in the U.S. increased by $27 trillion. If divided equally, every man woman and child would be almost $90,000 richer. But of course it wasn’t divided equally. Almost half of the $27 trillion (49 percent) was claimed by the richest one percent — $11.7 million more for each of their households. The top 10 percent grabbed almost $29 trillion, or 106 percent, more than the total because the bottom 90 percent suffered an average decline of just over $16,000 per household as their indebtedness increased.

This soaring inequality generated three dynamics that set the conditions for a financial crisis. The first resulted from limited investment potential in the real economy due to weak consumer demand as those who consume most or all their incomes received proportionately much less. Not being capable of spending all their increased income and wealth, the elite sought profitable investments increasingly in financial markets, fueling first a stock market boom, and then after the high tech bubble burst in 2001, a real estate boom.

As financial markets were flooded with credit, the profits and size of the financial sector exploded, helping keep interest rates low and encouraging the creation of new high-risk credit instruments. This enabled more of the elite’s increased income and wealth to be recycled as loans to workers. Financial institutions were so flush with funds that they undertook ever more risky loans, the most infamous being the predatory subprime mortgages that often were racially targeted. As the elite became ever richer, those below became ever more indebted to them. When this debt burden became unsustainable, the financial system collapsed and was bailed out by taxpayers.

The second dynamic resulting from wage stagnation and soaring inequality is that as the elite with ever more income and wealth ratcheted up their consumption on luxury goods in competition among themselves for the pinnacle of status, everyone below was pressured to consume more both to meet family needs and to maintain their relative status or social respectability. In effect, the elite’s dramatically larger shares of income and wealth led to a “consumption arms race.” Pressure was especially strong in housing, the most important asset and symbol of social status for most Americans. As a consequence, over the three decades building up to the crisis, the household saving rate plummeted from 10 percent of disposable income in the early 1980s to near zero by 2006, as Figure 1 illustrates. By 2007, the average married household worked 19 percent more hours than they did in 1979—the equivalent of over one extra work day per week, or an extra 14 work weeks per year—and household debt as a percent of disposable income doubled from about 62 percent in 1974 to 129 percent in late 2007.

Figure 1 – Personal savings rate 1980 – 2010

Wisman Fig 1

Source: Bureau of Economic Analysis National Income and Product Accounts 2012, Section 7.

The third dynamic is that as the rich took an ever-greater share of income and wealth, they and their corporate interests gained greater command over politics and ideology so as to further change the rules of the game in their favor. The proliferation of right-wing think tanks, corporate lobbyists and corporate campaign contributions leveraged their political influence. In their competition for status among themselves, they understandably supported self-interested economic and political measures that brought them yet greater shares of the nation’s income and wealth.

As the elite’s command over essentially everything grew, so too did their ability to craft self-serving ideology—especially supply-side economics, a variant of laissez faire economics—in a manner that made it be ever-more convincing to a majority of the electorate. Flowing out of this ideology were tax cuts favoring the wealthy, a weakened safety net for the least fortunate, budget cuts for public services, freer trade, weaken unions, deregulation of the economy (especially the financial sector), and the failure to regulate newly evolving credit instruments.

How did the mainstream of economists not see the unstable financial conditions that soaring inequality was creating? Generally because economists have not viewed the distribution of income and wealth as an important domain of study. The 1995 recipient of the Nobel Memorial Prize in Economic Sciences even went so far as to declare that “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” Moreover, rising inequality has long been dismissed by economists as either irrelevant (if everyone is becoming materially better off, the size of shares is unimportant) or as missing the economic dynamism that inequality generates (which in fact it does not!!).

Mainstream economists were also blinded to the dynamics greater inequality set in motion by their tendency to focus narrowly on market phenomena, their refusal to study the manner in which humans as social beings react to the behavior of others, and their failure to address the nexus between economic and political power.

Economists might have stood a better chance of foreseeing the developing financial crisis had they thrown their nets far wider to catch the insights that have been harvested by a wide range of so-called heterodox economists. From the underconsumptionist tradition of Keynes, Kalecki, and Minsky they could have developed an understanding of how inequality affects aggregate demand, investment, and financial stability. From the institutionalist tradition of Thorstein Veblen they could have learned how consumption preferences are socially formed by humans who are as concerned with social status and respectability as with material well-being. And from the Marxist tradition they could have seen how economic power translates into political power. Economists have failed to grasp the wisdom of one of the foremost students of crises: “the economist who resorts to only one model is stunted. Economics is a toolbox from which the economist should select the appropriate tool or model for a particular problem.”

This article has been drawn from the paper Wage Stagnation, Rising Inequality, and the Financial Crisis of 2008,” which was published in the Cambridge Journal of Economics. It was first published by USAPP@LSE.

Reposted by02mydafsoup-01 02mydafsoup-01

February 04 2014

"Why We Need Basket Eurobonds" by Peter Bofinger

Peter Bofinger, Basket Eurobonds

Peter Bofinger

This column was first published in the Journal For A Progressive Economy.

The Euro area is suffering from insufficient macroeconomic stabilisation

At the end of 2009 the unemployment rates of the Euro area and the United States had reached a level of 10%. Since then, unemployment in the US has fallen to 7.3% while in the Euro area it has climbed to 12.0%. This is not surprising as the real GDP in the United States is now 9.0% above the level of 2009, but in the Euro area it has increased by only 2.4%.

These outcomes are very closely related to very different macroeconomic approaches. The US’s fiscal policy tried to stimulate the economy with very high deficits. On average in the years 2010 to 2013, the annual US fiscal deficit was 8.7% of GDP. This is more than twice the Euro area’s deficit, which was only 4.3% of GDP. Thus, unlike the United States which made ample use of their fiscal capacity, the Euro area – especially the member countries which were most affected by the economic downturn – was forced to pursue a restrictive policy which aggravated the recession.

Different approaches can also be identified in the field of monetary policy. Almost immediately after the Lehman collapse, the FED reduced interest rates to the zero lower bound. The ECB followed a much more cautious approach. After Lehman, the ECB did not go below 1% with its own interest rate – instead it raised it again in two steps to 1.50% in July 2011. It took almost two more years before the Eurozone rate was reduced to 0.50%. The more active approach of the FED is also reflected in its quantitative easing policy. Since Draghi’s strong statement on 26 July 2012, the ECB’s bond holdings have declined from 602 billion Euros to 600 billion Euros. At the same time the FED has increased its bond portfolio from 2,472 billion Dollars to 2,844 billion Dollars.

With this in mind, the weakness of the Euro area economy cannot only be explained through structural problems. Rather, it has more to do with an insufficient macroeconomic response to a severe macroeconomic crisis. This is also reflected by a comparison with the United Kingdom which according to all indicators is the EU country with the most flexible goods, service and labour markets. Nevertheless, in order to stabilise the UK economy in the years 2010 to 2013, an average fiscal deficit of 8.0% was needed and the bond purchases of the Bank of England were even more aggressive than the quantitative easing of the FED.

Of course, the rather weak macroeconomic stabilisation in the Eurozone to a large extent reflects the specific political and institutional framework of this currency area. In contrast to the United States and the United Kingdom, the member states of the Eurozone are indebted in a currency which they cannot print under their national autonomy. This exposes them to an insolvency risk which is not the case for other developed countries such as the US, the UK or Japan. As a consequence the weaker Eurozone members were confronted with “bond-runs” of global investors in the years 2010 to 2012, which in the case of Greece, Ireland and Portugal could only be stopped by a rescue programme which required very restrictive stabilisation under the aegis of the Troika.

As far as the ECB is concerned, its ability to engage in a comprehensive quantitative easing programme in the style of the FED or the Bank of England is limited by the fact that there is no integrated market for Eurobonds. Especially in Germany, ECB purchases of bonds from individual countries are criticised as a hidden form of government financing which is prohibited by European Treaties.

Basket Eurobonds: A way to overcome the German resistance to Eurobonds

Fundamental changes to the institutional framework of the Eurozone cannot be expected for the time being. Therefore, one has to ask how better macroeconomic management could be achieved within the present legal constraints.

In the last few years, several proposals for Eurobonds or quasi-Eurobonds, such as the debt redemption pact of the German Council of Economic Experts, have been developed. But so far it has not been possible to convince German politicians and the German public that joint and several liability for Eurozone debt is required to guarantee the survival of the Euro and that the risks of such a step can be controlled. In addition, any form of joint and several liability poses serious legal challenges.

A possible way out could be a synthetic Eurobond which is designed as a basket of national bonds where each country guarantees only for its share in the basket. While such a basket-Eurobond (BEB) would be issued and traded as a single debt instrument, each participant would be liable only for the interest payments and principal redemption corresponding to its share of the bond, and not for the debt of the other issuers (Favero and Missale 2010, p. 99). Proposals for such an instrument were made already by the Giovannini Group (2000), the European Primary Dealers Association, in 2008.

A decisive feature of such a basket-Eurobond is the share of the individual members. It could be either determined by the GDP weights of the member countries or by the share of their outstanding national government debt in total government debt of the Euro area. A basket according to debt weights would give Italy a share that is higher than its GDP share. A basket based on GDP shares would give Germany the strongest weight, while Italy’s share would be smaller than its debt share (Table 1). For the credibility of the basket-Eurobond a large German share would be more beneficial for the Eurozone. In addition, for the ECB only a Eurobond with GDP shares would avoid the criticism of implicit government financing.

Table 1: Shares of Euro area member countries in a Basket Eurobond (2012)

p2, basket eurobond

Basket-Eurobonds could be issued together with a sizeable issue of national bonds. Alternatively one could envisage a solution where almost all new bonds of the member states are issued as basket bonds. A large issue of basket bonds would have the advantage of a fluid market with correspondingly low interest rates. A fully developed BEB market would be much more fluid than each of the existing national markets. In addition, it would limit investor shifts from one national bond market to another, which has been a major source of instability in the last few years.

A strong expansion of the BEB market could be achieved if all new German bonds were issued as basket bonds. With a basket according to GDP shares, this would imply that countries with a debt share exceeding their GDP share (Italy, Ireland, Portugal and Greece) are forced in addition to issue a relatively small number of bonds as stand-alone national bonds. But as these countries are able to raise a very high share of the new issuance under the umbrella of the basket bond, the risk for the remaining bonds would be rather limited. In addition, if countries are obliged to issue bonds by themselves some  discipline exerted by financial markets could be maintained.

For countries with a debt-to-GDP ratio below the German ratio a GDP weighted basket implies that they would raise more funds from the capital market than their funding requirement. The difference could be invested by the issuing institution (Euro Debt Agency) in assets with the same rating as the corresponding countries.

From a German perspective the main problem of a basket bond could be higher financing costs. The interest rate for the basket bond would be higher than the interest rate for a traditional German bond. This problem could be solved by differentiating the interest payments for the participants according to their individual debt levels. For instance, for each percentage point of the national debt-to-GDP ratio below the Eurozone average, a certain discount on the interest rate of the basket bond could be made. For countries with above-average debt levels a corresponding surcharge would be applied. This mechanism would provide better incentives and disincentives than the bond markets which for many years did not react to the differences in debt levels and then overreacted after the crisis had started in 2010.

The ECB’s potential for quantitative easing

A well-developed market for Basket Eurobonds would facilitate the ECB to engage in a policy of quantitative easing in the same way as central banks of other major currency areas. With an explicit commitment by the ECB to purchase a certain number of basket bonds for an extended period of time, the average long-term interest rate of the Eurozone could be reduced. Since the outbreak of the financial crisis, this rate has been considerably higher than long-term bond yields of other major currency areas (see chart). Fundamentally this spread is not warranted as the average deficit of the Eurozone has been lower than the deficit of other major currency areas. At the same time, the Eurozone debt level has been more or less identical to the US and the UK level, but much lower than the Japanese level.

p1, Basket Eurobonds

Of course, since July 2012 the ECB’s Outright Monetary Transaction (OMT) announcement has already helped to reduce the average interest rate considerably. But there is a risk that this commitment could be tested and that the ECB’s purchases of national bonds could be limited by legal concerns. With purchases of BEBs the ECB could always argue this is a purely monetary operation as it does not favour individual countries.

At the moment the ECB’s bond holdings amount to 6.3% of the Eurozone’s GDP, the FED’s bond holding total 17.5% of GDP. The monthly gross issuance of government bonds of Eurozone member countries is about 200 billion Euros. Thus, after the establishment of BEBs the ECB could announce monthly purchases of 50 billion Euros for a 12 month period. The total amount of 600 billion Euros would be equivalent to about 6% of the Eurozone’s GDP. It would double the ECB’s bonds holdings and help reduce the average Eurozone bond rate, as it will take the same time until a major number of BEBs become available. The ECB could start its OMT programme by purchasing national bonds according to the GDP weights of the member states.

Of course, the implementation of a BEB would raise a host of technical questions, above all concerning the legal status of the Euro Debt Agency, the timing of issues and the maturity of the BEBs. Nevertheless, BEBs are the only form of Eurobond which do not require joint and several liability and they are therefore the only instrument that can be implemented within the current institutional framework.

Hope for the unemployed

In spite of some positive signals the overall economic situation of the Eurozone is still rather bleak. The HICP inflation rate is now only 1.1% which is almost in a deflationary terrain as it is below the ECB’s target of close to 2%. Although the IMF expects a return to growth in the Eurozone in 2014 and growth rates of about 1.5% in the following years, the Euro unemployment rate will increase to 12% in 2014 and will remain above 11% until 2017.

Of course, structural reforms can be helpful to improve the competiveness of the Euro area. But without a dynamic macroeconomic environment, improvements at the microeconomic level will not materialise. Under the current legal framework, the fiscal space of the Eurozone member states will remain very limited. Therefore, the ECB will remain the only powerful actor at the macro level. Its commitment to OMT has already shown a remarkable impact on financial markets. With the issuance of basket Eurobonds the ECB’s ability to engage in a policy of quantitative easing could be significantly improved. In addition purchases of such bonds could no longer be criticised as a form of implicit government financing.


European Primary Dealers Association, Securities Industry and Financial Market Association (2008), A Common European Government Bond, Discussion Paper, September 2008

Favero, C.A. and A. Missale (2010), EU Public Debt Management and Eurobonds, European Parliament Directorate General for Internal Policies

Giovannini Group (2000), Co-ordinated Public Debt Issuance in the Euro Area.


February 03 2014

"The Trouble with Emerging Markets" by Nouriel Roubini

Nouriel Roubini, emerging markets

Nouriel Roubini

The financial turmoil that hit emerging-market economies last spring, following the US Federal Reserve’s “taper tantrum” over its quantitative-easing (QE) policy, has returned with a vengeance. This time, the trigger was a confluence of several events: a currency crisis in Argentina, where the authorities stopped intervening in the forex markets to prevent the loss of foreign reserves; weaker economic data from China; and persistent political uncertainty and unrest in Turkey, Ukraine, and Thailand.

This mini perfect storm in emerging markets was soon transmitted, via international investors’ risk aversion, to advanced economies’ stock markets. But the immediate trigger for these pressures should not be confused with their deeper causes: Many emerging markets are in real trouble.

The list includes India, Indonesia, Brazil, Turkey, and South Africa – dubbed the “Fragile Five,” because all have twin fiscal and current-account deficits, falling growth rates, above-target inflation, and political uncertainty from upcoming legislative and/or presidential elections this year. But five other significant countries – Argentina, Venezuela, Ukraine, Hungary, and Thailand – are also vulnerable. Political and/or electoral risk can be found in all of them, loose fiscal policy in many of them, and rising external imbalances and sovereign risk in some of them.

Then, there are the over-hyped BRICS countries, now falling back to reality. Three of them (Brazil, Russia, and South Africa) will grow more slowly than the United States this year, with real (inflation-adjusted) GDP rising at less than 2.5%, while the economies of the other two (China and India) are slowing sharply. Indeed, Brazil, India, and South Africa are members of the Fragile Five, and demographic decline in China and Russia will undermine both countries’ potential growth.

The largest of the BRICS, China, faces additional risk stemming from a credit-fueled investment boom, with excessive borrowing by local governments, state-owned enterprises, and real-estate firms severely weakening the asset portfolios of banks and shadow banks. Most credit bubbles this large have ended up causing a hard economic landing, and China’s economy is unlikely to escape unscathed, particularly as reforms to rebalance growth from high savings and fixed investment to private consumption are likely to be implemented too slowly, given the powerful interests aligned against them.

Moreover, the deep causes of last year’s turmoil in emerging markets have not disappeared. For starters, the risk of a hard landing in China poses a serious threat to emerging Asia, commodity exporters around the world, and even advanced economies.

At the same time, the Fed’s tapering of its long-term asset purchases has begun in earnest, with interest rates set to rise. As a result, the capital that flowed to emerging markets in the years of high liquidity and low yields in advanced economies is now fleeing many countries where easy money caused fiscal, monetary, and credit policies to become too lax.

Another deep cause of current volatility is that the commodity super-cycle is over. This is not just because China is slowing; years of high prices have led to investment in new capacity and an increase in the supply of many commodities. Meanwhile, emerging-market commodity exporters failed to take advantage of the windfall and implement market-oriented structural reforms in the last decade; on the contrary, many of them embraced state capitalism, giving too large a role to state-owned enterprises and banks.

These risks will not wane anytime soon. Chinese growth is unlikely to accelerate and lift commodity prices; the Fed has increased the pace of its QE tapering; structural reforms are not likely until after elections; and incumbent governments have been similarly wary of the growth-depressing effects of tightening fiscal, monetary, and credit policies. Indeed, the failure of many emerging-market governments to tighten macroeconomic policy sufficiently has led to another round of currency depreciation, which risks feeding into higher inflation and jeopardizing these countries ability to finance twin fiscal and external deficits.

Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.

Over time, optimism about emerging markets is probably correct. Many have sound macroeconomic, financial, and policy fundamentals. Moreover, some of the medium-term fundamentals for most emerging markets, including the fragile ones, remain strong: urbanization, industrialization, catch-up growth from low per capita income, a demographic dividend, the emergence of a more stable middle class, the rise of a consumer society, and the opportunities for faster output gains once structural reforms are implemented. So it is not fair to lump all emerging markets into one basket; differentiation is needed.

But the short-run policy tradeoffs that many of these countries face – damned if they tighten monetary and fiscal policy fast enough, and damned if they do not – remain ugly. The external risks and internal macroeconomic and structural vulnerabilities that they face will continue to cloud their immediate outlook. The next year or two will be a bumpy ride for many emerging markets, before more stable and market-oriented governments implement sounder policies.

 © Project Syndicate

"The Battle Lines For The European Elections Are Drawn" by Jan Marinus Wiersma

Jan Marinus Wiersma, European elections

Jan Marinus Wiersma

Recently, the Dutch Parliament has discussed a citizens’ initiative that calls upon the legislators to stop the creeping transfer of national powers to Brussels and demands a referendum on major EU decisions such as the ones taken in the framework of tackling the euro crisis. While not all the traditional parties are in principle against a popular vote, they rejected holding a plebiscite now. The left wing populist political group, the Socialist Party (SP), however wholeheartedly supported the initiative. The PVV (Party of Freedom) of Geert Wilders went even a step further by insisting that a referendum on EU membership as such should be held as soon as possible.

And it is exactly these two parties at the political fringes that are currently leading in the opinion polls and are expected to do very well in the upcoming European elections. For the time being, the referendum is off the table in the Netherlands, but soon new legislation will allow citizens to demand a corrective referendum (on laws and regulations already adopted) if they collect at least 300.000 signatures. This change in the constitution was initiated by the progressive parties and is supported by a majority in parliament. One shouldn’t forget that the EU debate in the Netherlands has become very much linked to referenda. The first time in 200 years that the Dutch citizens could directly give their opinion on a legislative proposal was in 2005 – the outcome was a rejection of the EU Constitutional Treaty by 61% of the voters.

While the traditional party families in a joint effort plan to make the upcoming European elections more attractive and democratic by fielding their own candidates for the presidency of the European Commission and to give faces to the their campaigns, things are also happening on the fringes. Support for right and left wing populist parties has grown all over Europe, as have referendum movements. Some predict that populist Eurosceptic groups will occupy 40% of the seats in the European Parliament after the May elections. This seems a wild exaggeration not based on facts – unless one would include in these ranks Euro-critical parties such as the British Tories or the Dutch conservative-liberals.

A snapshot of the present situation in the EU member states shows strong support for left wing, anti-EU parties in Greece (SYRIZA), The Netherlands (SP) and France (Radical Left) for example. Right-wing (and often xenophobic) anti-EU parties manifest themselves in The Netherlands (PVV), France (FN), Sweden (SD), Denmark (DP), Greece (Golden Dawn), Germany (AfD), Italy (LN), UK (UKIP), Austria (FPÖ) and in some new member states like Jobbik in Hungary and Ataka in Bulgaria. It is unlikely that all of them together would ever get near 40% of EP seats since opinion polls do not justify this figure and it is unclear how the predicted low turnout will in the end affect their results.

Moreover, they will certainly not join forces in the European Parliament given the substantive differences between and even among the right wing and left wing populists who will end up in different camps after the European elections. The suggestion that these parties will figure as the Brussels tea party is therefore also somewhat misleading. Consider the situation on the right flank: Geert Wilders and Marine Le Pen have the intention to form a joint fraction in the future EP but some important anti-EU parties like UKIP distance themselves from this initiative. Though they will not create a joint political bloc, the anti-Europeans will probably be a force to reckon with by having great nuisance power.

Traditional Parties Will Have a Difficult Time In The Upcoming European Elections

The traditional parties will have a difficult time during the upcoming election battle, as criticism of the EU will be louder and have more popular support than ever before. A sceptical electorate, blaming the EU for the social and economic crisis, might turn away from the parties that they hold responsible and vote for those that carry no responsibility at all. The battle ground is no longer exclusively defined by conservatives, liberals, social democrats or greens, but – more than in the past – also by the parties operating on their fringes exploiting anti-European sentiments.

There is a real risk that the debates will not be about what kind of Europe (eg. neoliberal versus social democratic model), but whether there should be an EU at all. This will force the traditional parties into the pro-European corner defending the status quo while the populist anti-EU politicians can call for abandoning the whole idea of European integration. Such a negative frame will put the traditional European political families exclusively on the defensive and hamper their efforts to highlight the substantive differences between them and their candidates for the presidency of the European Commission.

Besides the battle between the major parties now dominating the EP, and the contest between the pro’s and the con’s, there will be a third front: the struggle to overcome the differences within the political families. How to reconcile the Dutch conservative VVD with the liberal candidate for the presidency of the European Commission Guy Verhofstad, a man openly striving for the federalisation of the European Union; how to bridge the gap between left-wing PASOK leader and Greek deputy Prime Minister Evangelos Venizelos and Eurogroup chair Jeroen Dijsselbloem of the Dutch Labour party? The national parties belonging to the same political families are also divided about the question of how to confront the populist threat: total isolation, strong opposition or adopting elements of their agenda in order to lure away voters?

It is obvious that the last point will have to be dealt with first. A joint agenda and strategy will have to be developed by the traditional party families. This will demand some flexibility in order to allow for differences under the same general heading. The danger is of course that vague compromise texts will be produced instead of clear messages on where the European parties stand on major issues and how they want to confront the outright anti-Europeans. We have seen this in the past – certainly also in the case of the socialists and social democrats. Hopefully this time they feel the urgency to make a difference and produce a clear and concrete message instead of leaving the public with the feeling that the emperor wears no clothes, and that there is no real choice. Then Martin Schulz, the candidate of the PES, can do what he is good at: speak clear language as he has recently shown at the SPD conference.

Reposted by02mydafsoup-01 02mydafsoup-01
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